Nigeria’s Fuel Subsidy Challenge as Oil Price Hits $67.8 Per Barrel

Nigeria’s Fuel Subsidy Challenge as Oil Price Hits $67.8 Per Barrel

In 2016, when the Federal Government moved pump price from N97 to N143/145, it’s in a bid to reduce the cost of subsidy that has been gulping whooping sums from the government coffers.

But unfortunately, the subsidy managed to survive complete elimination, and more so, it keeps gaining ground from market forces through rising cost of Premium Motor Spirit (PMS) or petrol. Today, the cost of subsidy has risen to N47.5 per liter due to the rising price of the commodity in the open market, currently expected to hit N180.78 according to the data from Petroleum Products Pricing Regulatory Agency (PPPRA).

The latest data from the PPPRA’s PMS pricing templates for December 12, 16, 17, 18, 19 and 23 put the open market prices of petrol per liter at N172.92, N177.33, N177.32, N174.81, N177.92 and N180.78 respectively. The ex-depot price for collection of petrol, as captured in the templates, was N133.28 per liter, which is an indication that the Nigerian National Petroleum Corporation (NNPC), was subsidizing the price of the product by an average of N47.5 per liter during the time of the review.

Fluctuating price has become part of the oil industry. The Organization of Petroleum Exporting Countries (OPEC) has been pushing to see that there is increase in oil prices by cutting production. The instability in oil prices has enabled marketers in the industry to stop importing, leaving it solely to NNPC for two years now.

The economic report of Central Bank of Nigeria (CBN), for the month of November 2019, confirmed the increase in crude oil prices. The report stated that the average spot price of Nigeria’s reference crude oil, the Bonny light (37° API), at the end of November 2019, was $66.11/b, compared with $61.10/b recorded in October 2019, which represents a 8.2 percent increase relative to the level in the past month.

The Apex bank also noted in the report that the hike in crude oil price in the month November was due to the adoption of cut measures by Nigeria and Iraq, and also the news of anticipated cuts by OPEC.

Mike Osatuyi, the National Operations Controller, Independent Petroleum Marketers Association of Nigeria, told Punch that the rise in crude oil price was a sure indication that the subsidy figures would increase.

“Even if the price of oil increases to $90, as long as the pump pric of petrol remains at N145 per liter, the government must continue to subsidize the product. We are waiting for government policy, whatever government decides, we are going to comply because we need to move forward. With Dangote refinery coming on stream, we should expect some radical policy changes in the oil industry, especially in the downstream sector,” he said.

Stakeholders have also shared the same sentiment. Marketers under the aegis of the Major Oil Marketers Association of Nigeria described the development as a drag on the mainstream sector of Nigeria’s oil and gas industry. The CEO and Executive Secretary, MOMAN, Mr. Clement Isong said.

“We are consistent in our view that the subsidy payment or subsidy in the petroleum downstream sector degrades operational efficiency and economics of the downstream sector. We don’t think it is good for the industry as a whole.”

There have been calls by economists and the International Monetary Fund (IMF) for Nigeria to reduce subsidy so as to spare more fund for infrastructure. The Regional Economic Outlook of IMF published in October stated.

“Fuel subsidies tend to be poorly targeted, foster over-consumption, curtail investment and maintenance in related sectors, and crowd out more productive government spending. Some countries need to take the opportunity afforded by low oil prices to reduce fuel subsidies to free up additional fiscal space (Cameroon, Nigeria, Senegal,) as was done in Mozambique and South Sudan and is being pursued by Burkina Faso.”

The 2020 national budget pegged oil benchmark at $57 per a barrel meaning that the recent increase in crude oil price would have been a good business for Nigeria if not for the subsidy payment gulping more than the excess.

The Nigerian government, through the NNPC has been making plans to get the refineries working by February next year. But the reality is indicating little hope, and the subsidy may continue even at higher cost of crude oil if OPEC continues to cut production. So the 2016 increment of PMS prices has only been able to curtail the cost of subsidy compared with the preceding years.

So far, there is no clear government plan on how to reduce the spending on fuel subsidy apart from the hope that Dangote Refinery will start operation very soon. So the rising crude oil price is not more of gain than it is a loss to Nigeria.

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