The Effect of Exchange Rate Fluctuations on Changes in Retail Oil Prices in Kenya

Abstract

The last half decade has seen extraordinary price fluctuations in the Kenya's oil market. Equally, the exchange rates (especially US dollar to Kenya's Shillings) have been characterized by significant fluctuations with the local currency hitting historical lows. Oil price levels can affect the world economy in many different ways. An increase in the oil price will raise the cost of production of goods and services in the economy so it will lead to an increase in price levels. Kenya adopted a floating exchange rate regime in 1993. Since then the exchange rates have been determined by the market forces of demand and supply. Undoubtedly, the changes in exchange rates do have a diverse effect across the economic spectrum in any country. This study was carried out to determine the effects of foreign currency exchange rate fluctuation on retail fuel prices in Kenya. The study used a quantitative descriptive research design. The target population for this study constituted the four main oil products retailed at the service stations namely Premium Motor Gasoline (PMS), Regular Motor Gasoline (RMS), Automotive Gas Oil (AGO) and Illuminating Kerosene (lK). This study analyzed average monthly retail prices for PMS, RMS, AGO and IK for Nairobi region for two and half years between January 2011 and June 2013. The study also analyzed the Central bank's monthly US Dollar to Kenyan Shilling exchange rate for the same period of study. The analysis on the movement of the two variables indicates a change in the same direction, a confirmation that indeed a change in foreign currency exchange rate affects retail fuel prices in a similar manner. This study however concludes that fluctuations in foreign currency exchange rate alone will not highly affect the retail oil prices in Kenya. The study is therefore consistent with previous studies that suggest that many other factors including taxes, spillage, dealer margins, transport rates as well as speculation determine