Thursday, May 5, 2011

Oil Shortage in Nairobi, Kenya

Sadly, there is little analysis in the video below the fold (HT: PNB) of why there is a shortage, just discussion of really long lines, frustration, scalping, and a government denying there is a problem. Just a little digging reveals what might well be expected: 1) the government sets the oil price and changes that price every 30 days. Oil companies would therefore rather hold on to oil stocks and wait for the price to go up before releasing more to the market. Rather than liberalizing the price mechanism, the government's solution appears to be to change the amount of time oil companies can hold on to stocks to 10 days. The government also announced tax cuts to bring prices down about 2-3%.

The unintended effect? This system favors large oil companies who have greater access to capital. Expect greater concentration in Kenyan oil markets, which the government will blame on anti-competitive behavior despite its own regulations being the cause. Speaking of which, another cause appears to be hinge on a dispute between the largest oil firm and the government, with both sides blaming the other.

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