Petrol subsidy back as landing cost soars

Nigeria has returned to paying petrol subsidy as the landing cost of around N180 per litre exceeds the pump price of N162 per litre, following a 45 percent increase in the global crude oil price.

Zainab Ahmed, minister of finance, budget and national planning, has said the Federal Government is no longer paying subsidies because it had deregulated the downstream subsector of the petroleum industry and did not make a provision for it in the 2021 budget.

But inquiries show that the state-oil company, the Nigerian National Petroleum Corporation (NNPC) has been quietly picking the tab, a situation that still amounts to subsidy because the NNPC remits the balance of oil sales to the Federation Account, after deducting expenses.

“We are back to the era of subsidy and Nigeria is bleeding badly because of this,” a respected source in the oil marketing industry informs BusinessDay.

This development is expected to add to the wasteful consumption burden of an already cash-strapped government who has produced some of the continent’s best-known billionaires, while at the same time creating a deeply unequal society in which almost half the population lives in extreme poverty.

Oil has surged about 45 percent to $58 this year since the end of October 2020, after a series of COVID-19 vaccine breakthroughs raised expectations for a sustained rebound in fuel consumption. However, the pump prices of Premium Motor Spirit (petrol) have remained unchanged since November 13, 2020, when the government made the last increase.

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“With deregulation, the current price of petrol should not be less than N181, so who is funding subsidy of the product for Nigeria to buy at the current fixed price?” the source asks.
The pricing template of Petroleum Products Pricing Regulatory Agency (PPPRA) shows the landing cost of petrol rose from an average of N143.60 in December to N158.53 per litre on January 7, with the expected open market price (retail price) being N181.53 per litre.

The product is currently being sold at between N160 and N165 per litre at many filling stations in Nigeria’s commercial capital Lagos and Abuja, the federal capital.

“The government does not have the boldness to allow full deregulation of petrol because of the spiral effects on Nigerians, and bearing in mind that Nigerians are in very hard times,” another oil marketer states.

Experts have argued that the current state cap of N160 per litre is far too low, given the recent devaluation of the naira. However, successive governments have had to tread cautiously due to the potential of massive rage kindled by Labour groups.

For the Independent Petroleum Marketers Association of Nigeria (IPMAN), which represents small and medium fuel sellers, the current fundamentals of higher Brent price and weakening naira support the need to have a higher petrol price.

It argues that the current state cap of N162 per litre is far too low, given the recent devaluation of the naira.

The exchange rate between the naira and the dollar on Wednesday, January 13, 2021, stood at N470/$1 in the parallel market. The rate had closed at N465/$1 on Tuesday, January 12, 2021.

“Because of the loans from the IMF and World Bank that they got with the condition that petrol should be deregulated, I believe the government is trying to manage the problem,” Alao Abiodun, head of energy research at New Nigeria Foundation, an advocacy group exposed to the oil and gas sector, notes.

Recall that BusinessDay reported Federal Government’s initial approved removal of petrol subsidy and the increase in electricity tariff in September 2020, were conditions to access a certain $1.5 billion loan from the World Bank.

Nigeria has the potential to produce more than 2.5 million barrels a day. But it rarely reaches that level because of poor infrastructure, theft and pipeline sabotage driven by unrest in the oil-rich Niger Delta region.

With the state-run refineries operating at zero percent of their 445,000 barrel-a-day capacity, the government then sells the fuel to retailers, which sell on to the public at the subsidised rate of N160 a litre.

“We are practising monopolistic deregulation, where one player is on the field and it is the goalkeeper, the defender and the referee,” Abiodun states.

BudgIT, a civic organisation, in a report, notes, Fuel subsidy deprives the nation of funds needed for critical socio-economic development. For example, the N10 trillion consumed by the subsidy regime is sufficient to provide 27,000mw of solar-powered electricity for stable power supply.

However, with no strategic framework for removal of the petrol subsidy programme and a population expected to balloon to 398 million people by 2050, Nigeria risks carrying the financial burden of the programme that could drown out the development of its other sectors over the next 15 years, warns BudgIT in the report.

Since 2015, Africa’s biggest oil-producing country has prioritised fuel subsidy, spending over N2 trillion funds allocated to education, health and defence and agricultural and rural development that would have increased the economic growth or standard of living of its over 200 million people.

It maintains a dizzying number of workers to manage the business of the importation of refined petrol. Yet, it spends a fortune paying the bureaucracy managing the three petroleum refineries that are even unable to produce enough petrol to power government-owned generators.

Although, for a vast majority of its 200 million people, cheaper fuel is the only benefit they see from a state that built no social-safety net for its citizens during the oil boom.