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Crashing Down Fuel Price: Imperative for Deregulation

25 Oct 2011

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By Ejiofor Alike

As the plan for removal of petroleum subsidy gathers momentum, it is increasingly becoming imperative that unless it is fully implemented to encourage the private investor to build more refineries and crash down fuel price, Nigeria’s pump price of fuel will remain one of the highest among OPEC member nations, even at N65 per litre, writes Ejiofor Alike

Previous Experiment
When on October 10, 2009, the then Group Executive Director in charge of Commercial and Investment at the Nigerian National Petroleum Corporation (NNPC), Mr. Aminu Babakusa, announced November 1, 2009 as the date for commencement of the full deregulation of the sector, the organised labour and other civil society coalitions mounted a relentless war against the move.

Babakusa, who was in Lagos to inspect facilities of private petroleum marketers, said the inspection was in readiness for the implementation of full deregulation.
Before Babakusa’s pronouncement, late President Umaru Yar' Adua had in February 2009 approved the recommendation of the Presidential Steering Committee on the Global Economic Crisis for the deregulation of the sector and also set up a committee to drive the process, indicating that there was no going back.
But after about two weeks of campaign against Babakusa’s pronouncement by civil-society coalitions, the then Labour and Productivity Minister, Mr. Adetokunbo Kayode, denied the NNPC top shot and his November date.

Kayode stated that the November 1 date did not originate from the government, as the pronouncement did not come from the late President Umaru Musa Yar'Adua himself or any of his ministers, whose portfolio was directly connected to the issue.

Despite, the official posturing, Babakusa’s pronouncement actually originated from the Federal Government but the government chickened out on account of mounting public pressure, despite all the gains of full deregulation.
The government backed out of the move because it could not actually muster the political will to implement the policy and convince Nigerians on its numerous benefits to both the economy and the people.

In other words, the administration, apparently, did not remember to showcase the fact that the removal of subsidy could encourage the building of more refineries, which in the long-run, will crash down fuel prices and benefit the masses directly.
Rather, it was the usual rhetoric of how the move would make more resources available for the development of infrastructure.

Unfortunately, such argument could not sway many Nigerians, who already believed that rather than making more resources available for building more infrastructures, removal of subsidy would make more money available for some corrupt officials to steal and earn jumbo allowances.

Current Move
Indication that the administration of President Goodluck Jonathan has the potential to muster the political will to remove petrol subsidy and deregulate the downstream sector for the long term benefits of the economy and the people, emerged recently when the Nigeria Governors’ Forum (NGF), the arguably the most powerful political bloc in the country called on him to take urgent steps to dismantle the current regime of subsidising petroleum products to pave the way for full deregulation of the sector.

Regrettably, the demand of the governors was induced by selfish motive as it was not hinged on the fact that the removal of subsidy could encourage the private sector to build more refineries and possibly, crash down the price to even below N65 per litre, for the benefit of the masses, as obtained in other member nations of the Organisation of Petroleum Exporting Countries  (OPEC).

The governors had rather hinged their demand on the selfish desire to have a larger chunk of the revenue shared monthly by the federal, state and local governments.
The governors also capitalised on the need to implement the Minimum Wage Act to demand for the removal of subsidy.

The governors had, in a recent communiqué signed by the NGF Chairman, Governor Rotimi Amaechi, demanded an “immediate removal of petroleum subsidy” to enable the states to access the N500 billion that the Federal Government spends yearly on subsidy.
In their argument, the N500 billion would go a long way in their quest to implement the Minimum Wage Act.

The governors are not sure that the relevant government agencies that pay subsidy receive as much as N500billion yearly, hence their desire to have subsidy removed.
They believe that if subsidy is removed, the proceeds will be shared by the states for the payment of Minimum Wage, but that is not the real benefit of removal of subsidy.

The position of the governors was hinged on selfish motive and did not take into account of the fact that the removal of subsidy could bring about the building of more refineries and improve the living conditions of the generality of masses through generation of employment and reduction in the pump price of fuel.

Fuel Prices in OPEC Member States

Even with the billions of naira provided currently as subsidy on petrol by the Federal Government, available statistics indicate that at N65 per litre, Nigerians still pay one of the highest pump prices among the 12-member nations of the Organisation of Petroleum Exporting Countries (OPEC).

This is principally because unlike other OPEC countries that enjoy cheap fuel because of their functional refineries, Nigeria ’s total dependent on importation of refined petroleum products accounts for the high cost of fuel in the country.

