• Thursday, March 28, 2024
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BusinessDay

Falling oil prices opens exit window for costly N1.6trn fuel subsidy

Consequences of fuel subsidy removal on Nigeria’s balance of trade

An agreement to cut 1.2 million barrels per day (bpd) from global oil production by the Organization of Petroleum Exporting Countries (OPEC) and non-members including Russia has not lifted prices providing Nigeria an opportunity to exit a costly fuel subsidy that could gulp N1.6trillion by year end.

Brent crude, the global oil benchmark, fell 3 percent to $57.80 a barrel on London’s Intercontinental Exchange. West Texas Intermediate futures, the U.S. standard, was down 3.3 percent at $48.24 a barrel on the New York Mercantile Exchange.

Analyses of oil prices show that both benchmarks have almost fallen 35 percent from four-year highs reached in October and are at their lowest levels in more than a year.

“If oil prices keep going down, it affects our revenue and infrastructural development because there would not be much money for investments, so this is the time to get out,” Ayodele Oni, energy analyst and partner at Bloomfield law firm said.

READ ALSO: FG should do more than say subsidy is removed, to full price liberalisation – oil marketer

Many economists now tell BusinessDay that as much as N1.6 trillion will be spent on petrol subsidy this year (2018). While the government maintains it is the right thing to do at this time, analysts say the truth is Nigeria’s economy cannot afford it and the result is out there for all to see now.

Lower oil prices often forces the Nigerian government to undertake painful for necessary reforms.

This scenario played out in 2016 when oil prices fell below $40 per barrel in the first three months of that year. Low oil prices cut revenue in half. The situation was further worsened by destruction of oil and gas infrastructure by Niger Delta militants whose campaign shut in a quarter of Nigeria’s oil production.

In May, the government was forced to review the pump price of petrol from N86 per litre to N145 but higher oil prices soon saw the gains eroded. The Federal Government which had hitherto sworn off subsidy resumed payment. Marketers say they are now being owed over N800billion; this is over seven times the capital budget for education in the 2018 budget.

Adeola Adenikinju, director, Center for Petroleum Energy Economics and member of the Central Bank of Nigeria monetary policy committee, believes Nigeria should get out of subsidy as fast as possible.

“Nigeria has to decide what it must do with fuel subsidy, because we can’t go on like this,” said Adenikinju.

Oil subsidy or under recovery as the Nigerian National Petroleum Corporation (NNPC) prefers to call it, has been rising astronomically within the last 24 months. A recent BusinessDay investigation found that between 2006 – 2015, the NNPC claimed N170.6billion as under recoveries while it claimed N632.2billion in two years alone (2017 and 2018), a 217 percent percentage jump.

This is not only a drain on the economy but creates room for corruption, experts say.

“I find no justification whatsoever for the increase in NNPC’S PMS claims,” said Jean Balouga, economics professor at the University of Lagos, commenting on the analysis of NNPC under recovery data in comparison with rise in oil prices. Balouga said the claims have been ‘grossly exaggerated.’

In March this year, the NNPC said it was incurring N774million daily to subsidise about 55million litres of petrol it claims Nigeria is consuming. Analysts say Nigeria could spend over N1.6trillion on subsidy for petrol this year, resources that could have been better utilised to fix broken infrastructure including roads, rail lines and bridges and fund education and healthcare.
The rise of shale oil, growing adoption of electric cars and renewable technologies mean that crude oil prices may not recover to $100 per barrel in the medium to long-term so depending on higher oil prices to fund fuel subsidies is not a winning strategy.

In the past, OPEC cuts were effective to rein in excess production and shore up oil prices. But the influence of OPEC as a cartel is waning and now needs non-members buy-in to exert influence. Even then, the threat of US production could derail any cuts meant to raise oil prices.
“Nigeria should get serious about diversifying, the government should look into tech and payment spaces and reduce dependence on oil and wasteful fuel subsidy,” said Oni.

ISAAC ANYAOGU