If the Federal Government’s pricing template is anything to go by, Nigerians may have to brace for an increase in the pump price of fuel in August as Brent crude, the major determinant for petrol price adjustment, heads towards the $45 region.
On Wednesday, West Texas Intermediate crude contracts jumped as much as 3.3 percent to $42.16 per barrel. Brent crude, oil’s international standard, rallied 3.4 percent to $44.75 at intraday highs.
For most market watchers, a gradual increase in the international oil price to $44 implied an increase in the landing cost which would mean a looming further increase in the price of petrol for August.
“With the current pricing template, higher oil price and double currency devaluation are expected to force Nigerians to pay more for petrol next month,” Charles Akinbobola, energy analyst at Sofidam Capital, said.
For the second time in five months, the Central Bank of Nigeria (CBN) devalued the naira by some 5.8 percent to N381 per dollar following the crash in oil receipts, Nigeria’s major foreign exchange earner. The CBN first devalued the official rate in March when it moved from N306/$, where it had been for over two years, to N360/$.
Analysts at United Capital Research have raised concerns around policy back-flip as they fret about government backtracking on the market-based price regime once oil prices start tracking higher and pressure on consumer wallets begins to mount.
“It is still impossible to tell if there is an end to the subsidy regime, as a return in the fortunes of the crude oil market would mean an increase in petrol prices, which would be met with stiff resistance by consumers,” analysts at CSL Stockbrokers Limited, Lagos (CSLS), a wholly-owned subsidiary of FCMB Group plc, said.
History does not inspire confidence. President Muhammadu Buhari already attempted to reform fuel subsidies back in 2016. At the time, it was supposed to be a permanent removal, yet subsidies were back in under two years. Indeed, since the 1970s, 11 out of 12 of Nigeria’s heads of state have attempted to reform fuel subsidies, with no long-term success.
Beyond the issue of higher landing cost, the deregulation of the downstream oil sector remains an important free-market reform required to ease pressure on government finances as well as boost profitability of the operators in the downstream sector.
Most listed Nigerian downstream players have seen margins pressured over the years with the price of their biggest revenue source (sale of petrol) remaining largely fixed. This has forced them to explore other areas to invest while many other companies have either been acquired or liquidated. This has limited investment in the sector.
The Federal Government said in March that it had bowed to long-standing pressure to restructure the downstream oil sector and had therefore removed oil subsidy after the country was hit by lower oil prices which placed more pressure on its foreign exchange reserves.
The Buhari administration had removed the petrol price peg of N145/litre to N125 in March 2020, the first time the price would be adjusted since it was reviewed from N86 per litre to N145 in 2016.
With no new template for the month of May, the PPPRA had stated that the cost of petrol would be reviewed monthly in accordance with the fluctuation of crude oil price in the international market.
