The Petrol Subsidy Conundrum

The price of Brent crude, the equivalent of Nigeria’s Bonny Light, closed last week at a record $69.36 per barrel. That is good new to the managers of Nigeria’s crippled economy. With oil price almost $30 above the 2021 budget oil reference price of $40 per barrel, the federal government would definitely earn enough from crude oil exports to reduce the yawning N5 trillion deficit in the catastrophic budget. 

However, the bad news from the boom in crude oil price is that the landing cost of imported Petrol has risen above official pump price by N21. At the current crude oil price, the landing cost of imported petrol would be in the range of N183 per liter. That is about N21 above the lower limit of the official pump price of petrol decreed by the federal government after weeks of hard bargain with labour leaders who demanded that petrol price be pegged at N145 per liter. 

The debate over the pump price of petrol has assumed multiple dimensions as marketers join the fray. The ex-depot price of petrol rose to N160, up from N157 per liter, when the price of Brent Crude crossed the $60 mark in February. 

Some retailers responded to the hike by pushing the pump price to N170 per liter. Some even hoarded petrol in the closing days of February as speculations were rife that government would announce massive increase in the pump price of petrol on March 1, 2021. 

The Nigerian National Petroleum Corporation (NNPC), the sole importer of petrol allayed fears of petrol pump price hike when it announced that government had no plans to do what the marketers were speculating. 

Petrol subsidy is a thorn in the flesh of the federal government. In the second quarter of 2020, Mele Kyari, NNPC’s group managing director boasted that the days of petrol subsidy were over in Nigeria as government was determined to deregulate the downstream sector of the oil industry and allow the invisible hand of market forces of demand and supply to fix the pump price of petrol. 

When crude oil price crossed the $50 mark in the closing days of 2020, it became obvious that government had slipped petrol subsidy back into the system through the back door as the landing cost of petrol exceeded the official pump price decreed by government. 

Last month, Zainab Ahmed, Nigeria’s minister of finance in an apparent impotent rage, warned that Nigeria would never go back to the days of petrol subsidy. 

Ironically the federal government was inauspiciously subsidizing petrol with well over N10 per liter as the minister was raving. 

With Brent crude at almost $70 per barrel and the landing cost of petrol above N183 per liter, the open market pump price of petrol would be in the range of N206 per liter when the cost of logistics and retailers margin totaling N23 per liter is added. 

The federal government is torn between petrol dealers demand for appropriate hike in pump price and labour leaders’ insistence that petrol price should not rise above N145 per liter. 

Right now, the pump price of diesel, a refined petroleum product normally about N38 cheaper than petrol in the international market, has risen to N230 per liter in some retail outlets. Petrol would be selling at that range if private marketers were allowed to import and sell at open market price. 

At the current price of crude oil, global average pump price of petrol published by GlobalPetrolPrice. com has risen to $1.1, or N418 per liter at the official exchange rate of N380 to the dollar. 

Ironically, Nigeria has one of the lowest pump price of petrol in the world. At the lower limit of N162 per liter, Nigeria’s petrol pump price is the 10th lowest in a list of 160 nations presented on ascending order by GlobalPetrolPrice. com. 

Cote D’Ivoire, a tiny west African economy ranking a distant 73 in global gross domestic product (GDP) rating where Nigeria is the 27th largest economy, sells petrol at the equivalent of N418 per liter. Yet it manages to keep inflation rate at a scant two per cent. 

Nigeria with a petrol pump price less than half of what obtains in Cote D’Ivoire, watches helplessly as food inflation spirals to 20.5 per cent, while headline inflation is four per cent above the 2021 budget inflation target of 12.6 per cent. 

We are worried that with the economy so grossly mismanaged, a careless hike in petrol price would simply let inflation slip out of control. 

We know that besides marketers, the International Monetary Fund (IMF) demands an end to petrol subsidy as one of the conditions for the $3.4 billion loan advanced to Nigeria last year. 

However, with an income distribution system catastrophically skewed against Nigeria’s inconsequential majority, no one can protect the poor from the devastating effect of petrol price hike. 

The World Bank has warned that 20 million more Nigerians would be pushed below poverty line by 2022. A careless movement in petrol price would simply double that figure as inflation prices millions out of the food market. Such a move could trigger street riots that would dwarf the looting and arson of last October. 

Nigeria must address its skewed income distribution system before tinkering with petrol price. 

Source: Independent Nigeria

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