Fuel price discrepancies explained
Nov 13, 2009
MEMBERS of Parliament, a short while ago, queried the issue of different fuel prices at different pump stations. Sseguya Lubyayi, the vice-chairman of the tourism, trade and industry committee, said either stations selling fuel expensively are cheating th
By Rebecca Harshabrger
MEMBERS of Parliament, a short while ago, queried the issue of different fuel prices at different pump stations. Sseguya Lubyayi, the vice-chairman of the tourism, trade and industry committee, said either stations selling fuel expensively are cheating the public or those selling cheaply, could be adulterating the fuel, tampering with pumps or smuggling fuel into the country.
The MPs resolved to investigate fuel stations, especially those with abnormally low prices.
Fuel usually comes into the country at the same cost, at similar taxes and therefore should reflect negligible differences in pump prices.
Saturday Vision hit the trail of the fuel destined for Uganda to discover the cause of price fluctuations.
Source of fuel
The fuel you buy may have come from anywhere in the Arab world, but the loading port used is in Bahrain, an island country in the Persian Gulf. Before coming to Uganda, the fuel travels two major routes. The first is through Kenya, beginning with the port in Mombasa, then either passing through Eldoret or Kisumu, before crossing the Kenyan border. Nearly 90% of fuel that enters Uganda comes through the Kenya route. Fuel may also come from Bahrain to Dar es Salaam in Tanzania. It moves to Mwanza, a southern port of Lake Victoria, then crosses the lake to Kampala.
Players in Uganda
Fuel is sold locally by three different players. Multinational companies like Shell, Total, Engen, Kobil bring fuel from the port in Mombasa or Dar es Salaam and sometimes directly from the port of dispatch in Bahrain. There are also mid-level players like City Oil, Gaz, Delta, which also bring fuel directly from Kenya or Tanzania. They deal in lesser amounts and when they have shortfalls, they buy from middlemen.
Small players include pumps and filling stations which source their fuel locally from middlemen and larger depots, which store and dispense oil.
Oil prices
The first factor that can either push up or decrease fuel prices is international oil prices, which move by the minute, according to Ivan Wambuzi Kyayonka, country chairman for Shell Uganda Limited for both Uganda and Tanzania. Oil prices are set by commodity traders, who bid on oil future contracts. A future contract is an agreement to buy a commodity at a date in the future, at a specific price. The current supply of oil in the market - which is strongly affected by OPEC, the size of available oil reserves, demand and crises in oil-producing countries - determines the prices that commodity traders offer. Since 2009, oil has been trading between sh70,000 and sh146,000 a barrel (158.9873litres or 8 jerrycans). It reached a peak last year, when it was trading at sh300,000 a barrel, according to Google Finance. Irene Yego, a petroleum dealer and middleman, who buys fuel wholesale and sells to mid-level fuel companies in Kampala, says it costs her $600 to purchase 1,000 litres from her suppliers in Kenya, which include Oil Libya, Gulf Energy and Kenyan Kobil. One litre is about $.60, or approximately sh1,200.
Ocean freight
Ocean freight is another major factor that affects the prices you see at the pump. Between 2007 and 2009, there was a large rise in piracy off Somalia’s coast, leading to a shocking 10-fold increase in insurance premiums. Before, insurance costs were as low as $900, (sh1.8m), but firms are now charging as much as $9,000 (sh18m).
Port fees
When ships reach the port, either in Mombasa or Dar es Salaam, a third cost incurred is demurrage. “This is the number of vessels waiting to offload their cargo,†said Kyayonka. “Ships can wait a month to offload, or get stuck at the port.†The next cost is transporting the goods to Kampala, as well as marking and clearing them at the border. Fuel can travel using the pipeline, which is the cheapest method. Rail is cheaper than road, but extremely inefficient and predictable, according to Kyayonka.
Road transport
By road, a truck can carry up to 42,000 litres of diesel, or 50,000 litres of petrol. Transporting the fuel to Kampala from Mombasa is sh93 per litre, according to Yego. A full truck of diesel costs sh3.9m, while petrol costs 4.65m.
Clearing costs
At the border, the Uganda National Bureau of Standards (UNBS) marks the products for local markets, at the cost of sh3 per litre, or sh150,000 for a full petrol truck. The marking distinguishes export products from products for local market. Border agents also have to clear the products at a cost of sh1 per litre, or sh42,000 for a diesel truck.
Taxes
Another cost is taxes. “Petroleum taxes contribute to 25% of Government revenue,†said Kyayonka. Government charges a 30% tax on pump price. Then, at the border, there is another tax of sh850 for petrol and sh530 for diesel.
Profit
Finally, middlemen, companies (like Shell or Total), and retailers add a margin for their profit.
The total cost of fuel up to the station, minus profit and company’s overhead costs is about sh2,147 if the dollar is at $2,000.
Cheaper fuel
So, why do some stations, especially small company ones which may just have one pump, sell fuel at a much cheaper rate?
