Petrol price post-subsidy hangs on dollar rates

The naira-dollar exchange rate is a major factor that will determine the pump price of petrol after the removal of subsidy.

At the current petrol pricing template, the pump price of the product would hover around N385 per litre in Lagos (using the official exchange rate of N461 per dollar), while it could sell for as high as N590 in Lagos (using the black market rates of N750/$1), an analysis of the template and survey of petroleum marketers data show.

The pump price of petrol could, however, move between N390 and N400 per litre when it is moved across Nigeria at the official rate. At the black market rate, it could top N600 per litre, based on how much the government pays as bridging claims to maintain near uniform pricing across Nigeria.

BusinessDay sought to obtain the Nigerian government’s current pricing template based on current oil prices and surveyed marketers on what prices would be at different oil price and dollar rate scenarios.

Considering the emotive response by many Nigerians to rising petrol price and the vehement opposition by labour leaders to any suggestion of price increase, the claims of over N750 per litre if subsidy is removed can scare Nigerians into agitating against their own interest.

The major components that constitute petrol landing cost in Nigeria include product cost, traders and insurance margin, shipping, charges by government agencies, financing and banking charges and storage charges. These come to about N358.24 per litre as landing charges.

Another N25 is added based on retailer margins (N15), dealers margin (N5) and transport cost at (N5). This brings the total costs to N383.24. However, pump price would vary based on station and location and, with government’s subsidised transport charges, could average at N385 per litre using the official exchange rate.

At the black market rate of N750/$1, the picture changes. The product cost rises to N503.91 per litre. Other costs including traders margin, freight, NPA port charges, NIMASA, financing costs, jetty storage, ans wholesale margin bring the landing cost to N565.34.

When retailer’s margin, dealer’s margin and transport cost are added, the price in Lagos would be N590.34. The price could average around N600 when it is transported across Nigeria.

Included in the manifesto of the incoming government from May 29 is the removal of subsidy. “We shall phase out the fuel subsidy yet maintain the underlying social contract between government and the people,” the document said.

Some of those affiliated with the incoming government have indicated that the subsidy would be removed in phases. The All Progressives Congress Presidential Campaign Council says the incoming administration of Bola Tinubu will decide the date of fuel subsidy removal. The challenge is they would have little wiggle room.

In January, Zainab Ahmed, minister of finance, budget and national planning, said fuel subsidies would gulp N3.36 trillion in the first six months of 2023. There is no budgetary provision to sustain petrol subsidies beyond June.

Some analysts say phased removal is the best option. “My recommendation is that the process should be done in phases,” said Ayodele Oni, energy lawyer and partner at Lagos-based Bloomfield Law Practice.

Oni said the refineries in the country should be functional and operational to the extent that they can meet the demands of the country. This would certainly reduce the importation of refined products into the country and the associated costs such as haulage, insurance, ship-to-ship transfer costs, etc.

The President Muhammadu Buhari government lacked the gumption to end subsidies, even when oil prices were literally on the floor, due to fear of popular revolt and having a face-off with labour unions.

It has evaded responsibility by proposing to end it after his term in office ends, thereby placing a hurdle on the path of his successor who comes into office after an election marred by violence, deviation from electoral rules and other irregularities bequeathed him a mandate, whose legitimacy is being contested at the tribunal and on the street.

Tinubu’s ‘Renewed Hope’ manifesto includes a plan to reform the current exchange rate management. “We are tied to an ineffective regime of multiple, somewhat arbitrary, exchange rates. This situation gives rise to financial dislocation, currency speculation and arbitrage.”

It stopped short at proposing a convergence of the official and black market exchange rates. However, regardless of the rates in use, the reality is that the current price of petrol is unsustainable.

The Buhari government has spent over N11 trillion on subsidies and now is using debt to finance the payments as oil sales no longer cover subsidy cost each month. The recent resistance to new loans by China presents a wrinkle.

Refineries: What difference would they make?

Labour unions have galvanised Nigerians to protest against deregulation based on the government’s inability to fix the nation’s decrepit refineries. Successive governments have allowed the refineries to rot, preferring a corrupt subsidy regime rather than refining its own crude.

However, the current situation shows that only freight and port charges would be saved if Nigeria’s refineries are fully functional and crude is refined at home. New problems involving distribution would arise.

As shown in the pricing template, the feedstock or crude represents 86 percent of the cost per litre. Regardless of whether the product is refined at home or imported, current prices are unsustainable.

Crude oil is sold in dollars and the earnings help fund Nigeria’s government. If all the refineries were working and the Dangote Refinery came on stream, this means all of Nigeria’s crude would be refined locally.

Nigeria’s current production is put at 1.3 million barrels per day (bpd). The Dangote Refinery has the capacity to refine 650,000 bpd or nearly half of Nigeria’s total production. All the four government-owned refineries in Kaduna, Port Harcourt and Warri have the capacity to refine 445,000 bpd.

But this is unrealistic as the Nigerian government does not own all the oil produced in the country. Oil companies, especially international oil companies, own between 40 and 60 percent of every crude produced in different wells, based on agreements with the government.

This means that the Dangote Refinery and even the state-owned plants, if their capacity could be restored, may need to buy crude at the international market, priced in dollars to meet their refining needs. This will translate to a higher pump price without subsidies.

The need to cushion impact of subsidy removal

Oni said to cushion the effect of the subsidy removal, alternative options for transportation must be provided by the new government including rails.

He said electricity ought to improve and other sources of income, including the textile and manufacturing industries, should be explored.

“Although they will not have a budget at inception, they will need to quickly work with some possible reserves from the outgoing government to cushion some percentage of the subsidy which I will suggest at least up to 55 percent subsidy at inception of the government,” he said.

Ndubuisi Okereke, senior lecturer in the Petroleum Engineering Department at the Federal University of Technology, Owerri, advised the new government to leverage earnings from the Nigeria LNG Limited and the Federal Inland Revenue Service, avoid new loans and auction some deepwater assets to obtain revenue for its plans.