Effect Of Supply Shocks On Fuel Price Fluctuations In Kenya

Abstract

The Kenya government is on its edge to make the economy to be more conducive to both investors and its citizen on oil and petroleum businesses. The government had gone ahead to form a commission and other authorities to enhance affordable petroleum and energy to the economy. There were challenges that were still hindering provision of fuel at stable prices. The purpose of this study was to establish the effect of shocks on fuel prices fluctuations in the Kenyan economy. The objective of this study was to determine the effect of supply shocks on pipeline transportation cost, inflation rate, world oil prices and foreign exchange rates on fuel price fluctuation. The population of study was identified to be Kenya while the unit of analysis was Energy and Petroleum Regulatory Authority (EPRA). The study adopted time series data design for 8 years from 2015 to 2022 in monthly intervals to make 96 observations. Stata version 13 was used to assist in data analysis and presentation after the data went through diagnostic test. VECM model was employed to analyze the relationship between dependent and independent variables after which conclusions and recommendations were made. The study came out with a number finding. First, it was determined that rate of inflation shocks have significant effect in fuel price fluctuation as study revealed that there was a negative relationship with fuel price fluctuation. Second, it was ascertained that world oil prices shocks have significant effect in fuel price fluctuation as there was a positive relationship existing between world oil prices and fuel price fluctuation. Third, the study established that exchange rate shocks had significant effect on fuel price fluctuation as there was a negative relationship between exchange rates and fuel price fluctuation. Forth, it was established that there was a positive relationship between pipeline cost shocks and fuel price as it has a slight significant influence in fuel price fluctuation. The study recommended that; the government should establish fixed exchange rates to cub losses from exchange of currencies. It was also recommended that tax subsidies to be introduced to control impact of taxes proportion on fuel prices.