OPINION: REDUCTION IN THE PRICE OF PETROL AND ITS MULTIPLIER EFFECT ON THE ECONOMY

FILE PHOTO - A gas pump is seen hanging from the ceiling at a petrol station in Seoul June 27, 2011. REUTERS/Jo Yong-Hak/File Photo

The Federal Government (FG) has approved the reduction of the pump price of Premium Motor Spirit (PMS), popularly referred to as petrol, from N145 per litre to N125 per litre with immediate effect. The order from FG to the Nigerian National Petroleum Corporation (NNPC) for the reduction is coming against the backdrop of the crash in crude oil prices globally. The President also ordered NNPC to immediately reduce the ex-coastal and ex-depot price of the premium motor spirit to reflect the current market realities.

The President said that it was part of the measure put being put in place by the Federal Government to help provide relief to Nigerians and provide a framework for the sustainable supply of the product. Given the directive on behalf of the President, the Minister of State for Petroleum Resources, Mr Timipre Sylva, said that enforcement of compliance by petroleum marketers is to be enforced by NNPC and the Petroleum Product Pricing Regulatory Agency (PPPRA). The price reduction is expected to affect all petroleum products.

The minister also said that the ministry is going to adopt a price modulation mechanism so that the price of petroleum product can be regulated as the market dictates. The minister also assured Nigerians that the ministry will continue to encourage Nigerians to make use of compressed natural gas to complement PMS utilization as a transport fuel.

The pricing template puts the total landing cost for a litre of petrol at Nigerian port at N137/litre as of February 12, 2020, when Brent crude price stood at US$55.79/bb. This has however declined to N64.33/L as of 16 March 2020 following the dip in crude oil price to US$30/bbl.

The decision has been lauded by many as a signal towards deregulation of the downstream sector. While we see the rationale behind the move, we are concerned that the government is giving up an opportunity to prop up its already slumped revenue prospect given the significant drop in crude price. That said, the decrease will likely ease inflationary pressures at a time when inflation is on the rise. Headline inflation stood at 12.2% y/y in February, up from 12.13% in January.

On May 11, 2016, petrol pump prices were hiked by around 68% from N87/litre to N145/litre and many assumed this signalled full deregulation. This wasn’t the case however as the subsidy regime was still in place. The exchange rate factored into the landed cost of fuel was between N280 and N285/US$1.

A steep devaluation in the currency and an increase in crude prices in the international market, implied an increase in the landing cost which necessitated the continuation of the subsidy regime, though now booked as under-recovery losses in the books of NNPC.

The removal of the subsidy is a critical free-market reform, and it is beneficial to the economy and government finances, though it will almost certainly put pressure on consumers and small businesses. Beyond the impact on government revenues, the removal of the subsidy also removes disincentives to refine petroleum product and may improve the balance of payments through import substitution. We, however, refrain from labelling this price reduction move as any sign of deregulation as the price of fuel is likely to remain regulated.

The Group Managing Director of NNPC, Mallam Mele Kyari, listed over-supply and the outbreak of the coronavirus, which has led to a considerable fall in the price of crude oil, as the two major challenges facing the oil and gas industry today. “The combination of these two events means that there would be a lull in activities in the oil industry, and if forecasts are right, we may witness very low oil prices throughout the year and that will have a collateral effect on the economy,” the GMD observed. As the landing cost of petrol yesterday crashed to N64.32 per litre, going by the recent pricing template released by the Petroleum Products Pricing Regulatory Agency (PPPRA), there are fresh agitations for the government to deregulate the downstream subsector, using the opportunity provided by the current oil slump.

The outbreak of the deadly coronavirus and its spread across the world has forced the international oil market to a near standstill, leaving crude oil price to crash from around $60 per barrel to about $29. The drastic fall in the price reduced the expected pump price of petrol to N64.32. Despite the development, the ex-depot price stood at N125.63 per litre, while the government’s approved retail price hovers between N135.00 and N145.00 under a subsidy scheme that has been repeatedly criticized. While the PPPRA disclosed that the country currently has about 2,217,972,763 litres of PMS in stock, expected to last for 39 days in the face of the growing concern as businesses close down across the world over the coronavirus pandemic, there are indications that the Federal Government could save the N450 billion that was budgeted for subsidy in 2020.

The immediate past president of the Nigerian Association for Energy Economics (NAEE), Prof. Wumi Iledare, said there was the need for government to allow market realities to drive the sector. “I wish the government will have the will to let the PPPRA take charge, using the template for petroleum products pricing. Government must take advantage of this to liberalise or restructure the market to readjust itself going forward in proportion to relate changes in crude oil prices and exchange rates,” Iledare stated.