One reason could be that they have very low operatoin costs. Multinational companies like Shell, Total, Engen, Kobil, have high costs of operation. They pay workers highly, have office requirements, overhead costs, corporate responsibility, advertising etc, all of which must be catered for by the returns on their products. They, therefore deal in large volume to cope with costs.
Mid-level players like City Oil, Gaz, Delta, and smaller players like Yego have relatively lower costs for staffing and can afford to sell their fuel at a cheaper cost.
Fraud allegations
Fuel station pumps may be tampered with to give you less fuel than is measured by the meter. However, the station manager at one fuel station in Banda says this is less likely in urban centres. “Every six months, UNBS inspects fuel and pumps, then puts a seal on the pump to communicate to consumers that the station won’t cheat them. If in doubt, demand to see the seal,†he said
But the other reason could be that some stations allegedly adulterate their products. According to Yego, some unscrupulous dealers mix diesel with paraffin. UNBS came in to monitor the quality of fuel in 2003, but still, some dealers still adulterate their products. Kerosene has fewer taxes and is much cheaper.
“Parafin can actually run a diesel engine,†says Shuaib Kawuma, a mechanic along Rubaga Road. “But the fuel filter will get dirty very fast and need frequent changing. If you don’t change it, it spoils the injector pump. In petrol engines, there is a loss of power. You have to burn more fuel to move to the same place and so spend more money. There is a low mileage per litre.â€
The manager in Banda, who declined to be mentioned, said you can easily tell adulterated fuel by its smell. “The scent of adulterated fuel is almost like booze. The fuel is dense and very dark. Unadulterated petrol should be very light in density, almost like water,†he said
Smuggling
Workers and a manager at several stations in Banda concurred that smuggled fuel does not come from Kenya. They said it is taken from government and private vehicles, siphoned off and then sold in jerry cans on the outskirts of Kampala on Masaka Road and in northern towns like Arua. Mbiko and Jinja are other places where you can buy fuel smuggled from large government vehicles. Prices then become cheaper by about sh100. The jerrycans eventually expand so the measurements are irregular. It is also likely to be mixed with diesel or kerosene.
Fuel in Western Uganda
According to Yego, it will take a long time for petrol prices to go down, because oil exploration companies like Tullow will want to recoup their investment in the short-term. But in the long-term, fuel prices could go down if an oil refinery is built, and companies won’t have to transport the fuel from Mombasa or Dar es Salaam. However, if the oil has to taken be elsewhere for processing, then re-imported back to Uganda, fuel prices will remain the same. Kyayonka is sceptical about whether Uganda will have the capacity to refine oil in-country, and is waiting to see. Other factors that could bring down the cost of fuel would be a more efficient infrastructure, particularly the railroad. Better roads, less taxes, and more ocean stability near the horn of Africa.
MEMBERS of Parliament, a short while ago, queried the issue of different fuel prices at different pump stations. Sseguya Lubyayi, the vice-chairman of the tourism, trade and industry committee, said either stations selling fuel expensively are cheating the public or those selling cheaply, could be adulterating the fuel, tampering with pumps or smuggling fuel into the country.
The MPs resolved to investigate fuel stations, especially those with abnormally low prices.
Fuel usually comes into the country at the same cost, at similar taxes and therefore should reflect negligible differences in pump prices.
Saturday Vision hit the trail of the fuel destined for Uganda to discover the cause of price fluctuations.
Source of fuel
The fuel you buy may have come from anywhere in the Arab world, but the loading port used is in Bahrain, an island country in the Persian Gulf. Before coming to Uganda, the fuel travels two major routes. The first is through Kenya, beginning with the port in Mombasa, then either passing through Eldoret or Kisumu, before crossing the Kenyan border. Nearly 90% of fuel that enters Uganda comes through the Kenya route. Fuel may also come from Bahrain to Dar es Salaam in Tanzania. It moves to Mwanza, a southern port of Lake Victoria, then crosses the lake to Kampala.
Players in Uganda
Fuel is sold locally by three different players. Multinational companies like Shell, Total, Engen, Kobil bring fuel from the port in Mombasa or Dar es Salaam and sometimes directly from the port of dispatch in Bahrain. There are also mid-level players like City Oil, Gaz, Delta, which also bring fuel directly from Kenya or Tanzania. They deal in lesser amounts and when they have shortfalls, they buy from middlemen.
Small players include pumps and filling stations which source their fuel locally from middlemen and larger depots, which store and dispense oil.
Oil prices
The first factor that can either push up or decrease fuel prices is international oil prices, which move by the minute, according to Ivan Wambuzi Kyayonka, country chairman for Shell Uganda Limited for both Uganda and Tanzania. Oil prices are set by commodity traders, who bid on oil future contracts. A future contract is an agreement to buy a commodity at a date in the future, at a specific price. The current supply of oil in the market - which is strongly affected by OPEC, the size of available oil reserves, demand and crises in oil-producing countries - determines the prices that commodity traders offer. Since 2009, oil has been trading between sh70,000 and sh146,000 a barrel (158.9873litres or 8 jerrycans). It reached a peak last year, when it was trading at sh300,000 a barrel, according to Google Finance. Irene Yego, a petroleum dealer and middleman, who buys fuel wholesale and sells to mid-level fuel companies in Kampala, says it costs her $600 to purchase 1,000 litres from her suppliers in Kenya, which include Oil Libya, Gulf Energy and Kenyan Kobil. One litre is about $.60, or approximately sh1,200.
