Removing the Cap on Petrol Pricing


To address any potential instability in the supply of petrol, which might arise as a result of the increasing challenge of accessing foreign exchange by the marketers, Ejiofor Alike suggests that the federal government should remove the price cap on the product as was done to diesel

The federal government took a bold step on May 11, this year, when it adjusted the price of petrol upward from N86.50 per litre to N145 per litre, to reflect the market dynamics, especially the volatility in exchange rate.

In the circular with reference number A.4/9/017/C.2/IV/690 dated May 11, 2016 and signed by the acting Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPPRA), Mrs. SE Iyoyo, the federal government directed the marketers of petroleum products to sell petrol within the retail price band of N135 to N145 per litre.

The agency also reviewed other components of the pricing template to reflect the new price in what the government had described as appropriate pricing mechanism for petrol.
For instance, while the lightering expenses was increased from N2 per litre to N4.56 per litre, the charges paid by the marketers to the Nigerian Ports Authority (NPA) and the Nigerian Maritime Administration and Safety Agency (NIMASA) were increased from 21 kobo per litre to 84 kobo per litre and 15 kobo per litre to 22 kobo per litre, respectively.

Other components, which were also reviewed upwards include: financing (64 kobo to N2.50 per litre); retailers’ margin (N5 to N6 per litre); dealers’ margin (N1.95 to N2.36 per litre); bridging fund (N4 to N6.20 per litre); transporters margin (N3.05 to N3.36 per litre) and administrative charges paid by marketers to PPPRA (15 kobo to 30 kobo) per litre.

The PPRA had also added that it would continue to “monitor market fundamentals in line with the policy of appropriate pricing with a view to advising marketers on subsequent guiding price band for petroleum products at the beginning of every month.”

As laudable as the upward review of the price of petrol was, recent trends in the value of the Naira vis-à-vis the United States Dollar, have shown that the N145 price ceiling would soon explode beyond the rich of consumers unless urgent action is taken to avert another fuel crisis.
Nigerians are supposed to have been enjoying a significant drop in the price of petrol following the slump in the price of crude oil at the international market.

From a peak of $115 per barrel in June 2014, crude oil price dropped to a 13-year low of $27 per barrel in January this year before it recovered to the current level of about $44 per barrel.
But even at $44 per barrel, petrol is supposed to be below N90 per litre at the pumps but for the rising exchange rate, which made it impossible for Nigerians to enjoy low fuel price.
Before the exchange rate rose to these unsustainable levels, the federal government under the former administration of President Goodluck Jonathan had reduced the price of petrol from N97 per litre to N87 per litre, few months before the 2015 general elections.

Though the decision was supported by the plummeting price of crude oil, which led to a drop in the price of refined products, most Nigerians had viewed the action as politically-motivated, coming few months before the election.

With the drop in the price of crude, the cost of refined products also dropped significantly, with the government incurring little or nothing in the payment of subsidy in 2015.
In 2013, Jonathan’s administration had set aside N971.1 billion for the payment of subsidy and had retained the same figure in the 2015 budget, according to the first Medium Term Expenditure Framework (MTEF) and fiscal strategy presented in September 2014.

Even though the initial subsidy projection was reduced by half with the falling crude oil price, which necessitated the revision of the budget benchmark, the government had no cause to pay huge subsidy claims in 2015 because before the reduction of the pump price, the difference between the official price and the expected open market was only about 90 kobo per litre.
This implied that the government was paying only 90 kobo as subsidy on every litre, as against N41 before the drop in the price of crude oil.

To ensure that Nigerians enjoy higher subsidy in view of the drop in the prices of refined products, the government had to reduce the pump price of petrol from N97 a litre to N87 a litre, thus increasing subsidy to N10.90 per litre.

Announcing this decision, the former Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, said: “As you may be aware, there has been a lot of volatility in the oil market in the past few months and due to this the importation prices of our petroleum products have been impacted”.
“Therefore, with the approval and directive of Mr. President and by virtue of Section 6 clause 1 of the Nigerian Petroleum Act, it is my responsibility as Minister of Petroleum Resources to hereby announce a reduction in the pump price of Premium Motor Spirit (Petrol) from N97 per litre pump price down to N87 per litre pump price, effective from twelve (12) midnight Sunday, 18th of January 2015,” she added.

Exchange rate volatility
Though there is volatility in the crude oil market, which has translated to global drop in the price of petrol, the volatility in exchange rate has made it impossible for Nigerians to enjoy the slump in petrol price.

