Explainer: Why fuel prices remain high in Kenya despite falling import costs – People Daily

Kenyan motorists have continued to pay high prices at the pump even when the cost of importing petroleum products declines, with government cross-subsidies and rising oil marketers’ margins emerging as key factors influencing local fuel prices.

An analysis of fuel pricing over recent months has raised questions about how savings from lower international fuel costs are shared with consumers, particularly after the government redirected some of the potential relief from diesel to petrol to cushion motorists against rising prices.

The review, based on figures published by the Energy and Petroleum Regulatory Authority (EPRA), shows that a reduction in the cost of importing a petroleum product does not necessarily translate into a similar reduction at the pump.

Instead, the government has at times used a cross-subsidisation mechanism, increasing the amount charged on one petroleum product to help reduce the price of another whose import costs have risen.

The arrangement is intended to moderate sudden price fluctuations, but it also means consumers using one fuel may not immediately benefit when its international cost falls.

How the government redirected diesel savings

The impact of the arrangement was evident in August, when the landed cost of diesel fell by more than Ksh17 per litre.

The landed cost refers to the cost of bringing imported fuel into the country, including the relevant import and associated charges before other components of the local pump price are applied.

Despite the reduction, the government added approximately Ksh19 per litre to diesel pricing instead of allowing the savings to be passed on to consumers.

According to EPRA Director General Eng. Edward Kinyua, diesel could have retailed at about Ksh198 per litre under the alternative calculation, compared with the actual pump price of Ksh217 per litre.

The government defended the decision, explaining that the additional amount collected from diesel was used to cushion petrol consumers after the landed cost of petrol increased.

As part of the arrangement, petrol received relief of about Ksh8 per litre during the same period.The approach illustrates how fuel pricing decisions can involve trade-offs between different categories of consumers.

While petrol users may benefit from a price reduction, diesel users can miss out on savings that would otherwise have lowered their transport and operating costs.

Diesel is widely used by heavy commercial vehicles, public transport operators, agricultural machinery and businesses that depend on road transport.

Consequently, changes in its price can affect the cost of moving goods and providing services across the economy.

Why the government says cross-subsidisation is necessary

EPRA has defended cross-subsidisation as a regulatory measure designed to prevent sharp increases and decreases in fuel prices.

The mechanism was also applied in July and September, according to the analysis. EPRA explained that sudden price movements could destabilise the economy, making it necessary to balance increases in one petroleum product against reductions in another.

The official compared the situation to a person experiencing an abrupt change in temperature, arguing that an economy also needs time to adjust to major price fluctuations.

Under this approach, the government can use savings from petroleum products whose import costs have declined to cushion consumers against increases in products that have become more expensive.

However, the mechanism is not specifically anchored in law, according to the report, although EPRA describes it as a regulatory practice informed by approaches used in other jurisdictions.

This raises questions about transparency, accountability and how the benefits and costs of fuel price adjustments are distributed among consumers.

For motorists, the key issue is that a fall in international prices does not automatically guarantee lower pump prices.

The outcome depends on how regulators account for import costs, taxes, levies, subsidies and other components of the final retail price.

The role of the Petroleum Development Levy

Kenya also operates a legally established stabilisation fund intended to cushion consumers when petroleum prices rise beyond certain thresholds.

The fund is financed through the Petroleum Development Levy, which the government collects on selected petroleum products.

According to the figures cited in the report, the levy comprises Ksh5.40 per litre of petrol and diesel, Ksh0.40 per litre of kerosene and Ksh0.40 per kilogramme of liquefied petroleum gas (LPG).

The fund collects approximately Ksh2.4 billion monthly, providing the government with resources to intervene when fuel prices come under pressure.

The government, however, says the money may not be sufficient during periods of substantial international price fluctuations.

Kinyua argue that relying exclusively on the stabilisation fund could exhaust the available resources, potentially forcing the government to introduce additional subsidies to keep pump prices manageable.

The cross-subsidisation mechanism is therefore presented as an alternative way of balancing price movements without depending entirely on direct government subsidies.

Nevertheless, the effectiveness of the arrangement depends on how the money is allocated, how long the interventions last and whether consumers can clearly establish why prices are rising or falling.

Oil marketers’ margins have also increasedWhile consumers face pressure from fuel prices, oil marketing companies have also received an increase in their margins.Their margins rose by Ksh2 per litre, from Ksh17 to Ksh19, following the latest phase of adjustments in August.

An EPRA official, Engineer Kinyua, said the increase was intended to reflect the costs oil marketing companies incur in supplying petroleum products to consumers.

The adjustment forms part of a phased process that began in March 2025, with the final phase implemented in August, according to the report.

The regulator says the margins will remain unchanged for the next five years in line with a cost-of-service study.

Oil marketers’ margins are among the components used in determining the final price consumers pay at petrol stations. An increase in the margin can therefore affect pump prices, even when the cost of importing fuel is unchanged or falling, all other factors being equal.

The increase does not, on its own, establish that oil marketers are making excessive profits, since the margin is intended to cover relevant business costs.

However, it adds to public scrutiny of how the different components of fuel prices are calculated.

What this means for motorists and consumers

The latest analysis highlights why international oil prices alone do not determine what Kenyans pay at the pump.

The final retail price reflects several factors, including the cost of imported fuel, taxes and levies, distribution expenses, oil marketers’ margins and any stabilisation measures applied by the government.

When international prices rise, consumers may face higher pump prices. But when import costs fall, the savings can be reduced or redirected through government pricing decisions and other components of the pricing formula.

For transport operators and businesses, these adjustments can influence operating costs, fares and the price of goods and services.

The central question is whether the mechanisms used to stabilise fuel prices offer consumers meaningful protection while ensuring that the costs are distributed fairly and transparently.

As the government continues to defend cross-subsidisation as a way of preventing sudden price shocks, motorists will be watching whether future reductions in import costs translate into relief at the pump.

The analysis ultimately shows that cheaper fuel on the international market does not always mean cheaper fuel in Kenya, because local pricing decisions determine how much of the savings reaches consumers.