Ocean freight
Ocean freight is another major factor that affects the prices you see at the pump. Between 2007 and 2009, there was a large rise in piracy off Somalia’s coast, leading to a shocking 10-fold increase in insurance premiums. Before, insurance costs were as low as $900, (sh1.8m), but firms are now charging as much as $9,000 (sh18m).
Port fees
When ships reach the port, either in Mombasa or Dar es Salaam, a third cost incurred is demurrage. “This is the number of vessels waiting to offload their cargo,†said Kyayonka. “Ships can wait a month to offload, or get stuck at the port.†The next cost is transporting the goods to Kampala, as well as marking and clearing them at the border. Fuel can travel using the pipeline, which is the cheapest method. Rail is cheaper than road, but extremely inefficient and predictable, according to Kyayonka.
Road transport
By road, a truck can carry up to 42,000 litres of diesel, or 50,000 litres of petrol. Transporting the fuel to Kampala from Mombasa is sh93 per litre, according to Yego. A full truck of diesel costs sh3.9m, while petrol costs 4.65m.
Clearing costs
At the border, the Uganda National Bureau of Standards (UNBS) marks the products for local markets, at the cost of sh3 per litre, or sh150,000 for a full petrol truck. The marking distinguishes export products from products for local market. Border agents also have to clear the products at a cost of sh1 per litre, or sh42,000 for a diesel truck.
Taxes
Another cost is taxes. “Petroleum taxes contribute to 25% of Government revenue,†said Kyayonka. Government charges a 30% tax on pump price. Then, at the border, there is another tax of sh850 for petrol and sh530 for diesel.
Profit
Finally, middlemen, companies (like Shell or Total), and retailers add a margin for their profit.
The total cost of fuel up to the station, minus profit and company’s overhead costs is about sh2,147 if the dollar is at $2,000.
Cheaper fuel
So, why do some stations, especially small company ones which may just have one pump, sell fuel at a much cheaper rate?
One reason could be that they have very low operatoin costs. Multinational companies like Shell, Total, Engen, Kobil, have high costs of operation. They pay workers highly, have office requirements, overhead costs, corporate responsibility, advertising etc, all of which must be catered for by the returns on their products. They, therefore deal in large volume to cope with costs.
Mid-level players like City Oil, Gaz, Delta, and smaller players like Yego have relatively lower costs for staffing and can afford to sell their fuel at a cheaper cost.
Fraud allegations
Fuel station pumps may be tampered with to give you less fuel than is measured by the meter. However, the station manager at one fuel station in Banda says this is less likely in urban centres. “Every six months, UNBS inspects fuel and pumps, then puts a seal on the pump to communicate to consumers that the station won’t cheat them. If in doubt, demand to see the seal,†he said
But the other reason could be that some stations allegedly adulterate their products. According to Yego, some unscrupulous dealers mix diesel with paraffin. UNBS came in to monitor the quality of fuel in 2003, but still, some dealers still adulterate their products. Kerosene has fewer taxes and is much cheaper.
“Parafin can actually run a diesel engine,†says Shuaib Kawuma, a mechanic along Rubaga Road. “But the fuel filter will get dirty very fast and need frequent changing. If you don’t change it, it spoils the injector pump. In petrol engines, there is a loss of power. You have to burn more fuel to move to the same place and so spend more money. There is a low mileage per litre.â€
The manager in Banda, who declined to be mentioned, said you can easily tell adulterated fuel by its smell. “The scent of adulterated fuel is almost like booze. The fuel is dense and very dark. Unadulterated petrol should be very light in density, almost like water,†he said
Smuggling
Workers and a manager at several stations in Banda concurred that smuggled fuel does not come from Kenya. They said it is taken from government and private vehicles, siphoned off and then sold in jerry cans on the outskirts of Kampala on Masaka Road and in northern towns like Arua. Mbiko and Jinja are other places where you can buy fuel smuggled from large government vehicles. Prices then become cheaper by about sh100. The jerrycans eventually expand so the measurements are irregular. It is also likely to be mixed with diesel or kerosene.
Fuel in Western Uganda
According to Yego, it will take a long time for petrol prices to go down, because oil exploration companies like Tullow will want to recoup their investment in the short-term. But in the long-term, fuel prices could go down if an oil refinery is built, and companies won’t have to transport the fuel from Mombasa or Dar es Salaam. However, if the oil has to taken be elsewhere for processing, then re-imported back to Uganda, fuel prices will remain the same. Kyayonka is sceptical about whether Uganda will have the capacity to refine oil in-country, and is waiting to see. Other factors that could bring down the cost of fuel would be a more efficient infrastructure, particularly the railroad. Better roads, less taxes, and more ocean stability near the horn of Africa.