If you have been following the news or interested in the oil sector globally, you must know that the world crude oil prices has reached at below $70 per barrel from $115 per barrel back in June! That is a 40% price drop.
I am not going to go into why the price has dropped or been dropping (there are a number of articles all over the Internet with details) To save you time on Google Search, here is an article Why the oil price is falling – the Economist, you should read it!
Over the last couple of days, I have seen tweets and interacted with many people who are asking the same question;
Why are the Pump prices of fuel NOT reducing, yet the world oil price has reduced?
@kasujja #shell and #total have refused to reduce the pump prices despite the global trends. We really need consumer protection in #uganda
— Santine™ (@ssenteza12) December 12, 2014
@VivoEnergyUg why are pump prices at #shelluganda fuel stations not going down yet oil prices worldwide are going down? — Eric Lubega (@ericlubega) December 13, 2014
Interestingly, this in not only being asked by people in Uganda but different parts of the world.
Over weekend, I had a long and interesting debate with Gilbert Buhirwa, Allan Ssenyonga, Santine and, Allan Kasujja and Nkem Ifejika chipped in too!
@cmugume I have fairly good knowledge of oil economics as I plan to study it at post graduate level @ssojo81 @ssenteza12 @kasujja
— 吉尔伯特 Bahirwa© (@b_guilbert) December 13, 2014
I am not going to post the whole conversation but I am going to answer your question on why Fuel Pump prices have not dropped.
Local fuel pump prices are not ONLY determined by the global crude oil price! As further confirmed by the Managing Director of Vivo Energy Uganda, the Shell licensee in the Uganda, Mr. Hans Paulsen.
The world oil prices (Platts) are one key determinant, as well as the cost of bringing the goods into the country, the strength of the Uganda Shilling, among others. You have noticed by now that our prices at Shell service stations have decreased.
The other factors that determine the local pump price include the dollar rate compared to Uganda Shillings. In May/June when a barrel of crude oil was $115, in Uganda, the dollar was about 2518Ugx. In December now, at $70 a barrel, the Uganda Shilling has dropped value, with the dollar at 2780Ugx. You need to note that these fuel companies make their purchases/logistics in US Dollars and sell the fuel in Uganda Shillings. Depreciation of the shilling will definitely affect the pump price.
These fuel companies in Uganda (not just Uganda) make bulk purchases, the fuel that is being sold right now on the local market, was probably purchased more than 3-5 months ago!
Here is what Vivo Energy Uganda’s Hans Paulsen, had to say about this;
Uganda is a landlocked country and most of the importation is done from the middle east via Kenya which means that at any specific time we have two to three months of stock in the logistic chain.
Something Allan Kasujja mentioned too!
@cmugume @b_guilbert @ssojo81 @ssenteza12 – @robyounguk was explaining to me and @nkemifejika – current stock was bought at high price — Alan Kasujja (@kasujja) December 13, 2014
Rob Young (robyounguk), is a Business reporter and presenter on BBC World Service radio.
A drop in the world crude oil price will not affect the stocks that were bought before the price drop.
@cmugume @b_guilbert @ssojo81 @ssenteza12 – As a result, airline tickets, for eg will not be lowering their prices for a while yet. — Alan Kasujja (@kasujja) December 13, 2014
All in all, yes we shall experience the benefits of the crude oil price drop BUT it will not be immediate.
You may ask, why then is a disruption in Kenya leads to immediate price hike?!
@cmugume @ssenteza12 @b_guilbert @kasujja when we get trouble in Kenya The price is quick to rise. what happens to the stocks in dat case
— Santine™ (@ssenteza12) December 13, 2014
Well, let me ask you this, if you were doing supply business and there is trouble along your supply route affecting the delivery of your next stock, what would you do with your current stock?
1. Continue selling like nothing has happened?
2. Workout measure to ensure your business wont fail as you sort out the issue
3. Stop selling and keep stock until your supply is restored
Depending on your choice of answer above, you can tell me if we need to have this debate too!
If you think I am wrong or missed something, I would love to hear from you… use the comments below.
