By Yemie Adeoye
Deregulation of the downstreamÂ sector of Nigeriaâ€™s oil and gas industry has been on the front burner of public discourse for quite a while now, and as it fully takes effect, November 1, according to government,Â it becomes highly imperative for the public to understand what deregulation as well as the furore trailing its introduction is all about.
Deregulation implies that the government either state or federal would not be involved in the business of petroleum products supply, marketing and distribution, as well as refining.Â It means that the private sector would have the sole responsibility of deciding how much Nigerians would buy a liter of petrol, just as it is with Dual Purpose Kerosene (DPK) and Automotive Gas Oil (AGO), where the price fluctuates based on the decision of the importers of the products. The importers have argued that they can not afford to sell the products at prices lower than their import costs.
It is generally believed that it is sad that Nigeria, OPECâ€™s sixth largest crude oil producer, still imports refined products whereas it has crude in abundance, due to provocative policies formulation and implementation by insensitive leaders. Lately, the reasonÂ put forward, among others, isÂ that deregulated economic policies will attract investors into the (oil and gas sector) downstream/upstream sector and engender competitionÂ that would in turn bring down the prices of petroleum products.
Secondly, that the cost of subsidizing importation has become unbearable for government to sustain. The Federal Government says it hasÂ through NNPC been spending N400million dailyÂ to subsidize fuel imports. As part of the deregulation policy, the Federal Government stopped the sale of the crude to NNPC at the preferential cost of $18 per barrel.
NNPC now buys at the prevailing international price since its refineries are down, thus exports and uses the proceeds to import refined fuel for local consumption. Consequently, the people are saddled with continuous increase in the cost of locally consumed fuel. NNPC, major and independent marketers have become importers of petroleum products, a situation that has left the pricing at the mercy of market forces.
Increase in petrol price and government revenue Fuel price increase has negative significance on government revenue. In 1982, fuel price increased to 20kobo, while total federally collected revenue fell to N 11,764million. In 1986, fuel price rose to 39.5kobo, while government revenue fell to N12,382million.
However, the fuel price, in 1993 and 1994, fell to N3.50 and N 11.00 per litre respectively, while government revenue rose to N138,874million and N 201,911million respectively. In 1998, fuel price rose to N 25.00 pre litre, while government revenue fell to N 463,609 million. This inverse relationship can be attributed to labor unrest which resulted in a fall in oil and gas industry activities consequently affecting the revenue that would have accrued to government coffer.
Increase in fuel price and unemployment
Whereas labour demand is influenced by money wage rate, labour supply is influenced by expected real wage rate. Thus, wage legislation has affected labour market negatively.
In 1982, petrol price rose to 20kobo, while unemployment stood at 4.1%. During the period 1986-1990, fuel price rose to 60kobo, while unemployment fell to 3.4%.Between 1991 and 1992, fuel price rose to 70kobo, while unemployment stood at 3.8% and 4.0% respectively. However, the inverse relationship witnessed during the period 1986-1990 can be attributed to the positive impact of SAP on the economy, which eroded in 1991.
Increase in fuel price and inflation
In1978, petrol price increased to 15kobo,while inflation rate rose to 21.7%. However, in 1993, petrol price fell to N 3.25, while inflation rose to 57.20%. In 1998, fuel price rose to N 25 .00,while inflation rate stood at 10.00%. In 1999, the price fell to N20.00, while inflation rate declined to 6.6%. The inverse relationship can be attributed to deficit financing by the Federal Government.
Deregulation: The PEF, PPPRA angle
In view of the controversy which has trailed deregulation, the Federal Government has proposed a bill to the National Assembly, also referred to as the Petroleum Industry Bill (PIB).Â The bill is expected to look critically into deregulation as well as other issues bedeviling the growth of Nigeriaâ€™s most important industry.
With National Assembly winding up its public hearing on the matter last July, Nigerians are awaiting what would eventually come out of the two chambers as an Act for the president to endorse or reject.
But of major concern to the people is how the proposed legislation would affect their well-being. And when institutions that the PIB seeks to modify are considered, two stand out as having direct bearing on the day-to-day lives of Nigerians. These are the Petroleum Products Pricing Regulatory Agency (PPPRA) and the Petroleum Equalisation Fund Management Board, PEF (M) Board. Part 2 Section 75 and Part 2 SectionÂ 200 of the PIB guarantee the existence of the PPPRA andÂ the PEF (M) Board.
The PIB made a wide ranging recommendations on PPPRAÂ and theÂ â€œBoardâ€, but all with the view of enhancing their efficiency. The PPPRA was set up by the PPPRA Act of 2003 to regulate pricing of petroleum products and to handle the Petroleum Support Fund (PSF).
PEF was created by Decree No.9 of 1975 (which was subsequently amended by Decree No.32 of 1989). Its main aim was to see that prices of petroleum products areÂ uniform throughout the county, as wide differentials in prices from zone to zoneÂ at that time had led to chaos in the sector. It has sinceÂ been playing that role.
The funding ofÂ PEF isÂ from the net surplus revenue recovered from oil marketing companies.
This fundÂ is usedÂ for the reimbursement of petroleum products marketing companies for any losses sustained by themÂ as a result of sales of petroleum products at uniform prices throughout the country. ButÂ pundits of full blast deregulation of the oil and gas sector are said to be lobbying members of the National Assembly to throw away PEF and the PPPRA.
They argue that with the determined pursuit of the present administration for a full blast deregulation of the downstream petroleum sector, there is no wisdom in retaining these agencies.
