For years, it was a common refrain in the circles of economic critics, energy experts and commentators for Nigeria to fully deregulate the downstream sector of the oil and gas industry. It however took decades for Nigeria to finally heed to that call, albeit forced by circumstances. What this means is that there is a large number of generations out there in Nigeria who have been used to subsidised petrol all their life until now. Fuel subsidy is finally gone but obviously Nigerians are yet to accept and adjust to this reality.
The famous literary icon, Samuel Johnson once said that the chains of habit are too weak to be felt until they are too strong to be broken. Nigeria first ventured into subsidising petroleum products in 1973 due to the oil shock of 1973 following an Oil Embargo imposed by Arab members of OPEC against the United States of America during the 1973 Arab-Israeli War in retaliation for the U.S. decision to re-supply the Israeli military and to gain leverage in the post-war peace negotiations. The embargo ceased U.S. oil imports from the Arab Petroleum Exporting Countries, and began a series of production cuts that altered the world price of oil. These cuts nearly quadrupled the price of oil from $2.90 a barrel before the embargo to $11.65 a barrel in January 1974.
Then military Head of State, Olusegun Obasanjo formalised the subsidy regime in 1977 when his military government promulgated the Price Control Act which regulated prices of items including fuel. From there, subsidy became an addiction and an albatross around the neck of the Nigerian treasury. Nigerians got hooked to cheaper petroleum products and always resisted any attempt by the federal government to remove subsidies. In 2003, ironically the Obasanjo administration attempted to remove fuel subsidies and totally liberalise the downstream sector of the petroleum industry. A lot of Nigerians as usual resisted the full removal of subsidy.
Eventually, in June 2003, Obasanjo removed subsidy on diesel consequently raising the price from N24 to N38 per liter. Pump prices of PMS and kerosene were also adjusted upwards to N40 and N34 per litre respectively. However, as crude oil prices rose, subsidy on PMS and kerosene returned to keep pump prices static and maintain stability. Diesel became fully deregulated however as the product was never subsidised again thereby allowing marketers to import and sell at market rates ever since. In 2016, subsidy on Kerosene was finally removed and price consequently rose from N50 to N83. In June 2023, President Bola Ahmed Tinubu announced that subsidy is gone. Pump price of PMS adjusted to above N500 per liter from N195 per liter.
Just over a month after the price increase in PMS, an additional increase between N595 to N617 per litre has been effected this week in fuel stations when most were still trying to get used to the initial price increase. This understandably elicited reactions from Nigeria with many calling on the federal government to do something while others especially opposition critics called out the supporters of President Bola Ahmed Tinubu and the APC. Some people are already making it look like it is a failure on the part of the federal government for prices of petroleum products to increase. It is not.
It is necessary for Nigerians, to understand the realities and dynamics of a fully deregulated oil and gas sector to avoid confusion and unrealistic expectations. With the removal of fuel subsidy, it is important to accept that the pump price of petrol will no longer be fixed by the government but by market forces. It is common to hear partisan critics argue that subsidy should not be removed until our refineries are fully functional so that there won’t be much price increase if subsidy is eventually removed while some feel that since we have abundant crude oil resources, if we refine petroleum locally, fuel will be cheap. They are unable to understand that local refining of petroleum does not necessarily keep price of PMS static or cheap.
They erroneously believe that government-owned refineries will simply get crude oil almost free. They do not know that the share of federal government’s oil in the many joint ventures or production sharing contracts it entered with IOCs on behalf of the 36 states is less than 800,000 barrels per day. It is the funds realised from selling this quantity of crude that forms a major chunk of the revenue entering the federation account, from where it is shared across the three tiers of government. So, even if our refineries are functioning, we cannot afford to stop exporting crude oil that will fetch us foreign earnings just to supply cheap crude oil to the refineries to keep the prices cheap. That is simply suicidal. These mentalities need to be corrected.
Let us to do a little mathematics to better understand the dynamics around a deregulated oil and gas sector. In Nigeria, it costs around $21 – $30 to extract one barrel of crude oil (1 barrel of crude oil is equals to 159 litres) from an onshore/offshore location. It then costs $10 to refine a barrel of crude oil to produce 170 litres of products out of which PMS makes up 73 litres, diesel makes up 40 litres and kerosene makes up 15.5 liters, while the other smaller components make up the rest. It therefore costs around 40 dollars (N31,520) to extract and refine one barrel of crude oil. This cost excludes the cost of storing the crude in depots and export terminals (around $15 per barrel) and cost of transporting the crude from the oil depot to the Refinery (depending on the distance). Meanwhile the crude oil is definitely not sold at the production cost of $30. Current market price of crude oil is $78 per barrel.
From the foregoing, the total cost of producing and refining one barrel of crude oil plus taxes, insurance cost, storage charges etc at the moment totals around $120 per barrel. Since we are still importing fuel, shipping cost is added, port charges, transloading, depot storage, custom duties and foreign exchange differentials. After adding these costs, you arrive at the landing cost for one litre of petrol. As at 19th July 2023, the landing cost of PMS is N565. NNPC Ltd is selling fuel at N588 after factoring in profit margin, tax and transportation of refined product to their stations while other major marketers are selling between N600 to N620 across the country. This is the reality, which government no longer determines. The least the government can do is to ensure the marketers do not add an excessive profit margin.
Nigerians should expect marginal reduction in price once our local refineries becomes fully operational since shipping cost and sundry storage charges will be eliminated. Going forward, the international crude oil price will determine the price of PMS as has been the case with diesel since 2003. So, anytime the crude oil price rises, PMS will witness increase in price and vice versa. As painful as these situations maybe, we have to accept them as the new normal and stop painting it as if the federal government or the President yet again increased pump price of PMS. It is time to wean ourselves off unsustainable product subsidies. According to Arthur Burth, nothing happens until the pain of remaining the same outweighs the pain of change. At the moment, the pain of continuing with the subsidy far outweighs the pain of removing the subsidies. Let’s stop resisting market forces instead let us make the most out of it.
Also, the government at all levels need to step up their search for a holistic solution mix that will reduce the suffering of the people. Part of this mix must include every initiative that will raise income levels of the people so as to cancel out the increased cost of living. Significant salary increase across board should be compulsory alongside direct/indirect interventions in the lives/businesses of those who would not benefit from salary increment and many other measures. This is an urgent barest minimum. These measures will surely require a lot of resources and thankfully we are already witnessing a significant rise in revenue that accrues to governments at all levels.
For example, as a result of the combined effect of fuel subsidy removal and unification of the exchange rate windows, which devalued the Naira by more than 60%, we are about to witness the largest disbursement of FAAC allocations ever recorded in this country this July. For context, in June, the FG, 36 states and 774 LGAs shared a total FAAC allocation of N786.2 billion (May earnings). For June earnings, the first full month since the removal of subsidy, the FG, 36 states and 774 LGAs are going to share N1.959 trillion this July. That is 149.2% or N1.17 trillion more than the FAAC allocations shared in June. This is a positive consequence of two hard decisions by President Bola Tinubu.
With this potential disbursement, states and LGAs in the country will get thrice the amount of allocation they received in June. This should provide Governors extra resources to begin to put in place short-term, medium-term and long term measures to cushion the effect of the fuel subsidy removal and unification of the exchange rate on the cost of living of the people in their domain. Since the extra resources are fruits of these two policies that jerked up costs of living, it is only fitting that governments across the three tiers use them to cushion the effects and raise income of the people. More than ever before it is time for people to demand greater service and accountabilities from their Governors and the LGA Chairpersons. All eyes should not be on the center, as this allows the subnationals to get away with mediocre governance and little accountability.