Menu

Since the end of February 2021, many parts of Nigeria have been experiencing varying degrees of scarcity of Premium Motor Spirit (PMS) or petrol. Many petrol stations across the country were closed during the first week of March either because they were out of stock or hoarding the product. Long queues were seen at some petrol stations that continued to sell PMS in Lagos, Abuja, and many other cities in the country.
    
A lot of questions arise as a result of this. One of them is why is the country still having issues with the marketing and distribution of petrol if the downstream oil sector has truly been deregulated.

Background

The fall in crude oil prices and significant drop in revenue in 2020 provided the Nigerian government yet another opportunity to deregulate the downstream oil sector and effectively end the practice of artificially caping oil prices. In March 2020, the government made a move to deregulate the price of PMS. The pump price, previously set at N145 per litre, was reduced and put at N130 per litre. It was further reduced to N108 per liter in May of last year, presumably as the interplay of demand and supply dictated the prices of crude oil in the international market.
    
But since the rebound in oil prices from around late 2020, the Petroleum Products Pricing Regulatory Agency (PPPRA) has been increasing petrol pump prices, with the current price band set at N160 – N165 per litre. With the increase in oil prices comes a corresponding increase in the landing cost of refined petroleum products. And given the economics of market forces, the pump price of petrol necessarily has to rise.
    
On March 11, 2021, the PPPRA published its latest monthly petrol pricing template on its website, showing that the retail price of petrol would be between N209.61 and N212.61 for at least the next one month.  On that same day, Brent crude, the global oil benchmark, was selling at $69.26 per barrel (pbl). At that price, one litre of unrefined bonny light, the Nigerian grade of crude oil, sold in the international oil market for about $0.44 per litre. Based on the official exchange rate of N379 to the dollar, the cost of unrefined crude oil equates to about N166.86 per litre, excluding the cost of refining it and other charges. (Suffice to state that while N379/$ is the official exchange rate used in this calculation based on information published on the Central Bank of Nigeria (CBN)’s website, the CBN Governor, Godwin Emefiele, said at a summit on February 26, 2021 that the official exchange rate now stands at N410/$.
    
Following the outrage over the PPPRA's new price template, which some media reports construed as an increase in the pump price of petrol, the template was deleted from the agency's website the next day. Although petrol prices continued to sell at between N165 and N170 per litre across the country, the indicative template induced panic buying in some parts of the country.

The Problem

As a net importer of refined petroleum products, the landing costs of these products are a function of (i) the product cost (free on board (FOB)), (ii) freight charges, (iii) insurance of at least 0.15 per cent of FOB, (iv) wholesaler’s margin, (v) retailer’s margin, (vi) port and storage dues and charges, and (vii) administrative charges. The landing costs are also ultimately a function of the prevailing naira/dollar exchange rate, which means variations in cost as the value of the naira fluctuates.
    
Using PPPRA’s February pricing template, the average landing cost per litre of refined petrol is circa N190. With a petrol price band  of N160 – N165 per litre, it means the government continues to subsidize petrol price by approximately N25 per litre despite it’s supposed deregulation. Moreover, if we were to take into consideration the March template that was deleted – indicating a price band of N209.61 and N212.61 – it implies that government is subsidising petrol prices at around N47 per litre. Is this sustainable?
    
According to the PPPRA, the country’s national average daily consumption of PMS is approximately 56 million litres per day. Based on this daily consumption level and the current PPPRA price template, the government has daily petrol subsidy tab of at least N1.4 billon a day or N511 billion a year. Since the government has made no provision for petrol subsidy payment in the 2021 budget, another question then arises as to how the government is addressing this obligation.  

Suggestions

The petrol subsidy regime in Nigeria is notorious for corruption and perpetuating inefficiency. It is also characterized by smuggling, misappropriation and under-reporting of products. These issues are inimical to the nation’s development. For instance, while no provision is made for petrol subsidy payment in the current budget, the estimated N511 billon in petrol subsidy is more than the 2021 budgets of the Federal Ministries of Health, Education, Defence, and Agriculture combined.
    
The government has the option of allowing market forces to determine the pump prices of petrol. It is expected that this would stop many of the corrupt practices mentioned above, including petrol smuggling. The cost savings as a result will help in reducing government deficits and investing in critical sectors of the economy. A portion of the savings can also be set aside for funding minimum wage obligations and public infrastructures.
    
Currently, there are five major refineries in Nigeria. Four of them are owned by the Nigerian government through the Nigerian National Petroleum Corporation (NNPC), while the fifth is owned and operated by Niger Delta Petroleum Resources. Although the combined capacity of the existing five refineries is 445,000 barrels per day (bpd), they all operate at far below their capacity. Dangote refinery, which is expected to be completed in 2021, will have the capacity to process about 650,000 bpd of crude oil.
    
The Dangote refinery is seen as a panacea to Nigeria’s petrol import. The refinery has considerable positive implications. For one, a drop in demand for foreign exchange for petrol importation will reduce the pressure on the naira and consequently taper the import-led or cost-push inflation. More-over, a reduction in inflationary pressure and investment in critical infrastructure by the government will improve the livelihoods and wellbeing of Nigerians.
    
The government will also need to go further in its deregulation of the petroleum sector by privatizing the moribund and inefficient government refineries, while incentivizing more private sector players to build additional refineries.  

Tade Oludare PhD is an economist and a professionally qualified accountant, banker, and stockbroker. He has significant experience working or consulting for financial institutions and the academia in Europe, the United States of America, and Africa.