• Tuesday, July 16, 2024
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BusinessDay

Petrol pricing in Nigeria and the fear of constant Naira devaluation

Fuel scarcity bites deeper as motorists groan
President Bola Tinubu ushered Nigeria into a new era of market-driven petrol pricing on May 29 but that was agreeably the easy part. Since that day, the price of petrol has risen and risen, and the prospect is that what Nigerians pay for petrol will continue to jump in the foreseeable future.
The reason for this is not far-fetched.
With the continuing devaluation of the Naira and the rise in the international price of petrol, the market has become so unstable that not a single oil company is planning on importing petrol soon.
All the oil companies have now turned to the state-owned oil company, NNPC for supply after one or two which tested the market came back with burnt fingers. But this was a key objective of deregulation, to open the door to multiple suppliers and stop the ugly situation where the nation’s supply comes through the NNPC alone.
On May 29, the Platts listed the price of PMS at $800/MT by the weekend, the price has shut up to near $1000/MT and with the resolve of the Saudis and their Russian partners to cull crude supply, the chances are that Platt price will continue to edge higher, leading to a higher landing price in Nigeria. Some markers who spoke to our reporter on Friday suggested that an element of subsidy has crept into the price mechanism to push landing cost near or higher than N650/litre.
The NNPC still has supplies linked to the old DSDP contracts and as a result does not yet need to source dollars on the I&E window for its petrol imports and as a result it is able to set prices in a manner that cushions part of the rise in landing cost.
Globally, there are at least four factors that drive short term price fluctuations and top of these is international crude oil price. Crude oil prices are so much more volatile than all other components of the final retail price as crude oil prices can double or decline drastically within weeks. For instance, a ten per cent change in the international price of crude oil will lead to about 7% change in petrol retain price in the United States.
Closely related to this is exchange rate volatility. A depreciation in the rate of the Naira makes petrol more expensive even if the international price of crude oil is unchanged.
There are also seasonal factors. Petrol prices typically are higher in the summer during the holiday travel months in the US. Finally, there are costs related to refining, marketing and distribution of petrol. These costs tend to be less volatile and do not fluctuate much.
Different countries in Africa have chosen different paths to petrol pricing. South Africa for instance, adopts a system whereby the average price for the previous month becomes the guide for pricing petrol for four weeks. Some other countries use the cost of inventory replacement. Nigeria will have to tell the people what path to petrol pricing it has adopted for the sake of predictability.
Since the deregulation of the price of petrol and the abolition of the bogus official rate for the Naira, the Central Bank has seemed to want to refrain from intervening in the foreign exchange market, leaving the Naira to float. It is unclear how long the CBN will continue its wait and see stance, especially with the agitation of labour and other pressure groups who are starting to feel the pain from the unprecedented squeeze on disposable income.
The petrol pricing saga has positioned to migration to the use of compressed natural gas, CNG as an attractive option for gas rich Nigeria. The challenge here is that Nigerians are expecting the government to do more to open the sector, but this must be a private sector led project and which is why the recent deal between the NNPC and NIPCO gas should be commended. Lots of Nigerians are pondering moving to CNG and there are some initial successes, but the adoption is rather slow for the kind of impact that Nigeria seeks.
Clement Isong of the Major Oil Marketers Association suggests a national campaign to enlist more adopters given that the price of PMS will continue to rise. He said, “We all need to get involved. Take a loan if you must, just the way we got our children through school, lets us make the move. It is a personal thing; it is about the personal cost we all pay to get to and from work daily.”
The average price of gasoline around the world is 1.33 U.S. Dollar per litre. However, there is substantial difference in these prices among countries. As a general rule, richer countries have higher prices while poorer countries and the countries that produce and export oil have significantly lower prices.
One notable exception is the U.S. which is an economically advanced country but has low gas prices. The differences in prices across countries are due to the various taxes and subsidies for gasoline. All countries have access to the same petroleum prices of international markets but then decide to impose different taxes. As a result, the retail price of gasoline is different.