THE RELATIONSHIP BETWEEN THE FUEL STABILIZATION FUND AND PETROL PRICES IN KENYA
Abstract
Statement of the Problem: Fuel prices significantly influence the economy, impacting inflation, consumer spending, and the overall cost of living. In response to global fuel price volatility, Kenya introduced the Fuel Stabilization Fund (FSF) in 2021 to shield domestic markets.
Purpose of the Study: The study aimed to assess the impact of the FSF on fuel prices in Kenya, specifically on super petrol, diesel, and the CPI, from September 2021 to May 2024. The research sought to determine the relationship between the FSF and fuel prices, and how this relationship influences the CPI.
Research Design: The study employed descriptive statistics, time series analysis, correlation, and regression techniques to analyse data on fuel prices and CPI during the study period. The research was framed within the Price Stabilization Theory, Buffer Stock Theory, and Social Welfare Theory to understand the role of stabilization mechanisms.
Findings: Descriptive analysis indicated significant volatility in fuel prices, with periods of FSF activity showing moderated price spikes. Correlation analysis revealed a strong negative relationship between the FSF and fuel prices, indicating the fund's effectiveness in reducing price volatility for super petrol and diesel. However, regression results suggested that global market factors and exchange rate fluctuations had a stronger influence on fuel prices than the FSF alone. The study also found that the FSF had limited influence on the broader CPI.
Conclusion: The FSF was partially effective in stabilizing fuel prices during global price fluctuations. However, operational issues, such as delayed disbursements and inadequate funding, reduced its long-term sustainability. The FSF's limited impact on the CPI suggests that other factors besides fuel prices are key drivers of inflation in Kenya.
Recommendations: To enhance the FSF's effectiveness, the study recommends improving governance and transparency, ensuring timely and adequate disbursements, broadening the scope of covered products, and addressing political challenges that affect its sustainability. Strengthening these areas could improve the FSF’s role in mitigating fuel price volatility and promoting economic stability.
Keywords: Fuel Stabilisation, Fund, Fuel Prices, Kenya
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