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 January 30, 2016 - 10:20 PM EST
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New Petrol Price - a Shift From Subsidy to Profit Making

WITH the newly adopted modulation model for the pricing of petroleum products nationwide, government has 'stylishly' deregulated the downstream sector.

In the new pricing model, Premium Motor Spirit (PMS), otherwise known as petrol, is sold at N86.50, kerosene at N83 and diesel at 74.99 per litre at filling stations.

From all indications, government is believed to be making a profit of N3.83 per litre of PMS, but the Petroleum Products Pricing Regulatory Agency (PPPRA) regard what is perceived as profit as 'over-recovery.'

Over the years, government has been selling the idea of fuel subsidy removal to Nigerians, communicating how immensely beneficial the measure would be for everyone.

It argued that savings from not paying subsidy could be channeled to the provision and improvement of infrastructure such as roads, schools and hospitals, among others.

In the last few years, subsidy debate has polarised the country. Envisioned as a people-oriented policy to help reduce the price of fuel for Nigerians, it has become a cash cow for the cabal involved in PMS importation.

Watchers of events in the petroleum sector believe that with the plummeting price of crude globally, the commodity ought to have gone below the recent pump price released by the price regulatory body, the PPPRA.

They said from the new pricing template, government has gone into the petroleum business with the sole aim of profit making. And instead of paying subsidy on the commodity, it is angling to make marginal profit, as the Estimated Open Market Price (EOMP) for the commodity is lower than the pump price.

This is even more worrisome, when the price template is compared to prices in fellow oil-producing countries.

Nigeria
is the biggest producer of oil in
Africa
, yet it was gathered that the same fuel that sells for N86.50 per litre (without payment of subsidy) in
Nigeria
goes for between N4 and N5 in
Venezuela
and N22 in
Libya
.

According to the template, government would be making about N3.83 profit on every one litre of the product. The PPPRA template states that that the EOMP of petrol is N82.67 with a retail price of N86.50 at filling stations nationwide.

The EOMP is the total landing cost of PMS and sub-total margins, including transporter's cost, dealer charges, bridging fund, administrative charges and a handful of other variables to make it the true cost of the product.

By the end of 2014, the official pricing template for petrol by PPPRA indicated that government was paying N6.45 per litre as subsidy, as the EOMP then was N94.45, which was N6.45 higher than the pump price of N87 per litre.

The difference between the EOMP and the retail price was what the government was paying as subsidy. This difference has now been removed with the new template, and government is now set to make profit instead of using public resources to pay for what has not been beneficial to majority of Nigerians.

Speaking on the development, Senator Lee Maeba said the Minister of Petroleum is still shy to announce a complete deregulation of petroleum products. The Senator, who represented Rivers South East in the Senate and initiated the Petroleum Industry Bill (PIB), told The Guardian that the type of modular prices system the Minister introduced cannot guarantee adequate pricing system of petroleum products.

Said he: "the Federal Government is shy to announce full deregulation and without deregulation, the price is still what the minister feels. He fixes it, and you cannot get adequate pricing system without full deregulation. When you deregulate, everybody would sell how he/she produces. In fact, there would be so many refineries producing. But the situation now is that we are still in price fixing.

"Whether you remove subsidy or not, as long as you are doing price fixing, you are regulating. So, the government should not shy away from deregulation. Yes, I agree that the first set of product that comes out is diesel, while the second set is kerosene, petrol and the last is jet fuel, and it goes down. So, these products are cheaper from concentration. So, as long as the price fixing is still going on, and as long as you have PPPRA, they will continue to fix price. When you deregulate, you disband all these institutions, so the market forces now control prices. Until market forces control pricing, you cannot have adequate price."

However, the organised labour believes that government is moving from petroleum subsidy to that of petroleum tax collection. The General Secretary of Nigeria Labour Congress, Dr. Peter Ozo-Eson, said the new pricing regime is fraught with ulterior motives.

Ozo-Eson told The Guardian that the process of arriving at the new template should have been transparently executed, with the consultation of the PPPRA board empowered by the laws of the land to fix price of petroleum products.

"We need to have a transparent re-working of the template. The PPPRA, by law, is saddled with that responsibility, but it also by law constituted in a stakeholders' context, which stipulates that engagement takes place before a change in template is effected," he said.

"PPPRA Executive Secretary, who is appointed by government and is directed either by the Minister or the President, cannot, on his own, fix the template. This is because the stakeholders have not met or reconvened for a long time. Therefore, there is a violation of the law by government. We need to be careful as a mono-economy country.

