An Examination of Price Controls in the Downstream Petroleum Sector in Kenya
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An Examination of Price Controls in the Downstream Petroleum Sector in Kenya.Presented by:Andrew LiseroMBA/2404/12A Concept PaperSubmitted in partial fulfilment of the requirements of degree of Master of Business Administration (MBA)Strathmore Business SchoolNovember 2012CONTENTSCHAPTER 1: INTRODUCTION TO THE STUDY 31.1 BACKGROUND 31.2 PROBLEM DEFINITION 41.3 RESEARCH OBJECTIVES 51.4 RESEARCH QUESTIONS 5CHAPTER 2: LITERATURE REVIEW 62.1 INTRODUCTION 62.2 PRICE CONTROLS IN KENYA 62.3 CONSEQUENCES OF PRICE CONTROLS 72.4 ENHANCING EFFECTIVENESS OF PRICE REGULATION 82.5 ALTERNATIVES TO PRICE REGULATION 82.6 RESEARCH GAP 92.7 CONCEPTUAL FRAMEWORK 9CHAPTER 3: RESEARCH METHODOLOGY 113.1 RESEARCH DESIGN 113.2 POPULATION 113.3 DATA COLLECTION METHODS 113.4 DATA ANALYSIS 113.5 RESEARCH QUALITY 12REFERENCES 13APPENDICES 15CHAPTER 1: INTRODUCTION TO THE STUDYBACKGROUNDKenya’s economy has undergone significant structural reforms since the mid 1980s aimed at improving the overall macro economic performance, attract investments, increase incomes, create employment opportunities and improve the efficiency and productivity of public investments. These reforms included privatization of Government stake in non-strategic public institutions and divesture of Government interests in activities of a commercial nature, liberalization of foreign exchange and interest rate regimes and abolition of price controls. (Energy Regulatory Commission, 2010)In line with these public sector reforms, the Government also undertook structural reforms in the energy sector comprising the electricity and petroleum sub sectors, with a view to improving efficiency by eliminating distortions that existed; allow energy prices to move in line with market fundamentals; attract investments into the sector and induce competition. (Kenya Institute for Public Policy Research and Analysis (KIPPRA), 2010)The commercial energy sector in Kenya is dominated by petroleum and electricity while wood fuel provides energy needs of the traditional sector including rural communities and the urban poor. At the national level, wood fuel and other biomass account for about 68% of the total primary energy consumption, followed by petroleum at 22%, electricity at 9% and others at about less than 1%. (Kenya National Bureau of Statistics (KNBS), 2009)
Petroleum is the most important source of commercial energy in Kenya. Petroleum fuels are imported in form of crude oil for domestic processing and also as refined products, and are mainly used in the transport, commercial and industrial sectors. (Onyango, Njeru, & Omori, 2009). Kenya is a net importer of petroleum products and has a refinery owned and managed by the Kenya Petroleum Refineries Ltd (KPRL), an 800 km cross country oil pipeline from Mombasa to Nairobi and Western Kenya with terminals in Nairobi, Nakuru, Eldoret and Kisumu, run by the Kenya Pipeline Company (KPC). The downstream petroleum sector boasts of over 30 oil importing and marketing companies. (Energy Regulatory Commission, 2009). The local and international companies licensed to undertake the importation, storage, wholesale, export and retail of petroleum products. (Ministry of Energy, 2012) In 1994, the Government of Kenya deregulated the downstream Petroleum Market operations. These reforms included liberalization of distribution and pricing of petroleum products and partial liberalization of product supply.Following the deregulation, it was noted that retail prices of petroleum products did not closely follow changes in international oil prices. It was argued that oil marketing companies are quick to adjust retail petroleum prices upwards when international oil prices are rising and slow to lower prices when oil prices are falling. In particular, when the international crude oil prices were rising during 2007 and 2008 Oil Marketing Companies quickly passed on these increased costs to consumers, but took inordinately long to pass on cost reduction benefits to consumers when international oil prices were on a downward spiral in the last quarter of 2008. The price of Murban crude oil dropped from US$ 137.35 per barrel in July 2008 to US$ 42.10 per barrel (69%) in December 2008 while the pump price of super petrol dropped from Ksh.110.00 per litre to Ksh.78.00 per litre (29%) over the same period. This behaviour by the Oil Marketing Companies generated a lot of public concerns on the overall economic efficiency and rationale of unfettered market mechanisms in the retail petroleum market in Kenya and re-kindled debate for re-introduction of price controls. (Energy Regulatory Commission, 2010)At the same time, prices of many essential items (including food items) had risen sharply due to inflationary pressure attributed to Global and local economic and political factors. As prices were rising from 2007 onwards, per capita income was shrinking, eroding the consumers’ purchasing power and ability to afford essential goods. In an attempt to address the problem, Kenya’s Parliament passed a Bill to control the prices of essential goods, including maize, rice, wheat, cooking oil and petroleum products. (KIPPRA, 2010)