Thursday, December 10, 2020 / 05:58 PM / by FDC Ltd / Header Image Credit: Homeland News
The Federal Government recently announced a N5 reduction in the pump price of fuel, effective December 14. This has raised eye brows on who controls the price of petroleum products... the government, the market, or the unions? Is the market deregulated or not? If yes, why is there still government intervention especially at a time when Brent crude is in contango - a situation where the spot price is higher than the future price?.
The deregulation of the downstream petroleum sector and the removal of subsidies on refined products especially PMS has been a subject of controversy in Nigeria for years. In Q1, the FG announced the approval of the deregulation process and in April, the price of PMS was allowed to slide in tandem with the fall in crude oil prices.
Brent crude averaged $26.63pb in April compared to $63.68pb recorded in January. Since then, marketers have begun pricing petroleum products to reflect global oil price trends, exchange rate and refining costs. The price of PMS now varies both intra and interstate.
The negotiation with labor unions and stakeholders on price determination is not part of a deregulated market. The price needs to be a product of crude petroleum price, exchange rate and refining costs.
The possible decline in PMS price courtesy of interventions by the Federal Government and unions could increase investor pessimism. This has serious implications for future investments in the petroleum industry as it signals that the market is not fully deregulated. In the near term, marketers would not be in a hurry to adjust their pumps and implement the downward revision in petrol price.
This is because prices are sticky downwards and marketers/distributors typically respond faster to a price increase than decrease. If the government and unions insist on the change, there could be artificial scarcity of petrol as marketers refute the decline (on the premise that global oil prices are increasing) and may decide to hoard the commodity.
Brent is currently trading around $48-$49pb on covid-19 vaccine rollouts in the US and UK and a recovery in Asian fuel demand. In addition, higher crude oil prices are positive for export earnings but could however mean another increase in the price of petrol to N170-N180/litre. This coupled with the cost reflective electricity tariffs and low income levels could further erode consumer disposable income.