COVID-19: Kenya continues pipeline plan despite drop in oil prices

In Kenya, diesel prices have recently plummeted by the largest margin in 13 years due to the decrease in global crude prices. The government had wanted to lower the prices even further, but the implementation of a new levy last month, in response to changes in the laws and to provide tax relief amid the COVID-19 pandemic, prevented deeper reductions. The country remains steadfast in its decision to proceed with the construction of a $1.135 billion pipeline from Lokichar to Lamu to enhance its exports of crude oil. Odhiambo Ramogi, an economic analyst, shed light on the situation during an interview on CNBC Africa. Real prices have hit record lows, with diesel prices dropping significantly more than petrol. The Energy and Petroleum Regulatory Authority justified this move by citing the decline in international fuel prices, which had even plunged into negative territory in the United States. This drop led to a decrease in barrel prices, reaching as low as $9 at one point. While this prompted the regulatory authority to adjust fuel prices downwards, it acknowledged that prices could have fallen even further had it not been for the amendments to the tax laws in 2020. The President had proposed legislation to increase the tax burden on petroleum products, which in turn affected the extent to which fuel prices could be reduced. Inflation in the country rose from 5.51% in March to 5.62% in January, primarily driven by surging food prices. Despite the decrease in fuel prices, the impact on inflation may not be as substantial as expected. The global supply chain disruptions are likely to result in varying trends, with some product prices rising contrary to the general expectation of a decline in inflation. Additionally, considering the recent locust invasion that threatened food security, the magnitude of its impact will determine whether food prices will indeed drop significantly. Fuel prices influence food prices through transportation and processing costs. However, the correlation between them is contingent on import quantities and how international food prices affect locally sourced products. Nonetheless, Kenya is pressing forward with its ambitious plan to build the pipeline from Lokichar to Lamu, despite concerns about falling crude oil prices in the global market. The pipeline is crucial for facilitating the export of oil extracted from northern Kenya, as most of the oil produced in Africa is earmarked for export. While petroleum companies advocated for the use of oil domestically, the government remains resolute in its decision to export the resource for revenue generation. This move is expected to benefit the government financially, although the impact on consumers remains uncertain. The government's interest in economic growth through oil exports must be weighed against the concerns raised by fuel vendors, highlighting the complexity of the situation. The budget estimates reveal that the State Department for Petroleum plans to allocate around 648.5 million Kenyan shillings for the project in the upcoming financial year, in addition to the 777.5 million Kenyan shillings already earmarked. The financing of this endeavor seems to rest solely on the Kenyan government, as no multilateral or bilateral funding arrangements have been observed. The project's total cost may require staggered allocations over several years to ensure its completion. Despite these financial considerations, Kenya's commitment to the pipeline underscores its dedication to boosting its oil exports and potentially augmenting its revenue streams.