‘The gains of crude price drop eaten up by Naira devaluation’

By Akoma  Chinweoke

Determined to end the fuel scarcity across the country, the Minister of Finance and Coordinating Minister of the Economy, Dr Ngozi Okonjo-Iweala, has assured Nigerians that queues will soon disappear from petrol stations around the country.

After last week’s Federal Executive Council meeting, the Minister said over N320 billion had been paid to marketers from the Excess Crude Account (ECA) in two installments last December, underscoring the fact that government was taking the payment of marketers very seriously. According to her, all outstanding issues had been resolved. She also noted that the scarcity was caused by a number of factors which included the depreciation in the value of the Naira.

Experts speak on the fuel situation in the country amid the easing of the scarcity of petrol, especially in Lagos.

This is the consequence of perennial indebtedness to marketers—Emeka Akabogu, Chairman, OTL Africa Downstream

Whichever way the dice is thrown, the result will be the same – knocks for government – even if not totally deserving. The scarcity experienced was always going to occur, as the circumstances did not allow for any other option. When government announced the removal of subsidy in 2012, the population took up arms against it. The bitter truth however is that the government’s move at that time was not wrong.

Why fuel queues?

Simple: significantly reduced importation and shortage of fuel stock. Hone to the bone, and the reality is inescapable – uncertainly rules the roost, and many a marketer will rather be safe than sorry. Price volatility internationally, a populist and politically expedient reduction in pump prices locally, naira on a freefall, heavy reduction in government income and arguably the most divisive elections in a generation round the corner all conspire to ensure that the safest option for importers may be to watch and pray.

Some marketers may have decided to take it literally and do just that, without more. Marketers are businessmen and have to deal with the reality of figures, particularly deficits. Continually owing them for inordinately long periods is not only a disincentive, but has empirical implications in Naira and Kobo. It raises blazing red flags with the banks, many of whom will be happy to strictly follow the risk assessment rulebook and keep the letters of credit safely zipped up.

While PPPRA has been on top of its game with respect to issuance of allocations, even they have been caught in the vortex of the exchange rate tailspin, resulting in temporary uncertainty as to the acceptable pricing template for PSF transactions. Since we insist on a subsidy regime for importation of petroleum products, the costs, we must pay. The Coordinating Minister for the Economy has to understand that there must be consequences following perennial indebtedness to marketers. Until she does that, the fuel queues will remain just a shout away.

What to do?

The pragmatic thing for government to do in the immediate term should be to go back to N97. The gains of the oil price drop have simply been eaten up by the devaluation of the Naira. Many retailers are not getting supplies at government benchmark rate, and have no choice but to either sell above N87 or not sell at all. N97 saves N10 for government and reduces its subsidy bill, a very useful fact in the light of government’s income reality.

In the long term, gasoline importation should be fully deregulated, but with clear competition guidelines in place to be implemented by PPPRA. Obviously PPPRA should be given independence and full powers to sanction breaches. Corruption will be solved primarily by transparent processes and not by shouting to the rooftops. A watertight supply chain incorporating the mother vessel, shuttle vessel, tank storage, inspection agents, truck-out logistics and retail stations is readily available with the deployment of necessary technology. Finally, these processes should be peopled by skilled persons and not be a watering hole for political patronage.



We must restore and increase refining capacity – Chief Martin Onovo, a petroleum engineer and presidential candidate of the National Conscience Party (NCP)

The fuel scarcity is the natural consequence of bad governance. Nigeria a major global exporter of crude oil and a leading member of the Organization of Petroleum Exporting Countries (OPEC) has worked itself into a globally stupefying dysfunctionality.

With our daily production of about 2.4 million barrels per day and total installed refining capacity of 445,000 barrels per day (70.7million litres per day), Nigeria should have complete control over its petroleum products supply but corruption by its more recent rulers has led to this incredible descent into national dysfunctionality in the downstream petroleum sector and in almost all sectors of our socio-economic life. The 2013 Corruption Barometer of Transparency International rated Nigeria the 8th most corrupt country in the world.

The 70.7 million litres per day of existing installed domestic refining capacity will ordinarily yield about 40 million litres per day of Premium Motor Spirit (PMS) – Petrol. Considering that total national demand for Premium Motor Spirit is less than 35 million litres per day (less than existing installed domestic capacity), then it becomes obvious that corruption is the bane of governance in Nigeria and only an incompetent and corrupt government can promote this paradox of importation of petroleum products.

The fuel scarcity is simply the result of inadequate importation and distribution of products since we have paradoxically accepted the importation of petroleum products in a major crude oil exporting country with super-sufficient installed refining capacity that is not available due to corruption, mediocrity, lack of maintenance and policy inconsistency.

The inadequate importation of petroleum products is the result of several contradictory, inconsistent and paradoxical policies of the government. Some of the immediate factors include, corruption; unpaid ‘subsidy’ claims by importers; the politically motivated recent reduction in the wastefully high pump price – which is high due to the unjustifiably high ‘landing’ cost associated with importation; the devaluation of the Naira which implies an increase in petroleum products price considering the lower purchasing power of the devalued Naira especially for imported products and banking credit challenges for high value international transactions with high price volatility.

If petroleum products were domestically supplied in Nigeria, the impact of the devaluation will be much less. In addition, the importation of petroleum products using very large amounts of foreign exchange increases the demand for foreign exchange and thereby increases the value of foreign currency against the local Naira (which is the devaluation of the Naira).

If we had like all other OPEC members developed and maintained sufficient domestic refining capacity, we would be enjoying lower costs of petroleum products; less pressure on the Naira as the current demand for foreign exchange will be less the amount for the importation of petroleum products; there will also be no subsidy payments as citizens will buy products domestically refined at much lower costs without a need for government subsidy; the waste associated with importation will be avoided; the pressure on the Naira will be less and the value of the Naira will be better protected; we will have more employment in the refining and associated sectors of the economy. Cheaper fuel will also stimulate other sectors of the economy.

We must understand the current petroleum products importation process to understand the inherent risks and weaknesses that we can avoid but are forced to live with by the illegitimate and corrupt rulers of Nigeria. In the process, the NNPC and private petroleum products importation companies approved by the government, import products as approved by the government and distribute same. They make claims of ‘subsidy’ for the products they have imported in accordance with a petroleum products pricing template approved by the ‘Petroleum Products Pricing and Regulatory Agency (PPRA). Government then pays the ‘Subsidy’ claims approved for the petroleum products importer. This is wrong and wasteful on all counts.

The root cause of the crisis (high cost, subsidy, debt, fuel scarcity, etc.) is the importation of petroleum products which we can supply domestically with very little effort. As long as we keep importing petroleum products instead of restoring existing installed domestic refining capabilities, we will have to face all the avoidable associated challenges of high cost, subsidy, corruption, debt, banking credit issues, fuel scarcity, etc.

Imported Petrol has unnecessary additional costs like; International Crude Oil Sales Price and Profit Margins. Foreign Refining Profit Margins. Transportation Costs of Products from source Country to Nigeria, Port Charges, Taxes and Export duties at source Country, Insurance costs for transportation, Brokerage costs for agents, Management costs. We must restore and increase refining capacity to the point where we will be exporting refined products like the more productive countries from where we import. An NCP government will reduce the prices of petroleum products by increasing domestic refining which is much cheaper.

- Culled from: http://www.vanguardngr.com