Last week news circulated about the possibility of an upward review of fuel prices in Nigeria to about N720 per litre, marking the third increase in just ten weeks. Industry players predicted that this spike might impact us sooner than we think. 

Following the removal of fuel subsidy and the Naira’s float, the oil sector under the leadership of the Tinubu administration has had to face a dual challenge: rising global crude prices and an ongoing foreign exchange rate crisis, impacting fuel pump costs. There has been a significant rise in the landing cost of gasoline, which has experienced a month-on-month increase of 37.4 per cent, reaching N632.17 per litre in July 2023, a notable jump from the N539 per litre recorded in June 2023.

But on Monday, the Nigerian National Petroleum Corporation Limited refuted the assertion of an imminent price surge for the time being. With a similar tone on Tuesday, the Presidency assured Nigerians that there will be no increase in the pump price of Premium Motor Spirit (PMS), or petrol, anywhere in the country. This got people wondering what his unequivocal statement meant since oil prices are solely determined by market dynamics and not the government. 

The statement suggested that the government would pursue one of two avenues: directing the Central Bank of Nigeria (CBN) to vend foreign exchange (FX) to oil marketers at a subsidized rate or bridging the financial gap between the former and current oil prices. In a hypothetical scenario, this means N720 (proposed oil price) – N617 (old price). The difference amounting to 103 per litre would be the temporary subsidised cost. So in the event of a decline in either international oil prices or foreign exchange rates, the government wouldn’t need to further shoulder the burden of subsidizing the cost. 

However in an unexpected twist of event, at the time of writing this article, the NNPCL announced it has secured an emergency $3 billion crude oil repayment loan. The loan is also expected to help stabilise the foreign exchange market, enable authorities to meet forex demand, and improve the value of the Nigerian currency.

With this development, it is now grounded that subsidy is not coming back. Since domestic oil prices are determined by international oil prices a stronger naira will result in lower prices of oil and avert future hikes, rendering subsidies needless.

But this is even for the short term and it poses a lot of questions including the duration of its effect. This is not the first time the CBN is injecting FX into the market yet the existing circumstances remain largely unchanged. Hence it is a short-term fix. While this measure might not offer the ultimate panacea, it could certainly contribute significantly to the overall solution.

And one more thing …

For many Nigerians, the persistent increase in the prices of oil is an unimaginable burden. With the government’s removal of fuel subsidies, they assume that prices have reached a definitive point and are not susceptible to further fluctuations. Plus we have a Dangote refinery so this should mean we have an ample supply of cost-effective oil products for the nation.

First, as explained above the government no longer determines the pump price of petrol as the sector has been fully deregulated. It is now subject to market dynamics and there is little the government can do. Petroleum is priced at the international price. It does not have local pricing so this makes fuel prices even more susceptible to Dollar fluctuations. 

Secondly, while the Dangote project is a commendable feat and hopefully the first of many refineries in the country, it has little to no effect on the cost of oil prices. Ironically the refinery was only commissioned, it is yet to start operations and there are no strong indicators it will start this year or the next. Even upon reaching full capacity, its impact on fuel prices is unlikely to be noteworthy. PriceWaterhouseCoopers (PwC) argued that in-country crude oil refining may not significantly reduce petrol prices because the costs of haulage, insurance and associated cost of importation do not constitute the most significant component of cost across the value chain.

According to the NNPCL DG Mele Kyari, one of the major benefits of refining domestically is employment creation and the security of supply. So the wait time of about 2 weeks when importing oil products from Europe is removed. Moreover, associated costs such as freight, amounting to approximately 21-27 naira per litre for transportation into Nigeria, insurance, ship-to-ship transfers, and depot storage expenses are also eliminated. Generally, there is a whole market or value chain created around domestic refining.

The days ahead remain uncertain for Nigerians. The latest report by the National Bureau of Statistics (NBS) revealed that Nigeria’s inflation rate rose to 24.08 per cent in July from 22.79 per cent in the previous month. Statistics aside, the realities are bare on the streets as many Nigerians are trying to make ends meet. Unemployment lingers and had been reported to have increased to 37.7per cent in 2022 and will further rise to 40.6per cent, due to the continuing inflow of job seekers into the job market. Hopefully, the measure put in place by the government in terms of FX injection into the economy and the drive to revitalise local refineries would materialise. 

The days ahead hold an air of uncertainty for the Nigerian populace. The latest report by the National Bureau of Statistics (NBS) revealed that Nigeria’s inflation rate rose to 24.08 per cent in July from 22.79 per cent in the previous month. Beyond the statistics, the harsh realities are starkly evident on the streets, as countless Nigerians strive to make ends meet. If the global audit and tax advisory firm – KPMG’s report is anything to go by, the unemployment rate in Nigeria is expected to rise to  40.6% as compared to 2022’s 37.7%. These are bad economic indicators for Africa’s largest economy. Hopefully, the government’s efforts, including injecting foreign exchange into the economy and the determined push to rejuvenate local refineries, will come to fruition.

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