The Economics Of Fuel Shortage In Kenya

Fuel shortage in the country, which has escalated for the third week now, has sent motorists into a frantic panic as they run up and down in search of the commodity.

From long queues to a limited amount of fuel at high costs and lack of fuel ins some stations, Kenyans have been frustrated and disappointed.

To curb the recent commodity shortage, the Government released 34.4 billion shillings to the oil markets on Monday 4th, 2022, as a subsidy and to cater for the 13 billion shillings 3-month arrears demanded by the oil marketers.

However, the situation seems to e worsening by the day, as witnessed in major petrol stations across the country. What is happening, and how can this issue be solved to ease a situation that could turn into a national crisis?

According to David Ndii, an economist, columnist, and renowned author, the ongoing fuel shortage in the country has two economic sides that must be looked into deeply to solve the puzzle.

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The first is a failure of price controls. When circumstances change, prices adjust accordingly, enabling businesses to operate profitably.

If prices are fixed and cannot adjust, then quantities (supply) adjust. That is why price controls and shortages go hand in hand.

This was the norm in Kenya, especially before the budget when products were hoarded in anticipation of price hikes.

However, shortages are limited to products and services whose prices are regulated, including electricity, water, and fuel. The price mechanism is why a decentralized market system beats a centralized command and control economy.

The second issue is government creditworthiness. A government IOU is supposed to be as good as money in the bank. A “letter of comfort” issued to a lender by a national Treasury is as good as collateral.

A week ago, the Government assured the oil marketers that they would be paid the money owed. The President even signed the supplementary budget authorizing the release of 34billion shillings to the oil marketers.

However, the turnout of events was not the expected. The oil marketers have decided that the Government’s word is not its bond. Today oil marketers, tomorrow someone else. Soon, everyone. This is the road to default.

As much as price fluctuations in the global market affect the retail price of the commodity, diving into these two issues might have the potential to bring a lasting solution to a problem that is causing headaches to the country.