Rising fuel pump prices: Just set the oil market free!

Why is Kenya and the rest of the world held hostage by oil?

Why is there more focus on oil than life-giving blood? When did we last have a public debate over blood? 

Today the price of oil matters more than the price of heart surgery. Ever wondered why the price of oil is controlled and not that of the Intensive Care Unit (ICU)?  The world’s addiction to oil and vehicles has led to its deification. This, in turn, has made the oil market behave abnormally. 

Price controls ought to reduce the price or keep it steady. It has mostly been going up. It has been suggested that it could have been worse without controls and subsidies.

I would contest that in broad daylight. Will you join me? Without subsidies, we can now test the hypothesis that the invisible hand of the market works better than the visible hand of the government.  Shall we now pay the market price for oil? Will the monthly adjustments end?  

My hunch is that if we set the market free, fuel prices will fall. Removing subsidies is not enough freedom in this sector. Let’s first admit there will always be echoes from external forces. Think of OPEC (Organisation of the Petroleum Exporting Countries), whose decision to increase or reduce the supply leads to price changes. We have other external factors like seasons, with demand going up in winter because of heating. Growth in key markets like China and India exerts demand and raises prices. 

Unexpected events like Covid-19 led to the collapse of oil prices. Do you ever recall our oil prices going down? Globally, the oil prices were negative. A petrol station should have ideally paid you to take fuel!  

Oil prices go beyond supply and demand. Whoever controls the supply chain controls the price too. Think of the chain from oil fields to the petrol pump. How good is the transport from pipelines to supertankers and roads?

Are there bottlenecks like offloading? Are there storage limitations? Storage is what made oil prices get into a negative zone during Covid-19. The price of oil is sticky, it resists going down. One, it’s run by big companies that have interests across the globe.

That gives them lots of power. The industry is capital-intensive and that serves as a barrier to entry. Think of mining oil from sea beds or in deserts. The big firms easily extend their tentacles downstream, controlling retailers. Remember when independent oil dealers once flourished leading to a fall in oil prices? Suppose they ensured quality? 

The power of big brands comes from an unlikely source - the tax they pay to the government. Add the fact that almost 50 per cent of the pump price is tax. Can you feel the stickiness? Our addiction to oil has led the government to get addicted to oil tax.  

What would happen if the market is set free, including the whole supply chain? 

Think of it. Why do East Africans want to export crude and reimport, prolonging the supply chain?  Who benefits from the byproduct of refining? Why can’t East Africa build a refinery and benefit from economies of scale? Is a refinery that complicated?  

Can we also do free exploration? Can we auction the blocks suspected to yield oil?

A good road, rail and pipelines will also help set the market free. Can I build a private pipeline just like the expressway? 

Why can’t we let anyone who can import oil? The resulting competition would lower the prices. What is so sacred about oil? 

The other aspect of oil freedom is finding an alternative and reliable source of tax, away from oil. What of demystifying the car with mass transport through rail and a shift to electric cars and rails?

We should even be bold and make Garissa or Sagana inland ports to the sea through river Tana. We can widen the river and conserve the forest to get more water. Remember the St Lawrence seaway on the border between the US and Canada? 

If we can free the market for medical services, why not oil? Why do we mystify oil so much, yet it’s much cheaper than beer? Why do we still see the car as a status symbol more than a century after its discovery? 

We currently blame the government for high oil prices. The market will take the blame if it’s set free. Is that not good politically?  After all, the market is invisible, unlike the government. We have tried controls and subsidies, so why not let the market do its work?  

I am eagerly waiting for next month’s fuel price guide to see the effect of freedom in the oil market.  

That freedom should be qualified; the oil industry has a lot of vested interests, more like politics where the voter is given an illusion of deciding the winner.

The price at the oil pump is not just about supply and demand, it’s a confluence of global and local interests.

That is why we should mute the expectation that the oil market will work in our favour.