Before the exchange rate soared to this current level of close to N400 per dollar, it was around N171.36, hence it was convenient for the Jonathan’s administration to reduce the price of petrol to reflect the drop in the international market price.

But with the current high exchange rate, even the recent upward review to N145 per litre ought to be re-visited to reflect the current market realities or the country might risk another crisis where petrol would sell for N250 –N300 per litre.

The Executive Secretary of the Major Oil Marketers Association of Nigeria (MOMAN), Mr. Obafemi Olawore had stated the high exchange rate resulted to the high costs of both petrol and diesel in the country.

“The unfortunate situation in which we find ourselves is that as the price of crude oil was dropping – as the international price of diesel was dropping, we devalued the Naira. For example, for Premium Motor Spirit (PMS), the exchange rate for bringing products before the devaluation was N171.36 per Dollar. At that rate, the landing cost of PMS was N90.67 per litre. There was a time the exchange rate rose to N188, that is, N188 was the interbank rate, while the CBN gave us N171.36. But when it went to N188, the landing cost of PMS rose from N90.67 to N98.36. As at today when the exchange rate has gone to N199 (there is no window again), the landing cost rose to N103.45. So, you see that the main factor here is the exchange rate,” he had said.

From an official rate of N197 per dollar, the administration of President Muhammadu Buhari raised the exchange rate to N285 per dollar and also increased the price of petrol to N145 on May 11, this year.

Fresh fuel crisis underway
With the rising exchange rate, marketers no longer source dollar at the N285 official price for importation of petrol.

The difficulty in accessing petrol at the current low international market price first started when in a bid to save the banks and the economy from collapse, the Central Bank of Nigeria (CBN) classified oil and gas sector into one segment and set a limit for lending by the banks.
The CBN had grouped the Exploration and Production (E &P); downstream and services into one segment and directed the banks not to exceed certain lending limit to this sector.

That was where the problem started because the marketers had argued that the CBN should have treated each of the three as a separate business entity.

After grouping the oil and gas sector into one segment- oil companies, the apex bank had in December 2014 directed the banks to reduce their transactions with oil companies to curb the challenges of meeting the huge funding demand of these companies and also address other liquidity issues.

The CBN’s directive stemmed from the result of an earlier risk-based supervision exercise carried out by the apex bank, which revealed a huge financial exposure of the banks to the oil and gas sector.

The apex bank was said to be concerned about some risk management deficiencies, and was determined to take necessary steps to ensure that banks have sufficient capital buffers to mitigate escalating risk-taking activities.

The second directive of the apex bank that affected the marketers was the closure of the retail Dutch Auction System/wholesale Dutch Auction System (rDAS/wDAS) segment of the foreign exchange market.

CBN’s action was an indirect devaluation of the Naira at the interbank forex market.
With the closure and the quoting of an exchange rate from N197 to N285 per dollar, the marketers became comfortable selling imported petrol for N145 per litre.
But the volatility experienced in recent weeks has made it impossible for the marketers to access dollar at the official price.

The Minister of State for Petroleum, Dr. Ibe Kachikwu has made spirited efforts to get foreign exchange for the marketers from the international oil companies (IOCs) but the IOCs, it was learnt, no longer give dollar to the marketers at the official rate.
One of the marketers told THISDAY at the weekend that no marketer would enjoy any margin at exchange rate of above N285 per dollar.
The downstream sector has successfully exited the subsidy crisis and has moved into exchange rate crisis.

It is pertinent that government take the bull by the horns by removing the price cap on petrol to avoid dragging the country back and forth into avoidable crisis.
Since the country cannot sustain the official price of petrol without plunging into crisis when the price will hit N250, N300 and above, the government should remove the ceiling and allow the market forces to drive the price at sustainable level.

Diesel has since been deregulated and no crisis has been witnessed in the supply of the product.
In a reaction to the previous debates on the merits and demerits of deregulation, the PPPPRA had acknowledged the unquantifiable benefits of deregulation.

“Basically, the underlying principles behind deregulation and liberalisation are the same; removal of official restrictions and bottlenecks that discourage participation and investment, and the consequent opening up of the sector with the aim of engendering maximum competition. This applies in all cases so there is no fundamental difference based on sectors. Therefore, the feat achieved in the communication, aviation and broadcasting sectors of our economy can be replicated in the downstream sector if the policy is followed to its logical conclusion,” the agency had noted.
Already some marketers are clamouring to sell at N151 per litre, but interestingly, some retailers are selling below N145 per litre.

So, deregulation will engender competiveness in pricing and investment and end the perennial crisis, which leads to the price rising beyond sustainable levels.