Is There A Case For Government Action To Stabilize Energy Prices?

Yes. There are 4 possible channels through which retail fuel prices can unnecessarily be so high in the country:

First, through market forces of demand and supply, as the Ugandan economy has grown at an average rate of 6 percent per annum for the last two decades could lead to increased demand for more fuel/energy and if unmatched by increased supply would result in high prices at the pump.

However, this is an unlikely channel for the current fuel crisis, Uganda consumes a small percentage of oil produced in the world, and therefore it cannot influence world demand, supply and price forces. Its internal fuel prices should follow world oil price trends.

Second, high government taxes on fuel companies can lead to price hikes at the pump passed on to the consumers by the oil companies.

Third, through transport costs, road transport makes oil transported from Mombassa to Kampala inevitably expensive. A big portion of retail pump prices can reflect high transport costs especially with the new axle road requirements that limit amount of fuel a truck can carry at ago.

Fourth, the higher prices could reflect market manipulation/speculative behaviour by oil companies to earn windfall profits to oil companies.

Uganda is landlocked, with limited sources of fuel; oil companies can take advantage of this by hoarding/stockpiling oil and create a supply deficit in order to charge exorbitant prices of what they supply.

Discontent among Ugandans indicates that this is the likely channel for the current fuel price crisis.

What are the effects of fuel price hikes to the economy overall and the ordinary individuals?

Fluctuating/volatile fuel prices can have significant negative effects on the performance of the economy and macroeconomic stability in various ways. I will attempt to explain some here:

First, the immediate effect of high fuel/energy prices is an increase in production costs for goods and services because energy is a major input in the industrial production process.

These are passed on to consumers as high product prices curtailing consumer demand for these products.

Fluctuating, high energy prices lead to high production costs, which lead to high product prices that depress individual demand leading to overall reduced private consumption and thus overall reduced economic activity in the country.

Second, rising energy prices, consumer products prices, capital goods prices and exports prices lead to the economy to experience a general rise in prices of all goods, because energy prices feed into all aspects of the economy. The result is inflation. Core inflation has been rising since last year to the current double digit of 12.6 percent.

Inflation is bad for everyone, it reduces real disposal income (income available for individuals to spend on goods and services falls in value), depresses aggregate demand, hence national economic output level falls.

Third, reduced national economic activity leads to loss of employment, plants, and agro-processing sectors, operate below capacity because of fuel shortages and in order to cut energy costs, could employ few people. This will lead to income loss and further reduced private consumption of goods and services.

Fourth, increased costs of production make it hard to export. The regional and international export competitiveness of Uganda weakens because of higher export prices. This leads to reduced demand for national exports and loss of national income.

Firth, fall in business investment and construction services because they are adversely affected by the high energy prices, reduced output and lower real disposable income.

Sixth, there will be a rise in interest rates to match rising inflation thus increasing cost of credit as well as cost of doing business.

Seventh, loss of value of Uganda shilling relative to other currencies, rising inflation which peaked at 15.8 percent in August 2008, leads to the shilling losing its value. In the last one year the shilling has lost almost 15 percent of its value i.e. from 1700 in December 2007 to current 1960 per dollar.

Eighth, overall, there will be loss of national income, i.e. real GDP will decline with a slow down in economic activity. Fuel prices have increased to a 30-40 percent since last year, 2007.This could lead to 1-3 percent loss of GDP, and at the current estimates of national income at approx. USD 10 billion, 3 percent income loss is equivalent to USD 300 million. This is a staggering loss for government inaction (bigger than annual revenue from coffee exports or foreign aid to Uganda)! (Possibly that’s why the ministry of finance is forecasting a growth rate of 7.2 percent from the previous 8.9 percent achieved last financial year.

So is there a rational for government intervention in the current crisis?
Government can act to stop speculative, monopolistic behaviour of oil companies, who may be manipulating the fuel markets, by artificially supplying less than the efficient level of fuel to influence its price and take home windfall profits.

Through regulation government, can demand commercial transparency and predictability of oil companies` transactions because they control a vital part of national economy and because of need to protect Ugandan citizens from such predatory behaviour.
It should not fix prices; price fixing would worsen the situation by creating magendo (black markets) for fuel, which further destabilise the economy.
So what are the available Policy Choices for the government?

First, it should act as a priority to ensure adequate logistical infrastructure for adequate spare capacity to smoothen supply of fuel at anytime of the year and reduce fuel price volatility/fluctuations and ensuring macroeconomic stability.
This will deter speculative behaviour intended to benefit a few individuals at the expense of average Ugandans.

Second point of action and of strategic importance is the investment in improved railway transport. Railway lines would guarantee a relatively cheaper way of transporting fuel both nationally and across our neighbours at least cost and in large quantities.

Third, investment in search for other alternative reliable sources of energy, including renewable besides the prospective oil exploration in western Uganda, build a scientific infrastructure to champion energy related research in the region.