Fuel is not a major factor
in the price of commodities
The Sunday Nation
Nairobi,
09 May 2010
Reader George Thuo (not the MP) ruled me off-side on last week’s article
and came close to showing me the Yellow Card. I suppose his sentiments
are shared by many others when asks: “Which calculator were you using?
…8am to 9pm = 13 hours [and] 5minutes per voter = 12 voters per hour…”
Things got mixed up: the 9 should have been a 5 (of course the voter
registration centres were closing at 5pm, not 9pm!) and the 5 a 10 (as
the President put in the IIEC television advert: “na ukienda pale, ni dakika kumi tu – basi” [when you go there, it
will take 10 minutes and that’s it]).
Sorry about that; I will be more keen in future.
And now, we turn to this week’s topic: Oil marketing company Kenolkobil
announced a Sh2.50 per litre increment on the price of premium
petroleum. As expected, the public reacted with anger even before giving
full consideration the explanation given for the increase.
Many motorists and traders interviewed in the media expressed displeasure
with the increment, saying that this will inevitably result with
increases in prices of most commodities. The question then is: should
the Sh2.50 have a large effect in the prices of other goods?
In June 2006, I wrote about the expected increase in commuter fairs after
the Minister for Finance increased fuel levies by Sh3.20 per litre. By
looking at the average consumption rate of a
matatu and the mean distance for urban routes, it turned out that
the Sh3.20 increment should correspond to about 90 cents increase in
fairs.
Without repeating the details of that calculation, it is clear that since
Sh2.50 is less than Sh3.20, the corresponding increment in commuter
fairs should be lower that 90 cents per trip. Indeed, using the law of
proportions, it turns out to be only 70 cents.
The same argument applies to transporters of goods. Assuming that fuel
accounts for about 20 per cent of the price charged, we can calculate
the corresponding increment as follows:
The additional Sh2.50 is about 3 percent of the previous price. Thus the
running costs will increase by 3 per cent of 20 per cent. That is 0.6
percent. Yes; zero-point-six! In other words, a job that was charged
Sh5,000 should now be raised to Sh5,030 – only Sh30 more.
How about other commodities: do the traders have justifiable reason to
hike prices on account of increased transport costs? To find out, we
need to know the contribution of transportation charges on the total
cost of the goods. I estimate it at below 10 per cent.
For example, the transport element for an item costing, say, Sh100, is at
most Sh10. Zero-point-six per cent of Sh10 only 6 cents. Thus the
Sh100-product now will cost Sh100.06.
It is clear then that, contrary to popular opinion, the cost of fuel is
not a major factor in determining the price of most commodities.
However, that does not belittle the fact that oil is used in the supply
of all products and services. It’s a kind of a Heisenberg uncertainty
principle: the input that is needed for the largest number of products
affects their prices by the smallest amount.
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