Nigeria churns out roughly 2 million barrels of crude oil a day, making it Africa’s top producer and the world’s thirteenth. But still, because of its feeble domestic refineries, Nigeria imports about 80 percent of the gasoline it consumes at home, selling it at a government-fixed rate (US$0.43) that is below the international average price (US$0.97) and the landing cost determine by world oil price and cost of freight. The difference is finance in subsidy. For instance, in 2011 alone, the total subsidy amount was over $13 billion—about 3 percent of Nigeria’s GDP that year.
To reduce this huge fiscal burden, Nigeria’s government in January 2012 attempted to free up the gasoline price by ending the subsidy regime and allowing demand and supply to determine the price. (The subsidy program was also considered rife with double-dealing—about US$6 billion in fraudulent claims were made in 2012.) Although praised by the IMF, the move was met by a storm of protests at home, forcing the government to rescind its decision. Within two weeks, the price reverted from 141 naira to 97 naira per litre.
But the price deregulation move was not permanently shelved. The government that came to power in May 2015 revisited the idea, and after one year in office raised the official price by 67 percent, to 145 (N95.18 if adjusted for inflation) naira per litre (US$ 0.43 at black-market rates). This remains the official price today. But as the world crude oil price heads to triple digits, there are concerns that what the government spends on the subsidy may rise, potentially pushing up the official price. However, there is no clear claim by the government, despite the price rise, that the subsidy regime is ended. But do motorists still pay this price for the product? The answer is not straightforward. These are the facts.
The domestic supply of and demand for gasoline in Nigeria has not always been matched. Its excess demand has always been preceded by truckloads of the product smuggled abroad. Higher pump prices relative to Nigeria’s (US$0.43) in neighboring countries is argued to have fuel the racketeering: Benin (US$0.72); Niger (US$0.88); Cameroon (US$1.03) Chad (US$0.78); Togo (US$0.71); and Ghana (US$0.92).
The fiscal dent (or ‘under–recovery’) of this, according to estimate by the NNPC, is US$2.3 million daily. This is the benefit that goes to the sellers and consumers of the products in the neighboring countries rather than the consumers in Nigeria. This often creates scarcity, which drives up the black market premium (BMP)—the difference between the unofficial (true) price and the official price.
It should be noted that if the BMP is zero, then there is perfect compliance by the distributors/retailers of the product: they are selling at exactly the official price. If, on the other hand, the BMP is greater than zero, then there is some non-compliance. Therefore the closer the BMP is to zero, the higher the level of compliance to the official price.
A caveat: theoretically, the BMP can be less than zero, but this is practically impossible because all distributors/sellers are expected to be rational, meaning they will never want to sell the product below its official price.
However, strong enforcement of the price control law does not necessarily guarantee a high level of compliance as there could be stiff resistance to the enforcement. But weak enforcement does not mean there has been more noncompliance—sellers’ fear of state authorities may compel their compliance. However, strong enforcement can lead to high level of compliance.
But:
- Evidence from the graph shows that all the states, on an average, sell the product above the official price; no state is exactly on the y (or the vertical) axis. There is no perfect compliance in any of the states.
- Abuja’s BMP (N1.27/litre), relative to other states, is the closest to zero, making it the most officially price-compliant part of the country. Abuja is the seat of power, where we expect institutions to be more effective in enforcing compliance.
- Abia is the state with the highest BMP: N25.71/litre, making it the least compliant state. Other least compliant states are found on the bottom right and top right of the graph. This simply means big state-level consumers tend to comply, more than other states, with the official price.
- Lagos is the biggest consumer of the product (see the outlier top left), followed by Kano. There are two likely reasons for this: both states have the largest (i) population sizes in the country; (ii) concentration of small and medium-scale industries that use petrol for power. We also know that there are big industries in these states but they use AGO (diesel). Kano is the commercial capital of the north while Lagos is the south’s and the country’s commercial capital.
- The curve in the graph slants downward from left to right. This represents an inverse relationship between the BMP and the quantity of gasoline consumed. This means rising BMP (less compliance) is associated with decline in the quantity demand of the product.
But what could account for the variation in the prices across the states?
If distance from refinery (Nigeria has four functional refineries, although not operating at full capacity at the moment) and cost of transporting the product significantly determines the variations, then the graph will be a straight 45-degree line and all the dots (or the state labels) will cluster around the line.
But what we see is partially the opposite: states that are closer to their nearest refineries tend to pay higher prices than other states. For example, Abia State is closer to its closest refinery (Warri refinery, Ekpan in Delta State) and still pays the highest pump price.
In fact, the correlation between the pump price and distance is negative 11 percent. The farther the state is from the refinery, the lower the pump price it pays, at least relative to other states.
On the graph, Delta, Kaduna and Rivers (the locations of three refineries) appear in the same area. The reason is simple: the distance from Delta to Delta is zero; distance from Kaduna to Kaduna is also zero and so on.
But then, about 80 percent of Nigerian petrol is imported. In this case, how is this brought into the country/distributed across the states? Answering these questions may shed some light in unravelling the source of variations.
The undersupply of gasoline has been the main justification for the fuel subsidy, and consequently the official pricing of the product. And as noted by Moss et al., “this has discouraged investment in domestic refining capacity. Of the 20 refinery licenses issued since 2000, none have been used because the current market structure does not allow investors to fully cover their operational costs.”
However, a discrete shift in the oil industry is forthcoming. Dangote, a private refinery considered to be the world’s biggest, is anticipated to be on stream by next year. It is expected to refine a sufficient quantity to keep pace with the domestic demand. It is, however, unclear how Dagonte will price its product, and whether its pricing may mark the end of the government’s official oil pricing and subsidy regime. Time shall tell!
Zuhumnan Dapel
Zuhumnan Dapel has a been fellow of the Scottish Institute for Research in Economics; former IDRC Fellow at the Center for Global Development; and Public Policy Fellow, Woodrow Wilson Center, in DC. Twitter: @dapelzg
