May 15, 2016 - 10:30 PM EDT
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The Mother and Father of Fuel Prices

In the wake of deregulation of petrol prices under Obasanjo in 2004, and the unfolding anxiety of Labour and the Nigerian public on the adverse impact of rising fuel prices, this column published two articles titled "The Mother and Father of Fuel Prices"(22.11.2004) and "Only a Stronger Naira Will Stop Rising Fuel Prices"(22.08.2005) The solution proposed in both articles remain solidly valid today as it was over 12 years ago; for this reason, a summary of both articles is again presented in the hope that the authorities will one day heed our counsel and resolve our dilemma.

Please read on.

The economic and social benefits of deregulation is evident from the demonstrable success in several countries. Deregulation properly construed would mean market determined prices for fuel; thus competitive pricing and improved customer service would prevail.

Furthermore, our comatose refineries would be rejuvenated and investors would also be eager to establish new refineries with the assurance that their survival and profitability would not be dependent on market manipulations or distortions by the Authorities. Petrol smuggling would also cease to be an attractive venture and the Treasury will be bolstered by the plug on such leakages.

However, the oppressive inflationary impact of deregulation since inception seems to be the exact opposite of popular expectations; for example, instead of lower prices, pump prices conversely remain on a continuous rise with a debilitating impact on the Nigerian patient!

The NLC is however buoyed by vibrant public support to insist that the promised palliatives are too minimal and not likely to restore the patient to good health. Consequently, we have both the next of kin and an enamoured doctor killing the patient, whom they both love so dearly, slowly with love, as the patient's health meanwhile, continues to deteriorate.

How can both the federal government and the NLC be so right in their aspirations, but wrong in the diagnosis of the problem! Undeniably, the NLC and the Federal Government share similar aspirations, in their quest for improved social welfare, that would restrain inflation, and support a progressive economy which is efficiently driven by market forces and competition.

Furthermore, Nigerians also expect that new refineries will come on stream, to properly coordinate domestic supply, so that surpluses can be gainfully exported. Evidently, both NLC and government also desire the same basic objectives, of increasing job opportunities with diversification and expansion in industrial capacity; regrettably, the pursuit of these objectives seems to have taken different tracks and yet neither party is anywhere nearer the declared objectives.

In general, the following factors have been canvassed by all and sundry as mainly responsible for rising prices: these are poor shape of refineries, additional cost of imported fuel, corruption and smuggling, increasing crude oil price and the price of the naira vis-à-vis the US dollar.

After thorough examination of these major factors, it will be obvious that even if our refineries are working at full capacity and new refineries are built, the local price of petrol in a deregulated scenario may only be cheaper than the cost of imported fuel by not more than 10-20%! The cost difference will be the additional cost of transporting crude oil to Europe or elsewhere and the cost of shipping back to Nigeria and domestic port clearing the charges of refined petrol. The potential savings in cost from relatively cheap local labour may also be nullified by cost of provision of own infrastructure, particularly high cost of power, and high cost of funds.

We cannot deny that corruption and smuggling indirectly affect petrol price, just as inefficiency in public service and lack of accountability could also lead to indiscrete resource allocations with attendant market distortions and higher prices.

The cross border smuggling of both crude and imported petrol will similarly affect prices at different levels; however, although massive smuggling of crude oil may help to stabilize or lower international crude oil prices, but cross border smuggling of imported PMS instigates a bloated local demand and also represents an open substantial subsidy to the economies of our ECOWAS neighbours; but these factors by themselves, do not explain the geometric leap in domestic fuel prices from less than N1/litre to its present oppressive level of over N50/litre.

However, the welfarist argument that Nigerians should enjoy lower prices for their natural resource endowment may jeopardize the advantages of a free market mechanism and all the benefits of attracting foreign investments into refineries, with competitive product pricing and improved customer services.

Besides, the cost effects of an open ended subsidy to stabilize petrol prices in a climate of steadily and readily depreciating naira will have a catastrophic effect on the survival of existing public refineries, as they would most certainly go under if, for example, the NNPC continues to absorb daily subsidy values in excess of N350 million (over N150 billion annually) as reported by the Group Managing Director recently. This burden would ultimately sound a death knell on the prospect of private investment in our refineries!

However, it would not be inappropriate to expect that even if international crude oil prices are rising, the expected upward push in domestic fuel prices will be cushioned by a stronger valued naira vis-à-vis the dollar (the crude oil value denominator), since the additional dollar revenue which automatically accrue to us from rising crude oil prices would also increase our foreign exchange reserves positively, and this should be reflected in a stronger naira exchange rate; Thus, ultimately, domestic fuel prices will either stabilize or even fall in response to a stronger naira.

Technically, even though Nigerians will be able to buy fuel more cheaply even when crude oil prices rise, smugglers of petrol will, however, be put out of business, as the stronger naira will reduce smugglers' margins and make the business unprofitable! Thus the stronger the naira, the lower in fact will be the local prices of fuel products.

Furthermore, a 10-15% petrol tax per litre can be added on fuel prices, while the revenue collected can be dedicated to critical areas of need such as education, health, transportation and provision of infrastructure. So it is clear that the single most important factor in the determination of local fuel prices, is actually the naira exchange rate.

In a deregulated market, local fuel prices have no choice but to move in sympathy with international crude prices, but appropriate and sensible management of the foreign exchange inflow from the increasing dollar revenue will determine the naira exchange rate and consequently the price also of local fuel products.


DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

Source: News (May 15, 2016 - 10:30 PM EDT)

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