Explainer: Why has the pump price of diesel remained same despite oil crash?

Within the past three months, the oil market has been hit by the twin combination of a price war among producers and a deadly pandemic that only weeks ago took the market into negative territory where producers had to pay buyers to take the WTI crude grade.

The governments of many countries responded to the outbreak of COVID-19 by instituting lockdown to contain the spread. Therefore factories and businesses have closed, airlines, subways, and even vehicular movement was curtailed. This led to a fall in demand for refined petroleum products.

Therefore prices of refined products dropped on account of slow demand. The Federal Government even cut the retail price of petrol from N145 to N125 and started talking about removing subsidies.

But the price of diesel in Nigeria seems insulated from the upheavals in the oil market. This drew the ire of private sector operators who use the bulk of diesel imported into the country.

The misalignment of the pump price of diesel in the country with current realities of low oil price in the global market, prompted a petition by the Nigerian Association Of Chambers Of Commerce, Industry, Mines And Agriculture (NACCIMA) representing the organised private sector, to the president through the Babatunde Irukere, director-general of the Federal Competition and Consumer Protection Council FCCPC, seeking an investigation into “the excessive price of automotive gas oil (ago)/diesel despite a decline in international crude oil prices.”

“Our investigations reveal that AGO/Diesel has continued to retail at a pump price as high as N226.50 (Two Hundred and Twenty-Six-naira, Fifty Kobo) in several filling stations across the country, which is apparently at odds with the market dynamics that should determine pricing at the present time,” NACCIMA said.

Diesel is a major cost component for manufacturers and household consumers. It is used to power the generators, to bring alive the machinery, computer servers, and mobile phone towers that run Nigeria’s economy, and serves as an intermediate input/cost element in production.

The change in price invariably affects productivity, competitiveness, and profitability. The pump price and availability of AGO/Diesel indeed affect both the micro and macro economy of every nation and Nigeria’s Diesel-dependent economy is no exception.

“In view of the foregoing, we hereby appeal for you to use your good office to urgently investigate the Downstream Sector of the Petroleum Industry in Nigeria to clarify the correlation between the prevailing pump price of AGO/Diesel and the landing cost, with a view to ruling out the possibility that the pricing may be unfavourably skewed against the end-user on the supply chain,” NACCIMA said.

However, operators in the downstream sector have a different explanation for the situation. According to Huub Stokeman, managing director of OVH Energy Marketing Limited in a webinar, the major reason is that diesel stock do not clear as fast as petrol because it accounts for only 5 percent of refined products sold at filling stations.

The use of diesel is mainly by businesses for their power plants and large generating sets so consumption volumes are much smaller than petrol and so are profit margins.

Diesel importers also say it takes sometimes as long as four months to clear a stock which means that before an inventory clears, the cyclical boom and burst in the oil sector would have impacted the market and temporary gains from crude price decline would have been eroded.