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Nigeria’s recurrent fuel woes: Could market forces and a Dangote refinery be the final answer?

Nigeria’s recurrent fuel woes: Could market forces and a Dangote refinery be the final answer?

Fuel supply is a politically sensitive issue in Nigeria, and with elections a year away, the need for a solution to the problems of assuring a steady supply and avoiding subsidies is growing more acute. Rafiq Raji looks at what can be done.

Nigerians had a rude shock last Christmas. Fuel, hitherto abundant, suddenly became scarce. President Muhammadu Buhari blamed saboteurs, in a veiled reference to opponents eyeing the presidency in 2019. While he did not say who they were, there is a consensus, in the top echelons of the government at least, that the shortages were contrived.

Controversy has always trailed the politically sensitive issue of fuel supply in Nigeria. Once a subsidised commodity, it was one of the few benefits citizens received from the government. Verner Ayukegba, principal analyst for sub-Saharan Africa at London-based IHS Markit, suggests why the Buhari administration is reluctant to raise fuel prices in tandem with crude oil price movements: “It is one of the few ways in which the government can reach a broad set of Nigerians, especially the struggling masses, with subventions.”

John Ashbourne, Africa economist at London-based Capital Economics says: “Raising fuel prices is obviously always quite painful – both economically and politically. The government might be hesitant to raise prices now, given that the economic recovery is still fragile and inflation has only just started to come down.”

But there is a greater fear for the government should it choose to increase fuel prices at this time: “The potential fallout is negative public opinion against the government in the run-up to the next elections,” says Ayukegba. The government could mitigate this by targeted grants to lower-income groups, but such programmes do not have a great history of success in Nigeria.

The government might be hesitant to raise prices now, given that the economic recovery is still fragile and inflation has only just started to come down.”

There are other ways the government could keep the current fuel price of 145naira per litre ($0.40) unchanged without paying a subsidy to marketers, or at least prevent a steep price hike in the event it decides to be bold.

As Ashbourne puts it: “In the short run, the government could reduce landing fees and taxes on importers and hope they pass on the savings.”

This is one of three strategies the government is considering, Ibe Kachikwu, the minister of state for petroleum resources, told a joint Senate and House of Representatives committee on downstream oil in January. He also suggested that foreign exchange could be made available to fuel marketers at a rate that makes up for any difference between the landing cost and retail price.

A further possibility would be a multiple pricing regime whereby marketers would be able to import fuel and sell at any price that suits them while the state oil company sells its own imported fuel at the government-approved price.

All three suggestions imply some form of subsidy or, in the third case, an average price increase.

Cheap fuel, shady deals

The Buhari administration ended fuel subsidies in May 2016. Even so, Nigeria’s petrol is very cheap. Inevitably, some entrepreneurs have been making profit by either hoarding the commodity or smuggling it to neighbouring West African countries where petrol is dear. Umar Ajiya, chief executive of PPMC, the state oil company’s distribution arm, reeled out the statistics in a media interview in January to support this supposition.

Nigeria’s typical daily consumption of petrol is less than 30m litres. The PPMC supplies about 40m litres a day. During festive periods, the daily supply can be as much as 60m litres.

Ajiya also said that at least one ship cargo of 50m litres is imported by the PPMC daily. Ordinarily, the PPMC should be a marginal player in a supposedly quasi-deregulated market: although the fuel price is set by the authorities, a reasonable margin is incorporated to make the venture profitable for marketers. Considering that the price of crude oil and its distillates in the international markets tends to be volatile, marketers would only be able to make a profit if the set price is adjusted with almost as much frequency as the crude oil price changes. Unfortunately, this is not the case, especially when the price rises.

Although the fuel price is set by the authorities, a reasonable margin is incorporated to make the venture profitable for marketers.

In the recent past, the Buhari administration was able to make upward adjustments to the petrol price, but that was when it still had much goodwill. Now in re-election mode, it has become more cautious. To increase the fuel price at this time would be considered very bold indeed. And it could not resume subsidies on fuel products after campaigning to remove them in the first place.

Liberalise, deregulate and diversify

But it is abundantly clear that the official price of 145 naira for a litre of petrol is not realistic, having been set when the crude oil price was much lower than current levels of above $60. At a landing cost of 171 naira for a litre of petrol, the authorities take a loss of 26 naira on each litre of petrol sold to the public.

Marketers complained the authorities were not making up the difference and insisted on being paid before resuming imports. With the authorities unyielding, in light of the fact that doing so would also imply an acknowledgement that subsidies were being paid, PPMC became the sole importer of petrol. But if it is still selling at 145 naira and importing at a higher cost, how then is it funding the difference?

When pressed hard during the above-mentioned interview, Ajiya classified it as an operating cost. Since PPMC is wholly owned by the government, that operating cost is borne by taxpayers. Simply put, the authorities have been paying subsidies on petrol. As such payments are extra-budgetary and an infraction by the executive branch, President Buhari could in theory be impeached because of them – but that is unlikely.

The official price of 145 naira for a litre of petrol is not realistic, having been set when the crude oil price was much lower than current levels of above $60. At a landing cost of 171 naira for a litre of petrol, the authorities take a loss of 26 naira on each litre of petrol sold to the public.

Another suggestion made by the minister for petroleum resources is for the country’s moribund refineries to be repaired and new ones built. As a lot of resources have been wasted on this in the past, it is not a good idea. They could be sold to private investors instead, as during the administration of President Olusegun Obasanjo. Africa’s richest man, Aliko Dangote, was one of the buyers. However, the sale was revoked by the following administration. Dangote is now building his own refinery from scratch.

Another suggestion made by the minister for petroleum resources is for the country’s moribund refineries to be repaired and new ones built…When completed, the Dangote refinery will be able to refine 650,000 barrels of crude oil daily, enough to supply all of the country’s fuel needs with extra to export.

The authorities may be calculating that they can continue to take losses on fuel imports to ensure the retail price for petrol remains unchanged at 145 naira until the Dangote refinery becomes operational in 2019. When completed, the Dangote refinery will be able to refine 650,000 barrels of crude oil daily, enough to supply all of the country’s fuel needs with extra to export. But is this a wise strategy? “I would worry about putting so many eggs in one basket,” says Ashbourne of Capital Economics.

“From a pure efficiency perspective, the best option would be to liberalise prices and then deregulate the import stream to allow more competition.”

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Written by African Business Magazine

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