Factors Affecting Petroleum Product Prices in Kenya

Abstract

Energy is a very crucial resource globally. There exists a high dependence on energy. Despite Africa consuming a mere 3 percent of the world's total commercially traded fuels, its demand for these products has been increasing. Similarly, in Kenya, modern forms of energy are becoming more critical. Studies have shown a strong correlation between the growth rates of modern energy consumption and monetary Gross Domestic Product (GDP). Global petroleum prices have been rising from a low of $14 in 1978 to $58 currently. The petroleum sub-sector in Kenya was deregulated in 1994 and that set forth an era where petroleum firms set their own prices. The issue of petroleum product prices has always been a matter of great concern. The study focused on the factors that contribute to the prices of the petroleum products in Kenya. A key aspect was the application of the Herfindahl Index (HHI). An analysis on the industry based on Michael Porter's generic and five forces model showed high barriers to entry, intense rivalry, and low threat of substitutes, strong supplier power and lower buyer power. The study found out that the current system of procurement, the open tender system (OTS) is better than the previous system. Efficiency and competition was perceived as having improved. Integration within the industry was perceived as an appropriate option but the study also showed that the Ministry of Finance through the monopolies and the prices commission prohibits restrictive trade practices by only approving proposal for mergers and acquisitions that do not allow the amassing of market power in the hands of a single player (tendencies towards a monopoly). Application of the HHI model showed a relatively moderate concentration level based on the bench mark of the United States of America Justice Commission. Retail pump prices have been on a consistent upward trend over a period of 10 years. The study recommends the retention but participatory improvement of the OTS system and increased participation by the Government to improve infrastructure.