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Global oil rally and Nigeria’s price modulation

By Sonny Atumah

The Organisation of the Petroleum Exporting Countries, OPEC and non-OPEC agreed to cut world supply by 1.8 million barrels of oil per day, bopd in November 2016; with the cuts extended to last through 2018. OPEC’s intent was to limit output to 32.5 million bopd to shore up prices. Expectedly many forecasted oil price rallies this year while others are despondent about the alliance and believe that oil price may have a downward slide in 2018. Proponents of a downward price regime believe that the fundamentals favour a reversal.

Oil
Oil

The United States Energy Information Administration, EIA predicted a 100 million bopd (OPEC 39.64 million and non-OPEC 60.69 million bopd contributions) demand this year up from the total demand of 98.39 million bopd in 2017.

OPEC deliberate cut in supply has drawn down crude inventories with oil price rallying from an average US$60 in 2017 to over US$70 in forecast for 2018. Reuters Tuesday quoted Morgan Stanley that the global Bench mark crude, Brent would hit US$75 a barrel by the third quarter of 2018, while the WTI could hit US$70 a barrel.

Traditionally, oil price is determined by the classic forces of demand and oil supply. For years oil price rallies are also bolstered by other extraneous market sentiments often triggered in the Fragile Five petro states of Iran, Iraq, Libya, Nigeria and Venezuela. The conservative clergy and the young generation public clashes in the New Year for Iran’s soul lasted for over ten days.

That protest caused a price rally last Monday which saw the Brent rallied at US$69.24 just below Nigeria’s Bonny Light crude which also hit an all-time high of US$70.34; the highest since December 2014. Last Wednesday the Niger Delta militants’ threatened to attack offshore oil facilities within days. These storms of events contribute to demand-supply disequilibrium.

Whether oil rallies helped Nigeria is a rhetorical question. Oil rallies are beneficial to OPEC members in budget deficits reduction. But the Federal Government price modulation policy introduced in December 2015 for imported petroleum products became an oppressive burden for Nigerians because it did not follow the standard principles. In context price modulation is where prices are determined by the dictates of the market.

In a modulated regime, a change in the price of crude translates to an adjustment in the pump price (up or down).

Nigeria’s imported petroleum price modulation introduced by the Minister of State and then GMD of NNPC Dr. Ibe Kachikwu to Nigeria on May 11, 2016 was when international crude oil prices were falling. At that time China, India, Japan and South Korea which were becoming biggest users of oil all benefitted from low crude oil prices saying that it was the best time they have ever had as buyers enjoying an overflow of oil.

The PPPRA announced a price increment of the pump price of petrol by 68.60 percent from N86 to N145 with immediate effect citing extreme difficulties faced by petroleum products importers in sourcing foreign exchange.

One year after the policy was introduced  NNPC became the sole importer of PMS and till date the major and independent marketers cite inability to access foreign exchange as a problem.

It raised additional revenue for government, but the panicky policy coupled with the floated exchange rate regime introduced almost simultaneously created a greater socio-economic problem of acute inflation for the people. If there were concerted efforts to rehabilitate our refineries Nigeria by now would have had near stability in petroleum products supply.

In our imported petroleum products price modulation, an increased cost of crude translates to higher landing cost of products. The 2016 PPPRA template included a landing cost of N119.78 per litre, including Cost and Freight N109; Lightering Expenses N4.56; NPA N0.84; and NIMASA Charges N0.22, Financing N2.51; Jetty Thru’Put Charge N0.60; and Storage Charges N2.

The total margins of N18.37 include distribution margins for Retailers, National Transport Allowance, Dealers, Bridging Fund, Marine Transport Average and Administrative Charge; bringing the total cost to N138.15 per litre. The retail price band per litre at the pump is between N135 to N145.

With the NNPC’s recent import figure of N171 and selling at N145 per litre an additional cost of N26 is being incurred and that is the subsidy the NNPC is paying. With the price of crude in the international market forecasted to reach US$75 per barrel in 2018, Nigerians may pay more per litre of PMS.

We pay not less than N50 per litre for importation (crude oil import duties, taxes and margins of refined products in originating countries) and that would have been saved for infrastructural development and maintenance if we were refining locally. At the worst scenario, the cost per litre of PMS may not be more than N100 for local refining. This is the root cause of fuel scarcity today.

The price modulation policy in Nigeria never made economic sense when we import refined petroleum products. President Buhari as Petroleum Minister should save Nigeria by finding our bearing.

 


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