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Opinion | The Global Crude Oil Prices Dropped More than 50% In 2014 – What This Means For Uganda.

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Posted January 23, 2015 by Ugandan Diaspora News Team in Oil Prices ~ 1,514 views

     

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By Emma Sabitti — While global crude oil prices dropped more than 50% during 2014, fuel pump prices in Uganda saw little relief.  Considering annual U.S. dollar price averages, global crude oil prices have dropped 48.9% between 2012-2015, whereas fuel pump prices in Uganda have dropped a muted 13.7%.   It’s important to note that on the whole, Uganda’s fuel pump prices, absent supply disruptions, seem to follow more muted price changes compared to the price changes reflected in the crude oil price.  For example on the flip side, between 2008-2012, when average crude oil prices rose 35.6%, Uganda fuel pump prices rose a muted 12.3%.  See Figure 1.

Figure 1: Annual Average Petrol and Crude Oil Prices 2008-2015 for Select Countries ($ per litre)

     Source: Country average annual petrol prices were compiled by www.globalpetrolprices.com

                  *2015 reflects the current fuel prices and not an annual average.

A few things to note for the 2008-2015 period:

  • Landlocked countries Rwanda and Uganda have significantly higher fuel prices compared to their coastal neighbors Kenya and Tanzania.  We included the U.S. in this graph just as a base comparison.
  • The U.S. fuel pump prices closely track, in direction and magnitude, the price changes in the crude oil price, whereas the fuel price changes in the East African nations Rwanda, Uganda, Kenya, and Tanzania are smaller compared to crude oil price.
Looking specifically at Uganda, it’s tough to clearly dissect what’s going on with the fuel prices without having full access to historical fuel pump prices, and without having good public disclosure on the cost elements that go into the retail fuel price.  The availability of easily accessible public data would help check public perceptions against actual price trends.  As a 2010 World Bank paper put it:
“Information about prices and price
structure, sources and volumes of imports, differences between domestic
and international prices, and companies operating in the country is
not readily available in many [Sub-Saharan African] countries. An important role of
government is to collect and make market information available to
inform both suppliers and purchasers. If the public is well informed, it
becomes more difficult to ignore sector inefficiencies. The Energy and
Water Utilities Regulatory Authority of Tanzania provides up-to-date
detailed prices throughout the country twice a month on its Web site.
Where charges of price collusion and pressure on the government to
re-introduce price control occur, as in Kenya and Tanzania, it would be
useful to have historical price information available to the public so that
perceptions can be checked against actual price trends. Historical prices
in countries where prices are not controlled require price surveys and
can be resource-intensive to collect. But the government agency in charge
of the sector can begin by collecting price information in the capital city
and, in due course, extend data collection to other major cities.”
Factors affecting the cost of supplying petroleum products:
 
In the absence of detailed cost data, we quickly look at the factors affecting the cost of supplying petroleum products.  According to the World Bank, “For a given price of a petroleum product on the world market, end-user prices net of taxes are affected by a number of factors:
  • Market size and economies of scale
  • Mode of product transport-in terms of cost per liter of fuel transported over land, the least expensive is pipeline transport, followed by rail, and finally by trucks
  • Liberalized versus controlled pricing
  • Protection given to inefficient domestic suppliers
  • Degree of competition
  • Clear and stable legal framework with effective monitoring and enforcement
  • Regular disclosure of industry statistics
  • [Exchange rate changes]”

Uganda, a small economy has historically faced fuel price surges from supply disruptions through Kenya that were exacerbated by Uganda’s poor fuel storage capacity (~20 days) – relies mostly on fuel transportation by trucks – has liberalized fuel pricing free of government involvement, and –  is currently not great at regular disclosure of easily accessible fuel industry statistics.  It’s interesting to note that diesel constitutes more than half the fuel consumption in Uganda.

Principal fuel price components:

We used different sources to build and categorize the percent cost allocations that go into the retail fuel pump price. The percent cost is broken out into a landed/Shipping Cost, Government Taxes, and Oil industry component.  The cost buckets are meant to highlight what costs are or can be controlled by what group. The numbers are largely estimates sourced mainly from a 2010 World Bank report and are not to be read as the bible. See Figure 2.

  1. Landed/Shipping cost includes cost, insurance, and freight, which covers the FOB price at the port from which the petroleum product is imported, marine freight and all freight/cargo-related costs, evaporation and other losses en route, and port fees to land the product in the pertinent receiving port.  Average 32% across Uganda, Kenya, Tanzania.
  2. Government take, which includes all taxes, duties, and government fees that are incurred in the supply chain that go to the treasury or to earmarked funds.  Average 41%.
  3. Oil industry component, which covers all gross margins for storage, inland bulk transport, local delivery, wholesale, and retail distribution.  Average 27%.
Figure 2: Estimated Percent fuel price component allocation for select countries
With good and long historical data, it would be interesting to explore fuel supplier inventory management, exchange rate management, shipping and transport cost management, and how significant a role poor storage facilities play in fluctuating fuel prices.
We leave you Harvard Business School dean Nitin Nohria, “Small, incremental bribes can create a moral climate where large-scale corruption becomes pervasive.”

Happy New Year, and enjoy the week!

Emmanuel Sabiiti 
About Emma Research
We enjoy researching and participating in the global financial market. We are Boston-based.
The information in this email is not a recommendation to buy or sell any security.


About the Author

Ugandan Diaspora News Team

Ugandan Diaspora News Online is an independent, non political news portal primarily aimed at serving Ugandans who work and reside outside Uganda. Our aim is to be a one stop shop for everything Ugandan and the celebration of our Ugandan heritage.

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