I have previously been asked to explain my opposition to government subsidies on fuel. This time I lay out an alternative that would be both sustainable and see more open competition that will translate into lower fuel prices for the consumer.

But first, what are subsidies?

Subsidy means benefit given by the government to individuals or businesses whether in form of cash, tax reduction or by reducing the cost of goods and services. The purpose of subsidy is to help individuals and businesses purchase/acquire essential goods and services that they may not be able to afford, under normal circumstances.

In our Kenyan case, since the oil market is liberalized, the only option if for govt to deny itself valuable taxes from this lucrative sector in the hope that oil marketers will transfer those benefits to consumers.

Subsidies mean lower prices, which mean increased consumption. Why, because economists tell us that every time consumers realize that prices have dropped, they increase their consumption rates and these are not necessarily in activities leading to economic growth. High fuel consumption translates into more pollution. More importantly, the incentive to invest and develop alternative and hopefully renewable energy sources will certainly decrease and then our economy becomes addicted to oil. Oil could become so cheap that we’re no longer interested in expanding our other energy sources like geothermal, HEP, wind etc. Ultimately, we’ll have made oil into a centre piece of our economy; anything happens to it and market instability sets in.

History shows that eventually the cost of subsidies become too great for the government to sustain which leads to their lifting; or they get compensated for by higher taxation elsewhere. The lifting of subsidies is currently causing unrest in Nigeria, Sudan, Egypt and it is feared other African economies are headed in this unfortunate direction.

Finally, there is an argument that when government subsidizes firms, it reduces incentives of firms to cut costs and be more efficient.

SUBSIDISE agriculture and other sectors that will bring real social benefits to citizens.

ALTERNATIVE TO SUBSIDIZING OIL

The goal here is to demonstrate how we can bring down fuel prices in light of the oil boom (from both local and regional sources) without tinkering with markets through govt subsidies.

What is the one thing that oil boom will avail? Crude oil, plenty of it. And cheaper too. Cheaper in light of the fact that the country will largely eliminate high transport and attendant costs (insurance, demurrage etc) that contribute to high fuel prices.

Also, having multiple sources means that the country can negotiate for discounted rates especially from our neighbor Uganda and perhaps South Sudan. We still do not have a figure of Kenya’s total estimated oil reserves, exploration is ongoing.

However, having plenty of cheap crude does not help UNLESS we have one important thing in this country: a fully functional, modern refinery with the capacity to meet local demand of our fuel needs. The refinery must also have the capacity to refine light distillates in large volumes since these are the most used fuels in our economy. In addition, an LPG unit must be built to take advantage of the available gas from oil fields throughout the region. The refinery must increase its storage capacity to hold oil reserves that can last at least six months to hedge our economy against fluctuating global crude prices.

Let me put it this way; without a refinery, the benefits of having all this oil will almost be zero. We’ll be exporting our crude and importing refined through the currently existing OTS arrangements.

The benefits conferred on the country by a modern refinery are immense.

1) We’ll reduce the consumer price significantly without distorting the market or asking the government to deny itself precious taxes.

2) A refinery will create an important petro-chemical industry that besides fuel will also avail raw material for fertilizers manufacture and pharmaceuticals etc. We can all agree that our farmers could really use cheap fertilizer to increase their output and deal with food insecurity.

3) Employment opportunities for workers in the refinery and related industries. Currently, KPRL alone has over 500 workers and it is operating way below its 30,000bpd capacity. Imagine if we raise that to 200,000bpd which will be Kenya’s domestic demand by 2025. (Current demand is 80,000bpd, growing at 7% PA)

The Kenya government needs to invest money in the refinery. My advice would be for govt to raise money from the public and NOT from some private investor. Let Kenyans own a piece of the oil infrastructure. There are billions of shillings in people’s pockets. One way these can be unlocked is through and IPO.

I am not an economist but I’m sure raising funds for construction of such a valuable facility should not be difficult; especially seeing that even in its dilapidated and inefficient state KPRL was able to get a loan facility from Standard Chartered to the tune of KSh. 30bln!

Having the refinery also act as a merchant is a brilliant idea. This means that it can directly sell refined products to marketers. I dare say that with a modern and efficient refinery, the government doesn’t have to continue enforcing the rule that requires OMCs to buy 40% of their fuel products from the refinery.

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