Way-out of Petrol Pricing Mechanism Conundrum

Oil & Gas
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Monday, February 8, 2016 08.04 PM/First Bank

The debate around the pricing mechanism for premium motor spirit (PMS or petrol) in Nigeria has ebbed and flowed over the last four decades. Shocks to the global oil price have invariably impacted the arithmetic of local PMS retail prices. Most times, prices have increased.

Between 1973 and 2016, government has revised petrol prices 29 times (19 upward reviews and ten price reductions). The downward revisions were mostly (eight of the ten times) in response to strikes by civil society/labour groups protesting against the price increases; while the last two downward revisions (January, 2015 and 2016) were the result of the pronounced and continuous decline in crude oil price.

But in spite of increasingly lower global oil prices, the size of the subsidy element (tagged “under recovery” in Petroleum Products Pricing Regulatory Agency ― PPPRA ― petrol pricing template) remains a major component of the pricing template; and has continued to be influenced by oil price volatility and exchange rate movement.

An ideal trigger for the PMS subsidy removal would be either increased volatility in the crude oil price or a significant movement in exchange rate. Incidentally, Nigeria is currently experiencing these shocks.

The exceptionally low crude oil price trend and gloomy outlook, together with allegations of underhand practices in the management of the oil subsidy scheme currently provide a platform for government to deregulate the downstream subsector of the oil industry. Unlike in 2012 when there was mass resistance to government’s decision to remove the petrol subsidy, today, many of the then ardent pro-subsidy crusaders currently appear willing to countenance its removal.

However, despite the strong arguments in favour of deregulation, government appears reluctant to tread this path. Indeed, the absence of provision for subsidy payment in the 2016 appropriation bill does not mean that the subsidy has been removed. Rather, it reflects the steep and persistent decline in the crude oil price.

The new PPPRA pricing template shows that the sustained drop in crude oil price has removed the subsidy component of template. Instead, therefore, of “under recovery”, the template indicates “over recovery”. As at January 19, 2016, the amount of over recovery (difference between the retail petrol price and the Expected Open Market Price – EOMP i.e. total cost) was N7.49. This means that instead of government bearing subsidy payment, consumers pay N7.49 per litre of petrol in excess of its total cost.



Notwithstanding this development, reports are that a litre of petrol is vended at far higher prices than the retail price of N86–N86.5. The National Bureau of Statistics’ (NBS) December 2015 petrol price watch survey reveals that the average pump fuel price per litre ranged between N89.18 (in Katsina state) and N154 (in Bayelsa State).

Petrol price per litre across Nigeria in that month averaged N119.61. This is higher than the N87 petrol retail price as at December 2015, and the price range of N86–N97 in the current price modulation era.

These data raise worries over the efficacy of the petrol subsidy policy, and the extent to which price modulation may fail to correct the anomaly in the petrol pricing mechanism in the country. Apparently, unless the price modulation framework reflects the market price, the problems associated with petrol subsidy (e.g. shortages and hoarding that push the price above official pump price, product adulteration, round tripping, etc.) will remain under the current price modulation regime.

 



At N86– N86.5 per litre, petrol price in Nigeria is less than half of the cost of the commodity in most of the neighbouring countries. As at January 18, 2016, a litre of petrol (using N200 = $1 exchange rate) cost N268 in the Central Africa Republic, N234 in Mali, N232 in Burkina Faso, N210 in Cameroon, N188 in Togo, N186 in Benin, N180 in Republic of Congo, N176 in Ghana, N168 in Niger, N162 in Gabon, and N148 in Chad. This clearly shows that the current petrol price modulation (N86–N97 in Q1 2016) may promote PMS smuggling across Nigeria’s borders.

Total deregulation of the downstream subsector of the oil industry, thus presents a strong value proposition. Given the sector’s inherent challenges, it may be necessary to first consider a variant of the deregulation exercise – close the gap between PMS price in Nigeria and the petrol price in the neighbouring countries by removing all subsidies associated with petrol price in the country.

While the subsidy element on the PPPRA petrol pricing template has been removed (by the emerging crude oil price dynamics), it appears there is still crude oil swaps subsidy; and this may be a major reason for the wide price differentials between a litre of petrol in Nigeria and those of the neighbouring countries.

With the deregulation and allied reforms, we may be able to know the true estimate of daily petrol consumption in Nigeria, even as key stakeholders in the oil and gas industry are better positioned to make informed business decisions.

Related NEWS

1.       Average Petrol Price increases to N119.61 in Dec '15 from N115.35 in Nov '15

2.     Petroleum Products Pricing Template - Explanatory Note

 

 

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