There has been a lot of apprehension in some quarters over the rising prices of petroleum products in recent times.
Lamentably, these arguments have been reechoed in every public discussion and for good measure too because the price of petrol has far reaching implications for the rest of the macro and micro economic indices.
To the undiscerning members of the public, the prices of the petroleum products should naturally be cheaper than expected given the fact that the country now produces locally. But those who should know say this argument hardly applies to Nigeria because of its own peculiarities as an oil-producing state.
While raising a poser, Gboyega Bello, an economic analyst, queried, “Are you suggesting that from the belief that your country produces oil, therefore it should be sold at give-away prices?”
Pressed further, he said: “That’s wrong economics. Accruals from oil sales should be used as a springboard to develop other sectors of the economy because oil is a wasting resource. To develop national infrastructure, to subsidise education and healthcare services, to provide security, to develop science and technology, to build human capacity, among others. Some countries do this and their citizens are happier for it e.g. UAE, specifically, Dubai, Abu Dhabi and even Norway.
”In Norway the price of petrol per litre as at October 2023 when it was reviewed is between 17-20 krone depending on the regions of the country. Let’s take the region where the price is least: NOK17 per litre. NOK17 = $1.59, which in turn comes to: N2,607.6 per litre! Yet, Norway has one of the best run national oil companies in the world, Statoil, now Equinor ASA.
“UAE is a major oil-producing country. Dubai sells petrol per litre at between AED3-3.50, which is about: N1,344.8 – N1,558. (I note income differentials among nations, but the relevant point is that these countries still charge appropriate prices for PMS despite the fact that they also produce crude oil).
”As a major source of revenue, certainly it’s poor husbandry for Nigeria to subsidise petrol. There are other areas the government can subsidise like agriculture, health services, education, transportation, among others.
“At the risk of repeating myself, accruals from the sale of oil should serve as the springboard to develop several sectors of the economy. It should not be for mere consumption, not in our part of the world where it encourages arbitrage, leading to Nigeria using our hard-earned resources to subsidise our neighbouring countries‘ economy.”
Mr Smart Opeyemi is on the same page with Bello.
In the view of Opeyemi, an independent petroleum marketer the global market forces remain the decider of fuel pricing everywhere in the world.
According to him, granted that Dangote Refinery produces locally, the cost of crude oil and other production factors will continue to be determined by the global computations significantly.
Pressed further, Opeyemi said the removal of subsidies also means that the prices Nigerians pay at the pump would now reflect the actual cost of refining, including logistics and distribution.
He was however quick to add that the long effect of the reforms introduced by the government will lead to sustainable investments in the sector long deprived of such opportunities.
With non-reliance on the importation of refined petroleum products local jobs will be guaranteed amongst other socioeconomic benefits, he stressed.
While noting that the recent discussions among stakeholders, including oil marketers and government officials, have focused on the pricing framework for petrol produced by the Dangote Refinery, Opeyemi said there is more to consider.
It would be recalled that the Federal Government has established a committee to ensure that crude oil is sold to local refineries in naira, and this committee is set to finalise the pricing details for petrol from Dangote.
However, there are concerns that the price of petrol from the refinery may exceed current market rates, which could lead to further complications for consumers and marketers alike.
The landing cost of petrol, which is the price at which the commodity arrives in Nigeria, is currently around N1,120 per liter. This figure has raised alarms among marketers, who fear that if the price from Dangote is set too high, it will lead to increased imports of petrol, undermining the refinery’s purpose of boosting local production. The NNPC has stated that it will only purchase petrol from Dangote if it is cheaper than international market prices, which adds another layer of uncertainty to the pricing landscape.
But some economists have expressed cautious optimism that the commencement of operations at the Dangote Refinery could alleviate some of the supply challenges that have plagued the Nigerian fuel market. However, they cautioned that while the refinery may help ensure the availability of refined products, it does not guarantee lower prices. The domestic price of petrol will still largely depend on global oil prices and local market conditions.
The economic analysts noted that while the Dangote Refinery has the potential to transform Nigeria’s fuel market by increasing local production and reducing reliance on imports, the actual impact on fuel prices remains to be seen as discussions around pricing and market dynamics continue.
The interplay between local production and international pricing will be crucial in determining whether Nigerians will see relief from the current high fuel prices.
Over the last few decades, fluctuations have existed in the prices of fuel in Nigeria but have averaged at a price of 0.43 USD per litre from 1991 until 2021, with its highest ever being 0.73 USD per litre in May 2016 and its lowest ever being 0.02 USD per litre in December 1992.
That was until the notable spike occurred in June 2023, when petrol prices surged by 129.23%, reflecting the broader economic shifts following subsidy removal. The current prices represent a substantial increase from previous levels, with petrol prices having risen from around N600 to the current range within a few months. This trend has been exacerbated by infrastructure issues, including pipeline vandalism and inadequate storage facilities, which have led to supply shortages and further price hikes.
Unlike most products, oil prices are not determined entirely by supply, demand, and market sentiment toward the physical product. Rather, supply, demand, and sentiment toward oil future contracts, which are traded heavily by speculators, play a dominant role in price determination.
A change in fuel price has a great effect on the GDP (gross domestic product) of the country, paying high price for petrol and using less of it will affect the demand for goods and services. Nigeria is known more as a consuming nation than a producing nation. The production industries in Nigeria face a daunting challenge to staying in business due to the high cost of production.
The effects on demand, however, have a great potential impact on GDP in the short run. In a perfect world, using less energy has only a small direct effect on production because, of all the inputs to production (labour, equipment, energy, and other raw materials), energy costs account for a relatively small share of output, but in the case of Nigeria, energy is a major share of output, as organisations have to provide for their own power in-house, with the use of alternative power supply, such as generators and are exposed to the market as it relates to energy prices with the subsidy gone. The effects on demand and the consequent indirect effects on production—could be a much bigger problem, since spending more on petroleum imports and the nation’s poor power sector will generally reduce spending on goods and services in Nigeria while it will increase prices on virtually every good and service.
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As of October 9, 2024, the price of petrol (Premium Motor Spirit or PMS) in Nigeria has increased significantly, with the Nigerian National Petroleum Company Limited (NNPC) raising the price initially from around N600 to between N855 and N897 per liter, and currently to N1030 per liter depending on the region. This price hike has led to a surge in transport fares across the country, with commuters expressing frustration at the elevated costs.
The recent price increase comes as a result of the NNPC terminating its exclusive purchase agreement with Dangote Refinery.
However, the thinking in some quarters is that once the independent oil marketers are able to get access to fuel from the Dangote Refinery it will not only promote fair pricing, healthy competition but will in turn have a positive ripple effect on the economy.
While the refinery aims to enhance local production and reduce reliance on imports, its impact on pricing remains uncertain.
Analysts suggest that while the refinery may alleviate supply challenges, it may not necessarily lead to lower prices due to the prevailing global market conditions and production costs.
