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Fuel subsidy and petroleum products prices

BY Mark Iloh

ANALYSIS

Perhaps no issue is more contentious in Nigeria ’s today political economy than the question of appropriate pricing of petroleum products and the removal of subsidy. It is generally perceived that as an oil producer, the prices of petroleum products should be low.

For a better appreciation of the issues at stake, it is to be noted that Nigeria is a member of (OPEC). One of the reasons for the formation of OPEC was the desire to stabilise the price of crude oil by controlling the total quantity of the crude oil produced by all member country.

This is known as production programming. The total production level agreed upon will be shared out between the member countries (known as production quota) based on their proven crude oil reserve levels. It is out of a country’s quota that it will meet its domestic needs.

Against the above background, the opportunity cost of refining for local consumption is specified percentage of its crude produced is the foreign exchange it could have earned if they products are exported. Again it is also believed in some quarters that the future generations have as much right to the crude oil deposit as the present generation. As a result of all these, Nigeria can use its crude produced as a member of OPEC to satisfy local demand, earn foreign exchange and conserve it for the future.

If Nigeria can be able to refine it locally, then the consumer should be able to pay the best price, which is the foreign exchange that will be forgone. A sale at a lower price will not be regarded as subsidising the consumers. This naturally tilts the scale in favour of a higher price that may be tied to the dollar as an international currency.

Thus, when it is said that petroleum products are be subsidized, the implication is that the country is not getting the full international price for the products what must be realised is that high energy price is a global phenomenon, therefore living within the economic realities of Nigeria is the emphasis which needs to be considered for a cheap energy cost as an OPEC member.

The focus on how the prices of petroleum products are determined is:

COST OF PRODUCTION OF CRUDE OIL: The cost of production of crude oil though generally low for onshore fields, the cost will obviously increase in the case of production in the deeper continental shelf area.

COST OF REFINING CRUDE OIL: Apart from the need to recoup the initial capital invested in the construction of refineries, it is equally expensive to maintain, cost of chemicals and catalysts employed in the refinery operation are high. So also are cost of procurement of spare parts, other cost include the expenses associated with routine maintenance and the overhauling or turnaround maintenance of the refineries.

COST OF DISTRIBUTION OF PETROLEUM PRODUCTS: This consist of the costs associated with the transportation of the crude from the production site to the refineries, the cost of transporting the refined products to the depots across the country, the cost of maintenance (monitoring and repairs) and operation of pipeline and depots and charter fees for coastal tankers.

COST OF MARKETING THE PRODUCT: This head would embrace cost associated with the haulage of the products from the depots to the retail outlets.

THE EXCHANGE RATE OF NAIRA TO THE DOLLAR: As a result of the desire to obtain prices similar to prices obtainable in the international scene, the dollar may become the reference point. Because of the weakness of the naira visa-vis the us dollar, the price of petroleum  product will remain on the high side and any further deterioration in the value of the Nigeria naira would almost automatically necessitate an upward review of petroleum products prices.

COST OF CRUDE OIL IN THE INTERNATIONAL MARKET:  Because the cost of crude oil is dollar denominated, when such cost is translated into weak-naira the result is an upswing in the cost of crude allocated for domestic consumption.

EFFICIENCY OF THE CHANNELS OF DISTRIBUTION: The efficiency channel of distribution will allow products to be moved economically and will as little disruption as is possible. Inefficiency on the other hand is counter productive, a dislocation in the system increase the social cost of production.

THE NEED TO CHECK PETROLEUM PRODUCTS SMUGGLING: One of the reasons always advanced for the short supply of petroleum products was that the products are being smuggled across the country’s border because of its cheap price in Nigeria. To discourage such illegal activity, it was felt that an increment in the price of petroleum products will neutralise the gains of the smugglers.

This, is say the least, is as unscientific as it exposes the porosity of the nations border. Therefore, government needs to strengthen the border security because Nigerians who are paying more for the products as a result of this act do not know where the border is located.

From the above analysis,  I would like to draw the attention of government to the reasons why countries produces locally commodities which they can import cheaply are to protect local industries, to avoid unemployment, to conserve foreign exchange, for the development of local labour, to encourage consumption of locally made goods, to be self reliant and favourable balance of payment.

It will be important, if the petroleum products can be refined locally, therefore government should ensure that  licenses are given and those given licenses should be able to invest in the refineries not using the license to import petroleum products. When Nigeria exports her locally refined petroleum products will we gained more economically than import.

Therefore, Nigerians will appreciate, if the government can repair refineries and power electricity so that ordinary Nigeria will not depend on fuel to power his electrical equipment which translates to energy/fuel consumption and the total local consumption will equally reduce.

 

Mark Iloh, is the Institute Registrar, International Logistics and Administration.

 


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