Why diesel remains high despite oil price decline

In Africa’s biggest economy, the market price of diesel has refused to drop despite the fall in global crude oil prices, with Brent crude averaging $80 per barrel.

Findings by BusinessDay showed small business owners are still feeling the heat of high diesel price, which is not regulated by the government.

Brent crude, the international oil benchmark, has declined by 33 percent from a high of $122 per barrel when the Russia-Ukraine war intensified.

Prior to the war, Brent stood below $80 per barrel while the price of diesel averaged N288.09 per litre.

A survey by BusinessDay showed that many marketers are still selling diesel at an average of N790-N800 per litre despite the drop in oil prices.

“I bought diesel at N800 on Monday before starting my commercial operation,” a commercial bus driver told BusinessDay.

The Lagos Chamber of Commerce and Industry (LCCI) attributes the development to complications with the exchange rate and other variable costs associated with importing diesel.

“We have issues like exchange rate pressures due to a weakening naira, insecurity in production bases, high cost of logistics due to rising energy costs,” the LCCI said in a statement.

The naira, which averaged N381 per US dollar in the black market in 2016, has lost over 53 percent of its value against the dollar compared to the current market rate of N820 per USD, while inflation, which averaged 15.68 percent in 2016, has jumped to a 17-year high of 21.09 percent.

Jide Pratt, chief operating officer at Aiona and country manager of Trade Grid, blamed the high cost of diesel on the exchange rate and vessel cost.

“If the cost of crude stays and exchange and vessel cost is higher (as they are scarce now), then prices will still go up until we can close that refinery gap when Dangote refinery comes up,” he said.

For Ayodele Oni, energy lawyer and partner at Bloomfield law firm, the primary reason is the depreciation of the naira or the increased strength of the dollar.

“So, while crude prices have not increased, the value of the naira has decreased, such that the percentage increase in dollar value means that the Nigerian price portion of any item will increase,” Oni said.

“Hence, a weakening of the naira means that the prices of imported items and other dollar-denominated items will increase in naira terms,” he added.

Read also: Businesses, households groan as diesel price surges 209.5% in one year

Ndubuisi Okereke, a lecturer in the petroleum engineering department at the Federal University of Technology Owerri, advised the government to consider reducing the duties imposed on diesel.

“Also, there is a need for an aggressive drive towards domesticating refineries in-country,” Okereke said on phone.

Diesel has a stronghold on the Nigerian economy as it powers a large part of the industrial and commercial activities in the economy, from the trucks used for long-distance haulage of both industrial and finished goods to small machines used by small-scale enterprises.

The surge in foreign exchange and energy prices in the country has caused negative impacts in the manufacturing sector such as oscillatory growth, low contribution to GDP, sub-optimal capacity utilisation, high inventory of unsold manufactured goods and declining investment, Segun Ajayi-Kadir, director-general of MAN, said in a presentation seen by BusinessDay.

“The crises are responsible for the unfavourable movements in manufacturing indicators such as capacity utilisation, contribution to real GDP, investment, employment, cost of production, competitiveness, etc.,” Ajayi-Kadir said.

He added that most manufacturers have embarked on strategic measures to minimise the impact of the inclement operating environment on their activities such as cost cutting, product selection and prioritisation and expanding their investment in the development and production of raw materials locally.

Others are increasingly resorting to self-energy generation and energy mix to complement the inadequate electricity supply from the national grid and dissaving retained earnings to support the current crippling condition, he said.

To mitigate the rising cost of operations for manufacturers, Ajayi-Kadir said the allocation of a significant proportion of available forex to the productive sector, particularly manufacturing, is key.

He stressed the need to carry out further investment in the electricity value chain and commit to adding 10,000 megawatts to the current electricity distributed in the country.