The Effect of Oil Price Regulation on the Financial Perfomance of Oil Companies in Kenya

Abstract

Kenya experienced sharp increase in prices of petroleum products between 2007 and 2011. It was observed oil firms were taking advantage of international prices changes to exploit the public. Due to public outcry and the need to protect consumers, the government introduced price controls on pump prices in December 2010. The objective of this study was to establish whether there exists a relationship that exists between price regulation and financial performance of firms in the Kenyan oil sector. This research study used causal research design. The target population for this study constituted five oil companies which had over five percent market share in the retail network were sampled for the purpose of this study. The study used secondary sources of data from published financial statements, Ministry of Energy statistics and industry reports. Financial data from statements of financial position, income statements and cash flow statements from January 2010 to December 2011 was used. Collected data was analyzed and presented using SPSS and Microsoft office 2007 applications. The study concluded that indeed price regulation on pump have affected financial performance of oil firms in Kenya. The local prices were found to lag behind international price quotations after introduction of price controls in 2011 by an average of 16%. A look at variance between margins allocated to OMCs as compared to Actual realized margins by oil firms reveals that oil firms have been losing part of their allocated margins to stock effe cts and volatility in exchange rates and financing costs. The study recommends that ERC formula should be revised in consultation with all oil marketers to cushion them from costs not factored in the gazetted formula.