Petrol: An End to the Subsidy Regime?

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Wednesday, September 09, 2020 / 2:11 PM / by CSL Research / Header Image Credit: TheCable Petribarometer


 

According to media reports, the  Executive Secretary of the Petroleum Products Pricing Regulatory Agency (PPRA) Abdulkadir Saidu, speaking at a press briefing yesterday, stated that PMS prices would  henceforth be determined by the forces of demand and supply and the international cost of crude oil. The agency said it would no longer release guiding price bands for Premium Motor Spirit (PMS). According to him, the role of the agency would henceforth be to ensure that oil marketers do not profiteer, as petroleum marketers  are now free to source for product and fix their prices.

 

 

There have been attempts in the past to remove the fuel subsidy but these have not been without resistance from the populace. On May 11, 2016, petrol pump prices were hiked by c.68% from N87/litre to N145/litre and many asssumed this signalled a full deregulation. This wasn't the case however as the subsidy regime was still in place. The exchange rate factored into the landed cost of fuel was between N280 and N285/US$1. A steep devaluation in the currency and an increase in crude prices in the international market, implied an increase in the landing cost which necessitated the continuation of the subsidy regime, though now booked as under-recovery losses in the books of NNPC.

 

In 2020, a steep decline in global crude prices triggered by the global pandemic completely wiped out the subsidy via significantly lower landing costs, paving the way for a reduction in the pump price of Petrol in mid-March. The PPPRA announced  a reduction in ex-depot price to N113/litre and official pump price to N125/litre. Since then, the PPPRA has gone on to raise fuel pump price to N135-N145/litre in April before implementing a reduction to N121.50 - N123.50/litre in June. An increase to N140.80 - N143.80/litre in July was implemented and was raised again in August to N148 - N150/litre to reflect rising cude prices.

 

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The removal of the subsidy on Petrol is a critical free-market reform in our view, and we believe it is beneficial to the economy and government finances. Asides the impact on government revenues, the removal of the subsidy also removes disincentives to refine petroleum product, and may improve the balance of payments through import substitution. That said, we are concerned that the timing may be inopportune given the effects of the pandemic and the recent hike in electricity tariffs on the already squeezed Nigerian consumer. Also, we are concerned about possible abuses by oil marketers.


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