Determinants of Volatility of Pump Prices of Petroleum Products in Kenya

Abstract

The purpose of this research was to examine the determinants of volatility in pump prices of petroleum products in Kenya. Petroleum products drive the economies of all countries in the world but the prices have been volatile, often affecting economic growth and planning. The study adopted a causal research design which ensured to investigate the problem using a time series model. This research design helped the researcher to understand why the dependent variable worked the way it did by proving causal links between variables and eliminating other possibilities. The population of this study comprised of the 65 licensed oil marketing companies and 600 oil dealers, one petroleum lobby group (PIEA), one regulator (ERC), Kenya Pipeline Company (KPC), Kenya Petroleum Refineries Limited (KPRL), National Oil Company of Kenya (NOCK) and Ministry of Energy and Petroleum & Petroleum (MOEP) all of whom play different roles in the Petroleum industry of the Energy sector in Kenya. The sampling technique followed in this study was stratified random sampling. The study selected all respondents where population was less than 30 and 30% of the target population. A self-administered questionnaire and face-to-face standardized interview schedules were the two principal tools of primary data collection. Target questions (structured and unstructured) were used in the questionnaire and addressed the investigative questions of the study. Closed ended questions were designed with alternative answers expressed in a Likert scale-style. Secondary data sources were the MOEP, ERC, PIEA, KPC and KPRL. The Data Collection Instrument, which is the questionnaire, was pilot tested on 5% of the sample size to ensure that it was manageable, relevant and effective. The data from the questionnaires and interviews schedules were coded and the response on each item put into specific main themes. Secondary data analysis used the E views statistical software to perform granger causality, GMM equation estimation, and analyse data for correlation, heteroskedasticity and multicollinearity. Descriptive statistics were utilized to analyze data from observation schedules. Qualitative analysis involved content analysis and identification of common themes emerging from the responses to the interview schedule.The study findings indicate thatthe world had witnessed a high volatility of oil prices over the study period (December 2010 to June 2015). The greatest single factor influencing petroleum product prices is the world oil prices. Political shocks and supply chain costs also impacted pump prices in a statistically significant manner. Exchange rates and regulatory costs did not have a statistically significant impact. However, sudden shocks in regulatory components (tax changes) had a direct impact on pump prices. It was observed that they comprise a huge percentage of the pump price of up to 50%. Currency exchange rate fluctuations were found to indirectly affect volatility of oil prices. The study concludes that the pump pricing of petroleum products in Kenya is volatile and complex, and is regulated by more than one government body causing many sources of influences on pump prices. The study recommends that the Central Bank of Kenya (CBK) should be empowered to be always in a position to intervene and stabilize currency exchange rate fluctuations. The indirect impact of the requirement that petroleum taxes be paid at the point of product entry, and its financing implications further complicates the impact of taxes on prices of petroleum products. The study recommends that this should form part of a future study. The study recommends that in order to lessen the burden of dealing with petroleum prices, the government should consider reduction of regulatory costs (especially taxes) and also look into the issue of oil losses.