Fuel Subsidy: Impact on Oil Marketing Companies on the Bourse



Wednesday, January 04, 2012 12:25 PM

The January 1, 2012 ‘inevitable’ but ‘curiously timed’ decision to ‘deregulate’ the downstream Oil and Gas Sector did little to change the fortunes of the sectors stocks quoted on the bourse, as the equities remained neutral.

On January 3, 2012, the first trading day of the year – Japaul Oil closed 4.44 percent up at N 0.94 on the Nigerian Stock Exchange, Eterna Oil was up by 1.35 percent to N 3.00 while all other stocks in sector did not showed any movement.


Balancing Views

With a tight budget for infrastructure funding open to the government in its budget plans, the removal of the fuel subsidy is seen by analysts as the fluid required to bridge the gap while shoring up our foreign exchange reserves.

The removal of the subsidy (even though no one has been able to explain how or what triggered the increase from N240bn to N1.2 trillion) is fully supported by the IMF/World Bank and many who believe that this is another way of closing some of the loopholes in the Nigerian economy.

Naturally, this should have encouraged a reaction of sorts in the equities of companies in that sector. This was not the case on Tuesday. Events as at the time of writing this report has not altered this position on Wednesday.

Pricing energy is always going to be a politically difficult issue. However, higher fuel prices will work as an incentive for consumers and companies to use a scarce resource more carefully and hopefully, more efficiently. Benefits of the fuel subsidy should remain limited to a target class, as the higher society class has a tendency to use subsidized cheaper fuel more.

The major adjustment might mean a reduction in consumption above the equilibrium between need and resource.

We will naturally be interested in computing a new consumer price index (to track the changes on a daily, weekly and monthly basis); tracking changes on the sectoral stocks, changes in foreign exchange prices and flows, international oil prices and input related cost to the PPPRA cost model;  as well as the utilization of the proceeds under the Christopher Kolade led team.

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