Kenya’s fuel pricing framework is coming under increasing pressure as rising global oil costs and supply disruptions threaten the sustainability of subsidies designed to cushion consumers. Recent developments indicate that the country may face significantly higher fuel prices in the coming months, particularly for consignments scheduled between May and August 2026.
The latest pricing review by the Energy and Petroleum Regulatory Authority saw diesel prices increase by 24.2 percent to Sh206.84 per litre, reflecting elevated global crude prices and tightening supply conditions. Without intervention measures, prices in Nairobi could have reached approximately Sh233 per litre, implying a potential increase of nearly Sh70 per litre. However, the government deployed a subsidy of about Sh6.5 billion alongside a reduction in value-added tax from 16 percent to 13 percent to moderate the impact on consumers.
Despite these efforts, the sustainability of the subsidy mechanism is increasingly uncertain. The Petroleum Development Levy Fund, which finances these interventions, is estimated to hold less than Sh9 billion, an amount projected to last no more than two months under current market conditions. This raises concerns about the government’s ability to maintain price stability if global oil prices remain elevated.
The upward pressure on fuel costs is largely linked to geopolitical tensions in the Middle East, particularly disruptions affecting supply routes such as the Strait of Hormuz. These developments have forced suppliers, including Saudi Aramco Trading Fujairah, to source petroleum from alternative locations at higher costs. As a result, upcoming shipments are expected to land in Kenya at significantly increased prices, which will likely be passed on to the domestic market.
Data on landed costs highlights the scale of the increase. The average landed price of kerosene more than doubled to Sh170.86 per litre, up from Sh82.63 per litre in February. Similarly, diesel rose to Sh133.89 per litre from Sh82.30 per litre over the same period. To offset these increases, the government applied subsidies of Sh108.10 per litre for kerosene and Sh23.92 per litre for diesel, preventing retail prices from reaching Sh260.88 and Sh230.76 per litre, respectively. Kerosene prices were maintained at Sh152.78 per litre.
Under Kenya’s fuel pricing model, oil marketers sell products at regulated pump prices while the government compensates them for any cost differences using funds from the levy. The levy itself is charged at Sh5.40 per litre, significantly higher than the previous Sh0.40 per litre rate prior to July 2021, reflecting efforts to build a financial buffer for subsidy interventions.
However, contractual provisions within the government-to-government fuel supply agreements introduce additional complexity. Clauses related to Material Adverse Change (MAC) allow suppliers to adjust prices in response to extraordinary events such as war or supply chain disruptions. The ongoing Middle East conflict has triggered such provisions, enabling suppliers to revise pricing terms upward.
The broader economic implications are significant. Higher fuel costs are expected to feed into inflation, increase transport expenses, and reduce household purchasing power. Given Kenya’s reliance on imported petroleum products, sustained price increases could also strain public finances as the government balances subsidy demands against fiscal constraints.
In summary, Kenya’s fuel subsidy system is facing a critical test as global market dynamics shift. While short-term interventions have mitigated immediate price shocks, the combination of rising import costs, limited fiscal buffers, and contractual pricing flexibility suggests that maintaining current subsidy levels may become increasingly difficult in the months ahead.
