Why Nigeria is not getting dividend of high oil prices

Fri, Oct 12, 2018 | By publisher


Featured, Oil & Gas

Although the increase in price of crude oil is beneficiary to oil producing countries, Nigeria is not benefiting much from it because of high subsidy of fuel pump price 

By Anayo Ezugwu

Oil producing countries across the world are making more money as a result of increasing crude oil price which is nearing $90 per barrel, but Nigeria may not benefit from the largesse. The country regrettably, would need to use a large part of its profit to service the fuel subsidies.

Oil price has been on an upward swing since 2017, hitting $71 per barrel in January this year and currently hovering around $85 per barrel. Nigeria’s 2018 budget benchmark is put at $51 per barrel while production was put at 1.97 million barrels per day, bpd. But, while countries with higher refining capacity may reap the gains of increased oil prices, same could not be said of Nigeria as the country is heavily dependent on imported products due to the state of the country’s refineries.

With such level of dependence on imported petroleum products, the gain that ought to have accrued to Nigeria would subsequently be ploughed back into the payment of subsidies. For Nigeria, a spike in oil prices would naturally translate to higher landing cost for refined products because once refiners buy crude oil at higher price, the cost of refining equally rises, thereby eroding the gain for countries with low refining capacity.

The Nigerian Natural Resource Charter, NNRC, said the country may not benefit from rising oil prices due to petrol subsidies. The NNRC in its official twitter handle @NigeriaNRC, explained that while oil prices continue to rise to new levels, Nigeria will unlikely benefit from it because it has also continued to maintain subsidy on petrol consumption.

“As oil producers appear to welcome the spike in price of Brent crude to nearly $90 per barrel, the highest since 2014, Nigeria may not benefit from this largesse.”

The NNRC explained that the continued rising in oil price since 2017, hitting $71 per barrel in January this year and currently hovering around $85 per barrel while Nigeria’s 2018 budget benchmark is put at $51 per barrel.

Drawing a nexus between the rise in oil prices and why Nigeria may not gain from it, NNRC stated: “For Nigeria, a spike in oil prices would naturally translate to higher landing cost for refined products because once refiners buy crude oil at higher price, the cost of refining would equally rise, thereby eroding the gain for countries with low refining capacity.”

Wunmi Iledare, president, Nigerian Association for Energy Economists, NAEE, said in a recent interview that the biggest disadvantage for Nigeria as oil prices surge higher is that petroleum product prices would have to rise because there is a positive correlation between crude oil prices and product prices. He said prices would have to go up because significant proportion of products consumed in the country is imported.

“Subsidies may be inevitable unless PPPRA Act is fully implemented and marketers who bring in products are allowed to sell at import parity price. Certainly, N145 per litre is no longer optimal at $85 dollar crude price. This is because of product importation, the gains that would have emanated from high crude oil prices on external reserves and forex could easily be eroded unless product price rises commensurately,” he said.

The Nigerian National Petroleum Corporation, NNPC, in its latest operations and financial report for May 2018 said 1,096.45 million litres of petrol were supplied into the country through the Direct Sale Direct Purchase, DSDP, arrangements as against the 1,510.35million litres of PMS supplied in the month of April 2018.

On the other hand, the petroleum products (petrol and kerosene only) production by the domestic refineries in May 2018 amounted to 161.91 million litres compared to 125.86 million litres last April. Though, the exact volume of petrol consumed daily in the country has remained controversial in the past years, figures from NNPC put it at 50 million litres per day.

At 50 million litres per day, it could be deduced that the country would certainly not reap from the gains of higher oil prices as such would have been eroded by the 1,550,000 million litres that would be imported on a monthly basis. Recent petrol supplies figures suggested the amount of financial subsidy Nigeria currently absorbs to keep the pump price of petrol at N145 per litre has gone up to N65.6k.

Clement Isong, chief executive officer/executive secretary, Major Oil Marketers Association of Nigeria, MOMAN, said with oil price at $70, it was impossible for marketers to import petrol and sell at N145 per litre because it came in about N200 to N205 per litre. “Currently, this burden is being borne by the government for Nigerians, but the truth is that it is not sustainable; it is just too heavy,” he said.

Isong said the outstanding subsidy debts owed marketers by the government remained the primary problem, adding that the debt “creates serious working capital constraints for all marketers, not just MOMAN.” He said this has made it difficult for them to run business, insisting that any business that is owed so much debt will struggle.

On his part, Olufemi Adewole, executive secretary, Depot and Petroleum Products Marketers Association, said: “It would have been a good thing if our refineries are working well, so that we can produce and refine what we use. The more crude oil prices rise in the international market, yes Nigeria makes more money. But unfortunately, the cost of refined products that we bring into the country is equally high.”

According to Adewole, the subsidy element iss “quite huge,” adding: “The last time I checked and it was when the oil price was lower than this, the landing cost of petrol was about N205 per litre.

“None of our members is importing since government has said it is not going to pay subsidy. So we are simply buying from the NNPC; it is only NNPC that can absorb whatever is needed to be absorbed. If we are bringing in products into the country at N210, that is about N65 above the regulated price of N145. That difference has to be absorbed by somebody. It is the government that is absorbing that through the NNPC and the PPMC,” he said.

But other experts are of the opinion that rising crude oil price is good for Nigeria’s economy. Sunday Babalola, oil and gas expert, said the rising price of crude oil is good for Nigeria’s economy because the more revenue government gets from royalties and taxes the better for the economy. He said generally, about 75 to 80 percent of government’s revenue comes from the oil industry.

Babalola believes the rise in oil prices is good for the economy, but with a caveat. “Let us seek to depend less on oil and gas because the price of oil especially is not stable; it may crash again. We do not want that to happen so we must manage what we get from the current price regime and hope for the best,” he said.

Uche Uwaleke, head of department, Banking and Finance, Nassarawa State University, said the rising crude oil price should have a favourable impact on the Nigerian economy. “Granted that we still import petroleum products and a sustained oil price rise could threaten the domestic pump price of fuel, the economy will be better off in the end. This time round, we should not only be saving for the rainy day but more importantly, seize the opportunity of favourable oil revenue to diversify away from oil,” he said.

– Oct. 12, 2018 @ 15:47 GMT |

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