Also, oil marketers under the umbrella of Major Marketers Association of Nigeria (MOMAN), stated that the global reduction in crude oil prices had presented Nigeria with the opportunity to reform and restructure the downstream sector of its petroleum industry. MOMAN Chairman, Tunji Oyebanji, said the fall in oil prices would open up petrol importation by bringing multiple players to participate. He appealed to the government to review industry margins. According to him, removing fuel subsidy at the period of a drop in prices would eliminate waste, address the issue of the low margin of marketers, as well as, set the country on the path of determining appropriate pricing for the product in the country. He also advocated the need for the restructuring of the nation’s downstream oil industry in order to set it on the path to sustainability. “The elimination of oil theft and leakages in the system, the optimization of the supply chain, the introduction of alternative energies and the regular and consistent maintenance of the distribution infrastructure are all necessary aspects of this downstream reform, which the passage of the Petroleum Industry Bill (PIB) will provide an opportunity for the country to resolve once and for all.”

Though the Federal Government unveiled a new template for the pump price of petrol, there are concerns among operators on when it will become operational as existing stocks are yet to be dispensed, thus fuelling the fear of possible hoarding and scarcity of the product.

The Petroleum Products Pricing Regulatory Agency (PPPRA) said the N125.00 new official pump price for Premium Motor Spirit (PMS) would cover the entire month. The Executive Secretary of the PPPRA, Abdulkadir Saidu, disclosed this in a statement in Abuja. He said: “In exercising one of its key statutory mandates to determine the pricing policy of petroleum products as enshrined in the PPPRA Act No.8 of May 2003, the Agency hereby announces a new price regime of Premium Motor Spirit (PMS) and other Petroleum products as approved by the Government. “Consequent on the new NNPC Ex-Coastal price and taking into consideration all existing approved margins on the PPPRA pricing template, the new pump price of PMS is N125.00 per litre, effective March 19.

“This new price will guide PMS pricing in Nigeria for the rest of the month of March 2020,” Saidu said the agency would continue to monitor trends in market fundamentals and announce a monthly Guiding/Expected Open Market price at the beginning of every month effective from April 1. He added that the new price regime would emplace a more transparent pricing model, stimulate investment growth in the downstream sector of the petroleum industry and encourage the resumption of products importation by Oil Marketing Companies (OMCs). This, he noted, would translate to more job creation as many depots and facilities that were presently dormant would now become active. “The directive of Government to the NNPC is to reduce the Ex-Coastal price of PMS, despite the fact that the current stock of product was imported during the months of January and February 2020 is highly commendable, although this action is not without costs to the Corporation. “We believe that the recent efforts by the Government to develop an alternative Fuels market will come to fruition in the medium term while various initiatives are being undertaken to deepen the utilisation of LPG/CNG as autogas in Nigeria. “The PPPRA wishes to assure all Nigerians of Government’s dedication to building a more vibrant and sustainable downstream sector,” the PPPRA chief added.

In a move signalling possible deregulation of the downstream sector, the Petroleum Products Pricing Regulatory Agency, PPPRA, said that there is the possibility of a new price regime for Premium Motor Spirit, PMS, also known as petrol on April 1, noting that the new N125 per litre pump price will last till the end of March 2020. Addressing newsmen in Abuja, Executive Secretary, PPPRA, Mr. Abdulkadir Saidu, stated that the agency would be undertaking a review of PMS price and would announce a new price for the commodity, April 1, 2020, if there is a change in the parameters used in determining the current price.

He noted that the price announced Wednesday, March 18, 2020, would apply till March 31, 2020, and a new price might come into effect after the review, adding that henceforth, PPPRA would be undertaking a review of petroleum products prices every month. He said: “The approved price of N125 per litre comes into effect from today, which is going to be what we would apply till the end of the month. Then, from the 1st of April, PPPRA will be modulating a monthly price of petroleum products based on the market fundamentals. What the new pricing regime is going to be doing is going to be looking at the actual market price. It is going to be a reflection of what the market is doing. “The way the market is going, this is N125 today, if by the end of March, the prices go below where they are today, then the Nigerian populace will be expected to pay less than N125. It is going to be a reflection of what the market is doing in any particular period. “What we are trying to say is that going forward, the price will be a reflection of what the international market is doing. Normally, the crude oil price determines the product price that we pay. Therefore, if the crude oil price moves it is going to affect the price of PMS. If it goes down, Nigeria will pay lower.”

However, the government must strive to repair the oil refineries and ensure that they are working in full capacity; also government should build new refineries as well as give licenses to the private sector to invest in building new refineries. Government should equally encourage the setting up of modular refineries too, so as to, stop the importation of petroleum products for local consumption.

 

*** Written by Jide Ayobolu.

 

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