The impact of exchange rate movenents on product pricing: the case of Kenya's petroleum industry

Abstract

The main purpose of this project was to investigate the impact of exchange rate movements on the retail price of petroleum products after deregulation of the oil industry in Kenya. The influence of other factors, namely, tax levels, crude oil costs, marketing and distribution costs, and freight and insurance charges was also investigated.

Both primary and secondary data were collected for analysis, the former by use of a self administered questionnaire to oil company executive while the both category of data suggests that taxation was the single most influential variable ion explaining the prevailing retail of oil in Kenya.

The influence of exchange rate movements on oil products was not found very strong. Data available suggest that most firms places a significant consideration to exchange rate movements in working out the 'real' cost of crude. As a result, firms consider any foreign exchange losses a part of that cost. This implies that from the point of view of industry operatives, exchange rate influence would be difficult to isolate. Generally, however, appreciations of the Kenya shilling was found to result in lower retails prices while depreciations had the reverse effect but such movements were not fully reflected in retail prices.

Given these conclusions, the Kenya government has to act fast to lower the tax levels on oil and to institute measures that create confidence in the economy by enhancing economic growth thus smoothening exchange rate movement.