The plan to remove the subsidy next year will no doubt jerk up the price, but if urgent steps are taken to boost local refining capacity and make the country less-dependent on importation of fuel, the price will quickly go down to possibly below N65 per litre, within a short period.
With over 36 billion crude oil reserves and average daily production of 2.6million barrels per day, Nigeria is the seventh exporter of crude oil, with 10th largest reserves in the world, but the only country among OPEC that imports refined petroleum products.
Since the country imports fuel, the price of products in Nigeria is a reflection of international oil prices, instead of a reflection of the cost of local refining.
The landing cost of fuel from the international market is currently over N147 per litre and it is expected that if refined locally, the cost will be far less.
As the price of oil goes up at the international market, the price of petrol also goes up in the country, resulting in constant adjustment of the pump price of fuel.
Past successive governments adjusted the official pump price of fuel 11 times between 1998 and 2009, to reflect the rising prices of crude oil at the international market.
While late General Sani Abacha pegged the pumped price at N11 per litre throughout his five-year reign from 1993 to 1998, the price was adjusted to N19 during the administration of General Abdulsalami Abubakar, which lasted for nine months.
Former President Olusegun Obasanjo adjusted the price eight times during his eight-year reign between 1999 and 2007, from N19 per litre to N70 per litre, before late President Musa Yar’Adua adjusted it downwards to N65 per litre.

Even with the billions of naira voted yearly to subsidise the price of fuel, studies indicate that at the exchange rate of N155 per dollar, Nigeria’s N65 per litre, which is an equivalent to $0.38 per gallon or $0.42 per litre is still one of the highest among other OPEC nations because other countries that pay less refine their crude oil locally.
In Saudi Arabia, for instance, the price is $0.45 per gallon or $0.12 per litre, an equivalent of about N18 per litre.
In Kuwait the price goes for $0.79 per gallon or 0.21$ per litre, an equivalent of about N32 per litre.
In United Arab Emirates, it is $1.40 per gallon or $0.37 per litre, an equivalent of about N57 per litre; while in Venezuela, it goes for $0.19 per gallon or 0.05$ per litre, an equivalent of about N7 per litre.
Qatar sells at $0.83 per gallon or $0.22 per litre, an equivalent of roughly N34 per litre, while in Iran; it goes for $0.42 per gallon or $0.11 per litre, an equivalent of about N17 per litre.
In Algeria, one litre of petrol is sold for $0.20, an equivalent of N31 per litre; while the pump price of fuel is also relatively cheaper in other OPEC countries of Angola, Ecuador, Iraq, and Libya.
With viable refineries, other OPEC countries refine their crude oil locally and at cheaper rate, to meet their daily demands of petroleum products and also export to other countries.
But Nigeria’s four refineries are not only non-functional but grossly inadequate.
Even if they are producing at full capacities, the 445,000 barrels per day capacity refineries can only produce about 10million litres of petrol daily, which is far less than the country’s daily consumption of about 35million litres.

However, the current regulation of the prices of petroleum products by the Federal Government has discouraged private investors from building refineries to complement government – owned refineries at Port Harcourt , Warri and Kaduna .
Conclusion
It is envisaged that full deregulation will encourage private-sector participation in the building of refineries and bring down prices in the long run.

Former Minister of Interior and Chairman of Depot and Petroleum Products Marketers Association of Nigeria (DAPMAN), Captain Emmanuel Ihenacho, alluded to this fact when he told THISDAY that deregulation would crash down prices.
He acknowledged that the price might go up immediately after the commencement of deregulation but added that it would quickly come down as soon as the private sector started building refineries.
Ihenacho noted that only the rich, who owns fleet of cars and other vehicles benefited from petrol subsidy and not the masses.
Reacting to the plan to remove subsidy, renowned cleric, Bishop David Oyedepo warned that the proceeds may be stolen by corrupt public officials.
Speaking at a recent Sunday service of Winners Chapel in Ota, Ogun State , Oyedepo said subsidy removal would not solve the country’s problems.
“I don’t have a problem with the removal of the subsidy but what will happen to the money that will be made. It will be stolen. My worry is with the thieves in government who steal the money that should have been used to develop the country. Can you imagine a public officer reported to have stolen N57billion? That would have been enough to develop a state,” Oyedepo reportedly told the congregation.
“Stealing is stealing no matter how and where you steal. Either from your mother, your family, your church or government, the act of stealing makes you a thief and it will attract a curse,” he added.
The renowned man of God frowned at what he called the “unquenchable quest” for wealth, which he said had forced many in government to engage in atrocities.
Therefore, the task ahead of the President Goodluck Jonathan’s administration is not to roll out the gains of removal of subsidy because they are unquantifiable.
Removal of subsidy will encourage Shell, Chevron, Total and other private investors to build more refineries to create employment opportunities, crash down the price of fuel to below N65 per litre and also engender stability in the supply of petroleum products, among other benefits.
What this administration should be concerned with is to demonstrate in practical terms that the proceeds from the removal of subsidy will not be stolen by some government officials.

Tags: Business, Nigeria, petroleum subsidy, Fuel Subsidy, Deregulation

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