Chineme Okafor weighs the implications of rising oil prices on Nigeria, which relies on imported petroleum products to run its economy
Oil prices have continued to rise to new levels and underpinning the higher oil prices is the spectre of far-reaching sanctions the United States has placed on the Iranian regime and which is intended to isolate it from economic interactions.
As at Tuesday, reports indicated crude oil prices jumped more than two per cent to a four-year high after Saudi Arabia and Russia ruled out any immediate increase in production despite calls by United States President, Donald Trump for action to raise global supply.
Already, benchmark Brent crude hit its highest since November 2014 at $80.94 per barrel, up $2.14 or 2.7 per cent, before easing to around $80.65 per barrel. Similarly, United States light crude was $1.30 higher at $72.08.
This happened after leader of the Organisation of Petroleum Exporting Countries (OPEC), Saudi Arabia and its biggest oil-producer ally outside the group, Russia, rebuffed a demand from Trump for moves to cool the market.
The new price hike equally followed what was obtained a week earlier when reports from Bloomberg indicated that West Texas Intermediate (WTI) crude for October delivery rose by $1.27 to close at $71.12 on the New York Mercantile Exchange, while Brent for November settlement added 37 cents to close at $79.40 on the ICE Futures Europe exchange.
Notwithstanding, commodity traders, Trafigura and Mercuria said within the week that Brent could rise to $90 per barrel by Christmas and pass $100 in early 2019, as markets tighten once US sanctions against Iran are fully implemented from November.
The expected US sanctions on Iran, according to JPMorgan, could lead to a loss of 1.5 million barrels per day (mbd) of oil, just as Mercuria warned that as much as 2mbd could be knocked out of the global market.
Yet these predictions have been supported by disclosure from the OPEC that its priority was to ensure stability in oil prices that would encourage the industry to return to investing.
At a recent oil and power conference in Cape Town, South Africa, OPEC’s Secretary General, Mohammad Barkindo, signified the prices of oil could remain on a healthy trajectory, when he said, global oil demand will reach 100 million barrels per day (mbd) later this year. He equally indicated this could be much sooner than the cartel previously anticipated.
“The world will attain the 100 million barrels a day mark of consumption later this year, much sooner than we all earlier projected. Therefore stabilising forces, which create conditions conducive to attracting investments are essential,” Barkindo was quoted to have told Reuters.
OPEC had in its latest Monthly Oil Market Report for August projected that this year, total oil demand will reach 98.83mbd.
Ordinarily, such consistent rise in crude oil price should be a blessing to Nigeria considering the revenue that should accrue to the federation account. However, the country spends a lot of money to subsidise the consumption of petroleum products especially petrol by its economy.
Based on the oil price rally, a new OPEC Revenues Fact Sheet released by the Energy Information Administration in August indicated Nigeria had recorded a significant increase in oil export revenue, noting that it earned an estimated $26 billion in the first seven months of 2017 from oil sales.
The increase in revenue was basically hinged on price and production increases. Brent crude, which is the global oil benchmark against which Nigeria’s oil is priced, rose to $66.87 per barrel at the end of 2017 from around $53 per barrel at the start of 2017 and continued in 2018.
According to the US EIA, member countries of the OPEC earned about $567 billion in net oil export revenues (unadjusted for inflation) in 2017. It said the 2017 net oil export revenues increased by 29 per cent from the $441 billion earned in 2016.
Yet subsidy on petrol appears to have denied the country benefits from the oil price rise. Petrol supply figures sighted by THISDAY recently indicated that the amount of financial subsidy Nigeria currently absorbs to keep the pump price of petrol at N145 per litre instead of the expected open market price may have gone up to N65.6k.
Based on the oil price rise, the landing cost of petrol into the country had increased. THISDAY gathered from operators in Nigeria’s downstream petroleum sector that the landing cost of a litre of petrol had gone up to N196.3k per litre.
Based on this, it added the N14.3k distribution margin approved in the last pricing template for petrol by the Petroleum Products Pricing Regulatory Agency (PPPRA) – an agency of the federal government responsible for periodically calculating and approving products’ pricing for the market – to the N196.3k landing cost, and arrived at N210.6k, which should be the current open market price of a litre of petrol in the country.
