An Assessment of Price Control and Financial Performance of the Oil Industry in Kenya: A Case of Listed Oil Marketing Firms

Abstract

This study investigated how price controls had affected performance of oil marketing firms and eliminated price inconsistency in the petroleum market. The objectives of the study were to analyse the extent to which current retail pricing policy had influenced income level of oil marketing firms, whether it had eliminated price inconsistencies in the oil industry in Kenya, and to determine the joint effect of international oil prices and exchange rates on retail prices for petroleum products. The research examined the movement of retail prices from January 2009 to December 2012, covering the period before and after the introduction of price control in the petroleum market in Kenya. The research utilized time series analysis on average monthly retail prices of regulated petroleum products and international crude oil prices and average monthly exchange rates using multivariate regression analysis. Financial ratios and trend analysis of financial statements of the two major oil marketing firms, KenolKobil and Total Kenya for the four year period were carried out. The empirical investigation found out that there existed price inconsistencies in the industry which price controls were effectively curtailed while the joint effect of international price and exchange rate was reduced through the proper determination of retail prices by the pricing formula implemented by ministry of energy. However, introduction of price controls had an effect on the ability of oil marketing firms to pass-on costs to consumers leading to lower margins. It was recommended that the government should continue to institute price controls in the oil industry, but, it should put up more infrastructures in terms of storage capacity and transportation in order to improve efficiency in oil supply chain. And oil marketing companies should adopt cost cutting measures in their operational and financial centres.