Oil Retail Pricing and Price Controls: A Case of Oil Marketing Sector in Kenya

Abstract

The study sought to determine the effect of international crude oil prices and the US dollar-Kenya shilling exchange rate on the average monthly retail prices of four oil products (Super, Diesel, Kerosene and Regular) in Kenya from year 2009 to 2012; the relationship between average monthly oil retail prices for the four products in the period before (2009-2010) and the period after introduction of price controls (year 2011-2012). Using multiple regression analysis and Pearson’s correlation analysis, the study found that monthly international crude oil prices and monthly exchange rates had a significant effect on average monthly retail prices for all the four products. The two predictor variables had a lesser explanatory power on average monthly oil retail prices in the period after introduction of price controls compared to the period before such controls suggesting that price controls had caused some effect on average monthly retail oil prices of all the four oil products. In the period before introduction of price controls, monthly international crude oil prices and exchange rates explained much of Super prices and very little of Kerosene prices whereas after the introduction of price controls, the two predictor variables explained more of Diesel prices but very little of Regular prices. A positive correlation between average monthly retail prices of Super and Diesel products in the period before and after introduction of the controls was documented unlike Kerosene and Regular average monthly retail prices which exhibited a negative correlation. The study recommends the need for ERC to closely monitor international crude oil prices and the manage dynamics of the US dollar-Kenya shilling exchange rate with a view of stabilizing the latter.

Keywords: price controls, price ceiling, price floor and price asymmetry.

JEL Classification: E640 (Pricing Policy), H42 (Publicly provide private goods), E3 (prices, business fluctuations and cycles), F31 (Foreign Exchange), L1 (Market Structure, firm strategy and market performance).