Nigeria far from attracting necessary investments with price modulation in downstream sector
The global economy and oil market are experiencing one of the most severe crises in recent history, caused by the COVID-19 pandemic. Countries around the world have virtually shut down, imposing travel restrictions and mandating social-distancing measures in an effort to contain the pandemic.
These measures have not only severely affected global economic growth, but they have also caused a historic demand shock in the oil market, which has led to extreme volatility in oil prices. Concerns about this grave oil market imbalance, which has led to a large build up in global oil stocks, has resulted in oil prices dropping significantly in late March to reach the lowest levels in nearly 18 years. Oil prices lost about two-thirds of their value over 1Q20.
Given the current market conditions and the massive oil demand destruction so far, the price of crude oil has lowered considerably, thereby creating a window for the Nigerian government to completely hands-off the price of petrol and deregulate the downstream sector of the petroleum industry. The cost of crude oil has a huge influence on the price of fuel.
It is a known fact that government’s interference in the price of fuel has denied the downstream sector of the necessary investments and employment opportunities. These are few reasons the sole responsibility of fuel importation has been left in the hands of the Nigeria National Petroleum Corporations (NNPC) with its attendant huge subsidy cost on government.
The crashing of the price of crude oil occasioned by the ravaging coronavirus has given another opportunity to the government to hands off the business completely. But rather than doing so, it has again introduced “price modulation” mechanism. This means that the price of fuel in the country will follow the swinging pattern of the price of crude oil at the international market.
The same mechanism was introduced during the tenure of Ibe Kachikwu, as minister of state forpetroleum, but it was not implemented for one day. This is because there was no political will on the side of the government to implement it.
No wonder the Major Marketers Association of Nigeria (MOMAN) has again emphasised the need for full “price liberalisation” rather than “price modulation” with respect to Premium Motor Spirit (PMS) commonly known as petrol.
Tunji Oyebanji, the association’s chairman, said that it had become necessary for the association to state its position, following the recent statement by Timipre Sylva, minister of state for Petroleum Resources, that the government would implement a policy of “price modulation” which means it will give effect to existing legislation enabling it to set prices in line with market realities through the Petroleum Products Pricing Regulatory Agency (PPPRA) as provided in its Act.
He stated that the clear and obvious risk is that the country has never been able to increase pump prices under this law, leading to high and unsustainable subsidies and depriving other key sectors of the economy of necessary funds.
“When crude oil prices go up, government has always been unable to increase pump prices for socio-political reasons leading to these high subsidies and we believe the only solution is to remove the power of the government to determine fuel pump prices altogether by law,” Oyebanji said.
According to him, “Our current situation laid bare by the challenges of coronavirus to the health of our citizens in particular and the economy of our country in general demands that we are honest with ourselves at this time. A fundamental and radical change in legislation is necessary.”
Purchase costs and open market sales prices should not be fixed but monitored against anticompetitive and antitrust abuses by the already established competition commission and subject to its clearly stated rules and regulations
He noted that there was no country or economy where governments do not have the power to influence prices. Nigeria, he said was no different with respect to any other commodity or product, stating further that governments use economic tools such as taxes or interventions on the demand-side or the supply-side of the market and other administrative interventions to influence prices where it needs to.
The problem here is that the government has retained for itself by law the power and the responsibility to fix pump prices of PMS which is what puts it under so much pressure and costs the country so much in terms of under-recoveries or subsidies when it cannot increase prices when necessary to do so. It makes sense to relieve itself of this obligation now when crude prices are low and resort to influencing prices using the same tools it does for any other commodity or item on the market.
The market should determine the price. There should be a level playing field. Everybody should have access to foreign exchange to be able to import and sell petrol at a pump price taking its landing and distribution costs into consideration. Government should no longer fix petroleum prices. Health and educational sector should be given a higher priority than paying for subsidy on petroleum.
The association said it is advocating for a market-based philosophy based on sustainability of the petroleum industry which encompasses free market competition where equal access to foreign exchange at competitive rates to all market players must be guaranteed.
Doing this would mean the discontinuation of the Direct sales and Direct Purchase (DSDP) program and all foreign exchange proceeds from all sales of crude be paid into the same pool from which all importers can access foreign exchange at the same rate.
Fuel import should however, enjoy priority access in allocation of foreign exchange, again through a transparent auditable and audited process of open bidding. Conditions for accessing foreign exchange should be streamlined.