If there is anything to take away from the current increase in international oil price, it is the reality that Africa’s biggest oil-producing country may pay more than half a trillion naira subsidising the cost of petrol within the first six months in 2021.
The current rising oil prices float all boats in Nigeria. While government revenue from oil production rises so does Nigeria’s subsidies on petrol prices, as Brent rises from an average of $54.77 per barrel in January to as much as $75 as of Thursday, June 17, 2021.
Nigeria’s petrol subsidy has soared by 397 percent over a four-month period, from a monthly cost of N25.37 billion in January 2021 to N126.30 billion in April, according to data gleaned from the Nigerian National Petroleum Corporation (NNPC).
A further breakdown shows the state-owned corporation spent N25.37 billion on petrol subsidy in January, which increased by 196 percent to N75.13 billion in February.
In March, the petrol subsidy bill increased by 49 percent to N111.97 billion, thereafter increased by 12 percent to N126.30 billion in April 2021.
Although the NNPC is yet to disclose how much it paid for subsidy for the month of May and June, most analysts expect Nigeria’s current petrol subsidy expenditure to be more than half a trillion naira in the first half of 2021.
This was attained by analysing the current rising price of crude oil, which translates to a higher landing cost of petrol as the cost of petrol quoted on Platts stood at N193.39 per litre when oil price averaged $64.81.
“Spending half a trillion naira on petrol subsidy in a population suffering high levels of life-threatening hunger is an anomaly. It’s a costly way to protect the poor,” a professor of economics and former president of the Nigerian Association for Energy Economics (NAEE), Wummi Iledare, says.
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He admits that while the economics has never been more in favour of ditching the costly practice, the politics behind keeping the subsidy is more intense than ever before.
“It’s a wrong application of whatever little money we have, the government should be bold enough to get out of this mess and allow deregulation to take its course,” Joe Nwakwue, chairman, Society of Petroleum Engineers (SPE), states.
He notes that every concern Nigerians including labour unions need to understand the opportunity cost of the current lower price of petrol, which is cancerous to the economy.
Experts say the implication of Nigeria’s reckless fuel subsidies means the country prioritises cheap petrol over education, health, defence, agricultural and rural development that would have increased the economic growth or standard of living of its over 200 million people.
For national operations controller at Independent Petroleum Marketers Association of Nigeria, Mike Osatuyi, N500 billion expense on fuel subsidy means Nigeria is financing the economics of other neighbouring countries.
“There is no doubt that Nigeria’s present subsidy scheme is currently making smuggling a thriving business,” Osatuyi says.
With a subsidy of at least N80 on each litre of petrol, most experts agree fuel subsidy is encouraging the smuggling of refined petrol across the Nigerian borders to neighbouring countries like Cameroon, Benin, Togo, Chad and the Niger Republic, which all share about 17,000 kilometres of border with Nigeria.
The above development means that some border states consume more litres of petrol than other states with higher economic activities or bigger Internally Generated Revenue (IGR).
He noted that if Nigeria’s petrol price was at par with those of the neighbouring countries smuggling would not be attractive to ‘both people who are taking it out and those allowing it to go out’.
With most forecasts predicting a $75 to $80 oil price in the second half of 2021, analysts expect Nigeria’s cost of subsidising petrol to hit more than one trillion naira as the country continues to grapple with fiscal deficits and rising debt levels.
“Deregulating the downstream sector is always a challenge in a country where the subsidy on petrol prices is seen as the only source of social security,” CSL Stockbrokers Limited, a subsidiary of FCMB Group Plc said in a research note.
Although Nigeria currently produces about 1.5 million barrels of crude per day, it has an almost zero refining capacity and imports roughly 100 per cent of its fuel for local consumption, negating much of the benefits oil-producing nations across the world get from high crude prices.
A plunge in the price of the commodity last year sent the country’s oil-dependent economy reeling into a recession from which it recently barely exited, while a rally has since pushed the oil price past the $70 mark.
But instead of reaping the benefits, Nigeria’s subsidy bill, borne by the Nigerian National Petroleum Corporation (NNPC), has surged beyond N100 billion, with the national oil company being unable to remit monies to the Federal Account Allocation Committee (FAAC) for two consecutive months.
The country now sits on a double-edged sword as “under-recovery” cost, the difference between what the government pays to import fuel and how much it sells the fuel for continues to wipe out the gains of the resurgence in the international price of the commodity.
On one hand, Nigeria is earning the much-needed foreign exchange but is also bearing increased importation cost for petroleum products and by extension the landing cost.
