Oil producers deal to hurt Ruto's subsidy plan

Kenya President William Ruto’s plan to fully scrap fuel subsidies is set to face major headwinds after the world's top oil-producing countries agreed to deeply cut exports to prevent erosion of revenues.

A group of 23 oil-exporting countries, commonly known as Opec+, on Wednesday, reached a deal to slash production by two million barrels per day, a move targeted at pushing prices per barrel back to $100 per barrel for the first time since July.

The cartel, which includes 13-member Organisation of the Petroleum Exporting Countries (Opec) like Saudi Arabia and allies like Russia, said the decision was aimed at stabilising prices.

The decision by Opec+ countries has dimmed expectations of lower fuel prices in coming months, a projection that partly informed Kenya’s decision to remove subsidy on petrol last month.

“There was hope that the drop in global fuel prices might start filtering through the economy. Net importing countries like Kenya had been hoping for more relief, particularly with the removal of the subsidy programme,” said Ken Gichinga, chief economist at Mentoria Economics. “But now the price drop might not be as significant as we had expected.”

Global oil prices have been falling in recent months largely on increased supply by exporting countries, but Wednesday’s deal to reverse policy on higher output has raised fears the cost will climb.

The average landed cost of petrol at the port of Mombasa, for instance, had in August dropped for the first time since January.

A tonne of petrol arrived at the port at $812.9, a 24.31 percent dip from $1,074.01 a month earlier, and the lowest since $676.40 in February, according to data from Energy and Petroleum Regulatory Authority (Epra).

The expectation was that the declining trend will persist in the near term, making the case for the removal of the subsidies which had been tapped since April 2021.

Epra scrapped the price cushion on petrol for the current month cycle through October 14, a day after Dr said the price cushion was unsustainable and prone to abuse, including causing artificial shortages of the very products being subsidised.

“The price of crude oil has come down. We would hope that this will continue going down. We expect that the direction that the other countries have done, the US in particular [which has been releasing oil from its strategic reserves], will continue pushing this lower,” Central Bank of Kenya governor Patrick Njoroge told a press conference on September 30.

However, the move by Opec+ countries in Vienna, Austria, which the market had predicted, has seen crude oil prices climb this week.

For example, Murban crude oil, which Kenya uses as a benchmark, was Thursday afternoon trading at $94.73 per barrel, a growth of 7.06 percent over $88.54 per barrel Thursday last week.

The US, through White House spokesperson Karine Jean-Pierre, has criticized the decision by Opec+ group, saying it was “aligning with Russia” whose budget had been hit by drop in oil prices.

“They took the decision to balance their budgets. They are raising their income but hurting others. Low-income countries will experience the worst effects of the decision,” Kwame Owino, the chief executive of the Institute of Economic Affairs, an economic policy think-tank, said. “With that decision, they may be giving their buddy [Russia] a lift. They could also be anticipating recession will come and this will cut oil demand and hence the prices.”

The low output by Opec+ countries will leave crude oil prices elevated, inevitably pushing up pump prices and further pushing up inflation which hit 63-month high of 9.2 percent in September.

“The drop in inflation which we had hoped will start dropping towards the end of this year might be delayed a bit,” Mr Gichinga said, adding that this will pile pressure on Dr Ruto’s government to relook at the fuel subsidy.

“The pressure [to review the policy on subsidy] will be there,” Mr Owino added.

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