Following from this, it then calculated the difference between N210.6k (actual market price per litre) and N145 (government price per litre) and arrived at N65.6k, which is the subsidy or under-recovery recorded over every litre of petrol supplied by the Nigerian National Petroleum Corporation (NNPC), which has since October 2017 reportedly became the sole importer of petrol in Nigeria.
Further to this, THISDAY multiplied the N65.6k by 46.54 million litres the ministry of petroleum resources disclosed recently in its newsletter was the daily petrol consumption level of the country in August and arrived at N3, 053,024,000, which was the figure the country may have incurred daily as subsidy on petrol consumption.
Additionally, for a period of 31 days in August, the calculation indicated that N94, 643,744,000 could have been absorbed as subsidy by the NNPC to keep the pump price at N145 per litre.
Though the NNPC did not confirm the figures, its Group General Manager, Public Affairs, Mr. Ndu Ughamadu, however explained to THISDAY that it has the financial capacity to absorb any gap between the landing costs and pump price of petrol in the country.
Ughamadu equally stated that the NNPC would continue to shoulder such burden to keep petrol supplies stable for all Nigerians.
As it stands, the NNPC is currently playing the role of a ‘social supplier’ with reference to PMS. The NNPC has the financial capacity to absorb any gap between the landing cost and prevailing pump price of PMS,” said Ughamadu.
He added: “The corporation, therefore, will continue to shoulder associated losses in order to ensure adequate and robust supply of petroleum products to consumers and all Nigerians.”
In December 2017, when oil price was $64.37 per barrel, the NNPC’s Group Managing Director, Dr. Maikanti Baru, disclosed to journalists that the landing cost of petrol was N171.40, and that a metric tonne cost $620.
Similarly, Baru explained that NNPC’s crude for product swap programme – the Direct Sales Direct Purchases (DSDP) – was under pressure and unable to satisfy increased petrol consumption in the country because it was originally programmed to meet the country’s 35 million litres daily consumption level.
He particularly stated then that: “The landing cost goes with the CIF (Cost, Insurance and Freight) price of PMS. As of Friday, the CIF price was in the neighbourhood of $620 per metric tonne, with the official exchange rate of N305 to the dollar, the landing cost should be N171.40 per litre.
“The government has consistently indicated that the N145 per litre is the price and to do that, it has mandated the NNPC to keep the equivalent depot price of N133.28 per litre, which will keep a cap of N145 per litre, there is a lot of profit in-between after taking the transportation cost of N7 off, so there is sufficient margin for the marketers in that PPPRA template at the price cap.”
Poor Social Service
Putting a context to the situation, the United States recently linked Nigeria’s poor social service delivery system to its continued practice of state-sponsored subsidy for petroleum products consumption in the country as well as its refusal to allow its electricity market operate on market-based principles.
According to the US, the decision of the country to continue to transfer public funds to keep petrol pump price at lower levels, as well as electricity rates below cost-recovery levels, meant that less funds are available to fund education, health care and other social sector services.
The US Agency for International Development (USAID) Country Mission Director, Stephen Haykin, who represented the US Ambassador to Nigeria, Stuart Symington, at a public function stated that apart from the inefficient energy sectors of the country, low tax revenues were also responsible for poor government investments in the social sector.
Haykin spoke at the 10th Anniversary Colloquium of the Financial Nigeria Magazine in Abuja. He said: “One proximate cause of poor health, education and nutrition standards is low public expenditure.
This in turn is related to very low public revenues due in fact to low tax rates and weak systems for tax collections.
“Low social spending is also as a result of transfers from government to petroleum and power sectors because fuel and electricity tariffs are below cost recovery levels.”
Further, an energy expert, Mr. Dan Kunle, in his analysis of the situation, stated that Nigeria had done poorly with its management of the oil price boom. He noted that earning revenue from oil sale and paying off subsidy on petrol was a bad economic decision. According to him, the situation was not sustainable and would continue to impact the oil revenue accrual to the country.