• Monday, July 15, 2024
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BusinessDay

‘Fuel subsidy amid high freight charges squeezes FG’s revenue’

Deregulation: A means to an end to perennial fuel scarcity!

Freight charges for refined petroleum products have more than doubled in the last one year, a situation that adds further pressure on government revenue used to subsidise petrol.

“Freight over the past 12 months or so has gone completely crazy,” said James Gooder, vice president of Argus Media, an independent provider of energy price information, adding that “Tanker freight went wild in 2022.”

In addition to poor distribution framework across the country, the rising cost of freight has hampered smooth delivery of the products into Nigeria as costs have doubled.

During a presentation at a webinar organised by the Major Oil Marketers Association of Nigeria (MOMAN) on Tuesday, Gooder said “the price of commodities in different locations around the world and how it brings transparency to those markets is influenced by freight rates and the origin.

However, the Nigerian government, who pays subsidies on the products, significantly distorts the markets across Africa as a large chunk of its subsidised petrol is smuggled outside the country.

“Apart from the bottlenecks in the import, they are also a drain of products out of the country into neighbouring countries, because the temptation is just too great,” he said.

He urged the Federal Government to prepare the consuming public for the effect of deregulating the price of petrol before taking action.

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Lower oil prices had made deregulation easier to approach. Freight and other issues remained significant factors to consider as prices are not static.

“If Nigeria moves towards positioning Dangote, exports of refined products become possible, then an export parity index for pricing of petrol will probably be lower because the freight will be subtracted compared to an import parity to which freight is added,” James said.

Last month, Mele Kyari, group chief executive officer, Nigerian National Petroleum Company (NNPC) Limited said that without the current subsidy on petrol, the actual pump price will be N410 per litre.

The situation could change next year when embargos on Russian crude take effect.

According to the energy price expert, if Nigeria allows a deregulated market where prices are allowed to float in line with that global market signal, then there is less incentive for smuggling to happen.

“The market will obey price signals that are based on market reality, not a government mandate. In theory, the shortages of the products should be less,” he said.

On the outlook for freight charges, he said with the emergence of the Dangote Refinery, there will be lower freight rate which will result in lower prices in Nigeria.

He said from January next year, there could be extreme freight volatility for petrol and diesel, due to proposed restrictions and price cap on Russian crude European countries.

The market is likely to rebalance as the year progresses but that high freight, especially on long range and medium range tankers, are likely to persist through the first half of 2023.

The implication for Nigeria who has a plan to end subsidies in June 2023 is that it could see a significant value erosion as cost would soar.

Already, Nigeria is virtually swapping NNPC’s entire share of crude from various production arrangements for refined petrol so that the pump price can sell at N165. The current trend could see Nigeria borrowing to keep up current subsidies till June next year.