"The N3.83 government is making now would not make sense, unless the price remains excessively depressed over a long period of time. This cannot be the basis of building up the kind of fund that is needed. Though a modulation scheme in itself can have economic logic, the way we have it now is not sustainable, if prices were to go up," he added.

The Chairman of Trade Union Congress in Rivers State, Chika Onuegbu, described the price of diesel as very exorbitant. He argued that government is making money from the diesel, because, "there is no how petrol will sell at N86.50 per litre without subsidy, and diesel will sell for N125 or N130, also without subsidy, which is a difference of about N40 per litre.

He said, "obviously, government has not reviewed the PPPRA template for diesel and AGO and that shows that a lot of money is being made from people. Government needs to review the template and bring it down. What is more painful is that these products are actually what most businesses use, as a result of poor power supply in the country. Companies use diesel to power their generators and that increases the cost of doing business in

Nigeria
. From hotels to hospitals, banks and telecom operators use diesel and that increases the cost they charge."

Onuegbu asked, "How could government reduce the price of PMS this time, and did not do anything to the price of diesel? Government should reduce price of diesel to around N80 per litre, because without subsidy, it should not be more than N80 given the current price of crude oil."

According to the labour leader, government should prove that it is concerned about people's welfare and generating employment.

On his part, the Rivers State Chairman of Independent Petroleum Marketers Association of Nigeria (IPMAN), Sunny Nkpe, said the answer to the whole issue is deregulation following the dwindling of foreign exchange.

"We have all seen that government can no longer sustain this thing anymore. The main thing is deregulation. Price of diesel was deregulated long time ago. NNPC sells at N90 per litre, while pump price of diesel fluctuates between N120 to 130. What determines the prices is the loading from government depot. If you load from government depot at less than N75 and the man that buys from private depot for N95, they cannot sell at the same price. So, deregulation is the solution to encourage competition and level playing ground for everybody."

The President, Association of Petroleum Explorers, Mr. Afe Mayowa, said government was collecting a form of tax from petroleum consumers. He agreed that government, through the differences in the landing cost and pump price, is collecting petroleum tax from consumers, but advised that the profit be ploughed back into the society for the benefit of Nigerians.

"Government is collecting tax with the price differential. But my advice is that the proceed should be invested in infrastructure such as roads, hospitals and schools for the education of the people, especially those in the North and Niger Delta, where illiteracy is prevalent. With education, there will be peace and security because people will not be deceived to imbibe false doctrine.

"The landing cost for PMS is supposed to be lower than the pump price, because government is now in business. The government has to make profit from what it is doing. The subsidy was a fraud, which has no justification. They should now allow market forces to determine the pump price of petroleum products. There is no way you can subsidise consumption, because that subsidy has no way of getting to the generality of the people. In my opinion, the difference is not too much. People paid as much as N150 per litre in Akure during the Christmas season," he said.

He added, "We should invest in the youth, create opportunity for the people to be educated and exposed. It is a lot of money the government is going to make. So, they should put the money to fix power infrastructure. The money is being taken from us and should be spent on the people. It is a tax being collected from the people. They should, therefore, not share it. I don't blame the people for not willing to pay such tax, because government had in the past disappointed them, such that the fund ended up in private pockets."

Commenting on the disparity in the prices of PMS, diesel and kerosene, he said the forces of demand determine their prices, supply and preferences, which have to do with the population, technology, economics and usage.

In his view, the demand for kerosene and diesel is very low, so is the supply, hence the rise in price.

Commenting on the price enforcement for the product by the government, Mayowa said the regulation is necessary for marketers not to become "shylock."

"In a market like this, you need some form of regulation (Cap) to prevent emergence of shylocks in the downstream sector. It is like what

Lagos
is doing to housing. Government says you cannot charge beyond certain limit. In this case, the government says you cannot sell PMS beyond N86.50, but you can sell below the price. If there is no such control, marketers will team up to fix pump price arbitrarily," he said.

The Assistant General Manager, operations at the PPPRA, Victor Shidok, said the agency has created a template that is normal and would prevent frequent changes of pump price.

He said government is yet to make official pronouncement on subsidy, hence it would be incorrect to say it has discontinued subsidy payment or petroleum products.

He said, "The government has not made public pronouncement on petroleum subsidy. It has not said it has stopped. Under Petroleum Support Fund (PSF) guidelines, there is what we call under and over recovery scheme. None of them is a permanent state.

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Source: Equities.com News (January 30, 2016 - 10:20 PM EST)

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