Indeed, at the public hearing on the Bill, major marketers, under the umbrella Major Oil Markers Association of Nigerian (MOMAN), asked that they be allowed to take over PEF and run it at a profit.
Misconception on equalisation subsidy
There is the misrepresentation that government is spending so much though the PEF Management Board and theÂ PPPRA to subsidise mainly petrol Premium Motor Spirit (PMS)Â for domestic consumption.
While, it is quite true for PPPRA which has the mandate of running the multi-billion Petroleum Support Fund (PSF), the PEF Management Board does not take a penny from government to reimburse marketers. The â€œBoardâ€ gets its funds from consumers of PMS. At the point ofÂ loading imported PMS, oil marketing companies pay bridging fund (plus marine transport average) of N3.95 per litre.
The â€œBoardâ€ collects this money at the ports and subsequently uses it to offsetÂ transport and bridging cost to all marketers so that prices of petrol would remain fairly the same all over the county. Consumers of petrol eventually pay marketers the N3.95 per litre when they buy fuel at filling stations, because that amount is part of the N65 per litre they pay.
Therefore, government does not spend a penny on equalisation.
However, the money collected by PEF runs into billions, when you think of the fact that Nigerians consume an average of 32 million litres per day of PMS, 85% of whichÂ is imported.
But the need for equalisation regime cannotÂ be overemphasised, given the grim reality of living in Nigeria. Those calling for the killing of the PPPRA and PEF are doing so to pave the way for massive exploitation in the name of full deregulation.
In the first place, the idea of calling forÂ full deregulation of the petroleum industry,Â with the way things stand today, is a clear call for anarchy; and ifÂ government is for the people, elected by the people, then it must distance itself from such clamour.
Deregulation of diesel
Going byÂ what is happening onÂ diesel, there is no more doubtÂ that deregulation, whether we like it or not, simply means â€œincrease in pricesâ€. At the timeÂ government had control of the saleÂ of diesel, its average price was about N45 per liter.
But with full deregulation today, a combination of largely domestic issues, such asÂ high interest rates by Nigerian banks, bridging and transportation costs, all kinds of taxes hasÂ led to dieselÂ selling for between N105 and N120 per litre.
In some remote areas, it goes for as high as N250 per litre. The international priceÂ of crude seems to matter less here, because even when the price of crude oil came down to $45 per barrel some months back, the price of diesel kept climbing marginally.
Now, the effect of that is that manufacturers now spend exorbitantly to keep their factories running on generatorsÂ in the face of poor power supply, according to the director general of Manufacturers Association of Nigeria (MAN), Mr. Bashir Borodo.
If the Nigerian power utility were working, that cost of energyÂ could have been minimal. ButÂ the manufacturer must, at the end of production, make profit. The consumer is made to pay for it. That is part of the reason increasing inflation is making rubbish of the pay of the people.
So, the idea in any guise that full deregulation would set in competition and drive the price of PMS down is not true given the diesel scenario.Â And if prices must remain fairly equal across the country, it would be wrong to eliminate the Equalisation Fund.
Nigeria could do other things with the billions of PSF
Many Nigerians find fault with the argument that the PSF could be put to â€œbetterâ€ use than inÂ being used to subsidiseÂ fuel. This is because if government were to pay back to Nigerians what most of us, except those in power, subsidise for the failure of government, none of them in power would be able to receive a kobo as remuneration, not toÂ talk of the billions they appropriateÂ for themselves each year.
Nigerians, today, build their homes, produce their electricity, provide water for themselves and arrange their own security. If that cost were to be computed, it would certainly be in trillions of Naira monthly.
While most of the people in power today went to school on government scholarship, they have ruined the educational system so much soÂ that only private schools remain the main places to get children fairly educated, at prohibitive costsÂ to parents. So, if the Federal Government spends N350 billion in a year to stabilise petrol at N65 per litre, people argue that it is not too much.
And they seem to have a case!Â If you allow the price of petrol to go to say N70 per litre, the price of staple foods like gari and yam will go up becauseÂ transportation fare will rise. The local barber will increase his price, because he generates his ownÂ power with petrol. The spare parts seller will hike his price.
Even GSM operators will start arguing for increased call rate, and it would make senseÂ since they all generate the power to run their base stations with diesel and petrol generators. Clinics will make marginal increases on their services to alleviate the increase in generating energy. The landlord will increase his rent, arguing that what he takes as rent cannot support him again.
History of fuel price increase
October, 1 1978:Â from 8.45k to 15.3k
April 20 1982: from 15.3k to 20k
March 31 1986: from 20k to 39.5k
April 10 1988: from 39.5k to 42k
January 1, 1989:Â from 42k to 42k commercial vehicles,60k private.
December 19, 1989: moved to uniform price of 60k
March,6, 1991:Â from 60k to 70k
November 8, 1993:Â from 70k to N5.00
November 22,1993: petrol price drops from N5.00 to N3.25k
October,2,1994:Â from N3.25k to N15.00
October, 4,1994: petrol price drops from N15.00 to N11.00
December, 20, 1998:Â from N11.00 to N25.00
January,6,1999: petrol price drops from N25.00 to N20.00
June,1,2000: from N20.00 to N30.00
June,8,2000: Petrol price reduced to N25.00
June,13,2000: petrol price further reduces to N22.00
January, 1,2002Â from N22.00 to N26.00
June,23,2003:Â from N26.00 to N40.00
June,2009: Petrol increased to N70.00 a liter.