• Friday, June 14, 2024
businessday logo

BusinessDay

Will the price of petrol fall as Dangote refinery begins operations?

Dangote refinery to create $21bn annual market for Nigerian crude

Following the commencement of the 650,000 barrel per day production by the Dangote Petroleum Refinery on Friday, January 12, 2024, some major questions begging for answers in the minds of many Nigerians are: Will the price of petrol crash? Will the refinery end frequent long queues at the filling stations? What benefits are there in having a “working” refinery?

Answering these very sensitive questions requires an in-depth analysis of various factors at play here. Majorly, prices of premium motor spirit (PMS) and other petroleum products are determined by the cost of crude oil, the rate of dollar to naira and government interventions such as subsidies, and reduction in taxes or levies.

Answering these very sensitive questions requires an in-depth analysis of various factors at play here

Firstly, Nigeria will sell crude oil to the Dangote Refinery at international prices through the Nigeria National Petroleum Corporation (NNPC). Should it sell it for less, it would be a form of subsidy.

As of today, the crude oil price is about $73 per barrel which translates to approximately N90,000 per barrel, using the official naira to dollar rate. Reports show that a barrel of crude oil yields about 170 litres of refined products.

Meanwhile, dividing N90,000 by 170 litres gives N530 per litre, which means that the cost of the raw crude oil alone comes to about N530 per litre. That’s how much the Dangote Refinery would pay on average per litre of products it produces.

What is more is that petrol production takes a chunk of the cost, which will ultimately affect petrol prices. So adjusted for that, petrol would cost more per litre, say N600 per litre.

Considering the actual cost of running the refinery, the Dangote refinery margin, taxes and levies, transportation to various filling stations across the country, and the retailers’ margins, the thoughts of having the price crash may not be happening soon.

Bearing all these in mind, the actual cost (not talking of any profit for anyone) with the current exchange rate and the price of crude oil already makes the cost a number that is a lot more than N600 per litre.

By the way, the reason why PMS is now selling for about N620 to 670 per litre today is because the NNPC is subsidising it. As at December 2023, Hong Kong, Monaco and Iceland are the three countries with the most expensive PMS prices in the world with N2,804, N2,129 and 2,071 per litre respectively.

Should the pump price remain the same, what impact will the refinery have on Nigeria and Nigerians?

Provision of job opportunities: The refinery is expected to create thousands of direct and indirect job opportunities. According to the latest report titled “Sailing through troubled waters”, by CardinalStone, a research firm, the Dangote refinery currently employs about 33,000 individuals and is projected to rise to 100,000 once the facility reaches full capacity.

Saving on foreign exchange: Nigeria will no longer need to import refined petroleum products, saving billions of dollars annually. Nigeria can now spend that money on other important things. “… the refinery has the potential to result in FX inflows of about $15.0 billion for Nigeria, equivalent to 45.8% of the current gross foreign exchange reserves. This substantial foreign exchange gain is expected to have a positive ripple effect on manufacturing companies by improving liquidity across various foreign exchange channels,” the report said.

Stabilising the naira: Petroleum products are the biggest drain on the nation’s forex. Eliminating this demand will create more supply of dollars than demand, reducing and ultimately stabilising the value of the naira.

Reduction in Inflation: Nigeria’s headline inflation rose to 28.2 percent in November 2023, according to the National Bureau of Statistics. If the exchange rate comes down, inflation will naturally come down as well. Meanwhile, inflation is projected to revert to its long-run average of 14 percent by 2025.

Boosting industries and productions: BusinessDay reports that GSK, P&G and some other multinational companies made moves to exit Nigeria due to an unfriendly business environment. The Dangote refinery has come to save the day for allied industries. It is like a rising tide that lifts all boats.

Long queues and fuel shortages will end: With the Dangote, Port-Harcourt and Warri refineries, if they operate at full capacity, Nigerians can finally say goodbye to lingering fuel scarcity and long queues at the filling stations.

Transitioning to an era of self-sufficiency: The Dangote refinery is set to transition Nigeria from a period of relying on other nations for petroleum products to self-sufficiency in petroleum refining, which is a huge step forward for the country. When the refinery reaches its full capacity, Nigeria can export both crude oil and refined petrol to neighbouring countries.

On the whole, the Dangote Petroleum Refinery’s commencement sparks anticipation of positive changes, yet the immediate impact on petrol prices remains uncertain. Factors like crude oil costs, exchange rates, and government interventions are pivotal. Despite this, the refinery promises job creation, reduced import reliance, naira stabilisation, inflation reduction, industrial growth, and potentially ending fuel shortages. Nigeria edges closer to self-sufficiency, a vital step for economic and energy independence.