Post date: Wed, Apr 8, 2026
Category: Fuel price
By: Fiona Okadia,

Fuel prices are once again on the rise globally, largely driven by the geopolitical tension that is the ongoing US-Israel war on Iran. The Middle East is known as a region that supplies approximately 30% of the global oil production and holds nearly half of the world’s proved oil reserves. Therefore, any interreference with this will ripple across global markets.

For countries like Kenya, this impact is set to be felt soon and there are already speculations in the market as to what the price could increase by. Kenya relies heavily on fuel imports, much of which originates from the Middle East. Under the Government-to-Government fuel import arrangement, there may be short term cushioning effects, but these are not permanent shields. Eventually, higher global oil prices will find their ways into the local market.

For Kenyan consumers, this means one thing: rising costs. Fuel is a foundational input in the economy, it affects transport, food prices, electricity, and overall cost of living. As prices increase, households and businesses alike feel the strain. Unfortunately, African economies, like Kenya’s often experience slower recovery from such shocks, prolonging the pain for consumers.

From a policy perspective, this kind of inflation presents a unique challenge. It is largely supply driven, meaning it originated from external factors rather than domestic demand. Because if this, traditional monetary policy tools like raising or lowering interest rates may not be effective in controlling inflation. Adjusting interest rates does little to influence global oil disruptions.

This is where fiscal policy becomes critical and having smart fiscal policy can make meaningful difference. Rather than focusing solely on monetary measures, the Kenyan government has an opportunity to ease the burden through targeted fiscal adjustments.

How Kenya Could Ease the Burden

One of the most effective ways for Kenya is to adjust the way taxes are applied, specifically the Value Added Tax (VAT). Currently, VAT is calculated on top of all other taxes and levies applied to fuel, creating a “tax on tax’ effect that inflates prices unnecessarily. Reforming this system to apply VAT only on the base cost of the fuel, while keeping other levies and stabilization mechanisms in place, could moderate the price increases substantially.

Recent data as illustrated in Table 1 below shows the impact such a change could have. The current retail price of petrol is Ksh 178.28 per litre. By recalculating VAT only on the base cost of the fuel, the price could drop to Ksh 169.29 per litre, saving consumers almost Ksh 9 per litre. Diesel, currently prices at Ksh 166.54, could fall to Ksh 160.21 per litre, offering a saving of over Ksh 6. Kerosene, widely used by low-income households, could see its price reduced from Ksh 152.78 to Ksh 148.39 per litre, saving around Ksh 4.

These reductions are significant, considering how fuel is used in daily life. For instance, an average driver who fills 100 litres of petrol a month would save nearly Ksh. 900, while a matatu operator consuming 1,000 litres monthly could save over Ksh. 6,000. Even small reductions in the petroleum prices could ripple through the economy, lowering transportation expenses for businesses and ultimately keeping food and goods more affordable for everyone.

Table 2: Scenario 2: Temporarily Removing Excise Duties

Another policy option, inspired by measures in Hungary, Italy, Slovenia, is to temporarily remove excise duties while keeping VAT calculated as usual. Using Kenya’s current excise tax rates (Ksh 21.95 for petrol and Ksh 11.37 for Diesel and Kerosene), the impact is more pronounced:

In this scenario, petrol sees the largest drop because its excise rate is the highest, while diesel and kerosene consumers also benefit significantly. VAT still applies to the remaining taxes in this scenario. For Super Petrol, the current price of Ksh 178.28 per litre could drop to Ksh 152.84, saving consumers Ksh 25.44 per litre, a 14.3% reduction. Diesel and Kerosene would also see significant relief, falling to Ksh 154.39 and KES 140.61 per litre, respectively, saving about Ksh 12 per litre for each.

Lessons from Around the World

Globally, governments are taking a variety of steps to manage the rising fuel prices. In Europe, responses vary: Hungary, Italy, and Slovenia have temporarily reduced excise duties, while Croatia and Slovakia have implemented short term price caps or controls. In other countries like Pakistan, schools have been closed and government offices shifted to a four-day workweek in an attempt to reduce fuel consumption.

Other countries are focusing on longer-term support and monitoring. Italy, for example, plans to invest EUR 100 million to support transport operators in 2026, while Austria is still discussing potential mitigation strategies. France, which maintains a fuel price index for transport operators, is working to minimize publication delays to avoid cash flow disruptions. Some governments have also formed task forces to track the situation and coordinate responses.

While these interventions may provide short term relief, broader general equilibrium effects often create unintended consequences across the economy. This is because when policy makers attempt to shift the market on one side, such as lowering prices through tax reductions or price caps, they disrupt the natural balance between supply and demand, leading to distortions elsewhere. Government interventions also come with additional costs of compliance and enforcement, such as monitoring price caps or ensuring adherence to reduced workweeks. These administrative burdens can strain public resources and reduce overall efficiency.

There is also a strong behavioural dimension, as fuel prices rice, consumers and firms gradually adjust, using less fuel, shifting to alternative energy or changing work patterns as they are rational. For instance, instead of the consumer running all their errands on the 5^th weekday, they may decide to do all that in the 4 days which then just means that they use almost the same amount of fuel.

Conclusion

Importantly, there are clear limits to what governments can achieve through policy tools especially in a country like Kenya, where options are relatively constrained. This makes fiscal interventions particularly important. Currently, fuel taxes are significantly high, accounting for about 45%, 42%, and 36% of the pump price for super petrol, diesel, and kerosene, respectively. While the government may be concerned about potential revenue losses, it does not need to eliminate fuel taxes entirely to provide relief. Targeted and thoughtful adjustments such as reforming VAT to avoid taxing taxes or temporarily reducing excise duties can meaningfully lower prices at the pump.

That said, while reducing fuel taxes can cushion the immediate impact of rising prices, combining such measures with strict price controls often creates conflicting outcomes. A more balanced approach would involve lowering taxes while removing price caps, allowing prices to better reflect market conditions without placing excessive strain on consumers.

More broadly, prices in an economy are interdependent and relative. Changes in fuel costs ripple through transportation, production, and ultimately the prices of most goods and services. Attempts at central price-setting tend to overlook this complexity. As emphasized in the Austrian School of Economics, no central authority, even with advanced technology, can effectively coordinate all price signals. Such interventions often lead to inefficiencies and create distortions that result in unsustainable economic outcomes.

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