Discussion Paper No. 92 of 2008 on Assessing Oil Vulnerability: Key Indicators and Policy Options

Abstract

Petroleum products are a key source of commercial energy in Kenya. The economic impacts offi rst and second oil shocks of the 1970s and current volatile crude oil prices have pushed supply vulnerability to the top of energy policy agenda. Kenya ought to continuously review the energy policy contained in Sessional Paper No. 4 of 2004 as well as implement energy plans and investments to obviate her potential vulnerability to oil supply disruption and oil price volatility. The problem of sustained higher global oil prices may undermine Kenya's economic growth and weaken progress towards achievement of Vision 2030. Clearly then, it is imperative to understand Kenya's energy supply constraints, especially the level of oil supply vulnerability. The study uses Shannon-Weiner index, Hirschmann-Herfindahl index and econometric modelling to assess Kenya's level of oil supply dependence, vulnerability and energy intensity, using secondary data sources. Two results emerged: First, Kenya is vulnerable to unanticipated supply interruption and international oil price volatility. Such supply vulnerability has knock-on effects for the Great Lakes region because the regional economy (consisting of Uganda, Northern Tanzania, Rwanda, Burundi, Eastern Democratic Republic of Congo and Southern Sudan) relies on petroleum infrastructure in Kenya for supply of refined products. Second, the econometric model shows that oil intensity rises positively and significantly with increases in per capita vehicle ownership and urbanization rate. Several policy recommendations are drawn from this study such as the need to manage national demand for petroleum products by tapping into potentials for energy efficiency savings in various end-use sectors; the need to hedge external supply shocks by diversifying crude oil supply sources within Gulf producing countries by reducing the market share commanded by a single country; fast tracking implementation of essential stockpiling systems of strategic petroleum reserve; and exploiting alternative energy opportunities in Kenya.