Deregulate Fuel Pricing!

Published on 12th July 2006

The hike in fuel prices occasioned by the recent budget is deeply biting into the common man’s pocket and altering lifestyles of many a family. Transport costs have dramatically soared triggering price hikes in other commodities as a result of the Ksh 3.20 per litre increase.

 

“The offering has drastically reduced in my church. Most faithfuls no longer attend church with their family members as they can’t afford fares for all of them,” laments Pastor Zakayo Indeche of a local church in Shauri Moyo.

 

He is not alone. Musembi, a news vendor from Donholm, has had to cut the food budget in his house hence endangering the dietary requirements of his family. With a daily income of Ksh.300 and two children to take to school, Musembi parts with Ksh.80 daily per child for fare, besides his.

 

The scenario which has pitted commuters against transport managers recently broiled into a showdown between the public and public service vehicle operators in Garrissa District. The former pelted matatus with stones over fare hikes causing the police to intervene.

 

“Why should they pelt us? We are going ahead with the new fares owing to high fuel levies and maintenance costs,” says Abdullahi Samatar, Chairperson of the Matatu Owners Association.

 

“Although the TLB chairperson, Hassan Kamwaro, and Transport Permanent Secretary, Gerishon Ikiara, say the hikes in fare are unjustified, this is mere public relation talk which will change nothing,” says Onyango, a Jomo Kenyatta International Airport based taxi driver.

 

Petrol and diesel are significant in many enterprises. When their prices rise, businesses either pass the cost to the beleaguered consumer and in the process compromise the business’s competitiveness as consumers look at competitively priced alternatives, or simply close shop. No business writes to the government to say it is closing down as a direct result of petrol price hike.

 

In the face of the petrol price hike, the taxi operator for example, with full knowledge of ensuing consequences, is faced with no option but to fold up or pass the cost to the commuter. The commuter will look at alternative means of transport.

 

What implication does this have on the economy? The consumer’s disposable income is seriously reduced precipitating less saving. The income displaced by the price of petrol does not go to other areas where it would translate into more jobs. More income for businesses results in expansion and the employment of more people. Economists call this “opportunity costs”. The cost of the increase in the price of petrol, which translates as income for the oil industry, has a negative impact on consumers and the economy at large. So what is to be done? Deregulate the pricing of liquid fuels!

 

The government will not be blamed regarding price increases as prices will be dictated by market forces. The price of crude oil will be a production cost that producers and refiners will find innovative ways to mitigate. In a deregulated scenario, producers and retailers of the commodity compete with one another on the basis of pleasing the consumer. This means different prices and service packages all in the name of consumer satisfaction. The taxi operator then has latitude in terms of who offers the best fuel deal all things being considered.

 

The consumer’s disposable income accrues to the banks, investment institutions, philanthropic causes, more goods being bought and, in the process, more business being empowered. The paraffin vendor sells more paraffin, and the petrol attendants become more courteous to the consumer, and so on.

 

The litmus test for the government when faced with a stark choice should be: what is in the best interests of the consumer? Pass laws which penalize property investment and have less investment. Punish people for saving and investing capital and get less investment.

 

Thomas Sowell opines that price controls “have been happening for literally thousands of years, going back to price controls in ancient Rome and Babylon. Yet price controls have always been popular politically, despite being counterproductive economically. After all, how many votes do economists have and how many voters know economics?"


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