Drivers of Changes in Uganda's Fuel Pump Prices During the COVID-19 Crisis
This policy note examines fuel price movement in the domestic, regional, and international fuel markets and analyses how local price increases are synchronous with regional and international prices. The global surge in oil prices continued through the first half of 2021 and peaked in October and November 2021. Because of the lifting of COVID-related lockdown conditions, the rebound in global economic activity led to increased global demand for fuel. However, the supply gap widened because of pandemic-induced supply chain disruptions and reduced global oil production. As a result, crude oil prices increased, raising fuel costs for retailers. When the local pump price is decomposed, in the first and last halves of 2021, international fuel price (crude oil) emerges as the most significant driver of Uganda’s fuel pump price, comprising 40% of the pump price, followed by tax (31%) and distribution and marketing costs as well as retail dealer profit margin (29%). Based on pass-through coefficients, results still suggest that through price transmission, international fuel price is an important factor in driving local fuel price - on average, for every dollar increase in global fuel price, there is a likelihood that about 2 dollars are passed through to the pump price. Fuel shortages, exacerbated by a weak fuel reserve capacity, have driven the skyrocketing fuel price observed during January and February 2022. The tendency of an oligopolistic cartel-like structure of the petroleum market also seems to amplify the fuel price crisis. Domestic policy actions can influence tax-related costs, distribution, and profit margin rather than the international crude oil price. In the medium term, the government can align fuel taxes with the inflation target. Fuel price increase spurs inflation; measures can be established to regulate price and costs related to distribution and margin. To minimise potential losses, tax measures should be implemented alongside regulatory measures. A fuel stabilisation fund or subsidy can also be explored to mitigate the effects of the international price crisis. Building an effective fuel reserve system (with higher capacity) is also crucial for price stabilisation during fuel crises. Regulatory and reserve measures can be designed and implemented under an autonomous public agency.