Fuel market crisis deepens as subsidy swells

The crisis plaguing Nigeria’s downstream petroleum sector has shown no sign of abating as rising crude oil prices have sent the country’s bill for petrol subsidy rocketing, piling more pressure on ailing government finances.

This week, petrol queues re-emerged in several major cities across the country, including Lagos, the latest sign of a sector in turmoil as reforms stall amid the steady surge in global oil prices. The current bout of scarcity was triggered by the reduction in supply, according to operators.

The country had early this year experienced a severe petrol scarcity that lasted for over a month after what the government described as “limited quantity of petrol with methanol quantities above the country’s specification” were imported into the country in January.

Africa’s top oil producer relies wholly on imports to meet its fuel needs as its loss-making refineries have been shut down since 2020 for rehabilitation.

The Nigerian National Petroleum Company (NNPC), which has been the sole importer of petrol into the country in recent years, has been bearing the subsidy cost incurred since 2016, when the government stopped the subsidy being paid to private importers.

In 2020, the sharp drop in crude oil prices on the back of the COVID-19 pandemic coronavirus saw the landing cost of petrol hitting a record low, wiping off subsidy on the product. This prompted the Federal Government to reduce the pump price of the product in March to N125 per litre from N145.

The Nigerian government, in a letter of intent in April 2020 to support its request for emergency financial assistance of $3.4bn, told the International Monetary Fund that the recent introduction and implementation of “an automatic fuel price formula will ensure fuel subsidies, which we have eliminated, do not re-emerge.”

But the subsidy, which the NNPC prefers to call ‘value shortfall’ or ‘under-recovery’, resurfaced early last year as the government left the pump price of petrol unchanged at N162-N165 per litre despite the increase in oil prices.

The price of Brent crude, the international benchmark, rose by over 50 percent last year to close at $77.24 per barrel. It hit a record high of $130 per barrel in March this year on the back of the Russia-Ukraine crisis.

The World Bank, in a report released last week, said during 2020 and 2021, when oil prices were much lower, the Nigerian government lost an opportunity to address one of the primary sources of fiscal vulnerability by choosing to maintain the subsidy for Premium Motor Spirit (PMS).

It described the subsidy as “unique, opaque, costly, unsustainable, harmful, and unfair.”

The Federal Government had on January 24 suspended its plan to remove fuel subsidy this year. It also proposed to extend the subsidy removal implementation period by 18 months, saying it would engage the legislature for the amendment of the Petroleum Industry Act (PIA).

“The PIA is being implemented piece by piece without any clarity for the operators. We are not aware that the government has submitted anything to the National Assembly,” Clement Isong, chief executive officer of Major Oil Marketers Association of Nigeria, told BusinessDay on Tuesday.

“Currently, what we have is a statement that seems to have kicked the can down the road as far as price deregulation is concerned. The high cost of diesel has crippled the distribution system.”

The price of diesel, which marketers use to power road tankers transporting petrol to different parts of the country, has more than doubled this year to as high as N800 per litre.

The passage of the PIA into law in August 2021 was expected to usher in the full deregulation of the downstream sector in February this year, allowing market forces to determine the pump price of petrol. The prices of other petroleum products have already been deregulated.

BusinessDay findings show that the widening gap between the petrol prices in neighbouring countries and that of Nigeria has led to an increase in the smuggling of the subsidised product to those countries.

“Consumption of petrol in Nigeria is better termed apparent consumption, because there is plentiful evidence of smuggling of petrol to neighbouring countries with much higher pump prices,” the World Bank said in its latest Nigeria Development Update report.

“The higher the price of oil, the more financially attractive smuggling becomes, and the higher the apparent consumption, increasingly benefitting smugglers and consumers in the neighbouring countries while reducing the net oil revenue transfers to the federation,” it added.

The Centre for Promotion of Private Enterprise had warned in April that increased fuel smuggling would put further pressure on the NNPC to be able to supply petroleum products for domestic consumption and this may lead to a return of fuel queues and the proliferation of black markets for fuel.

Muda Yusuf, CEO of CPPE, had said: “If crude oil price remains at current levels, and the PMS price remains fixed, the country may be teetering on the brink of bankruptcy. Current subsidy payment regime is simply not sustainable. The deregulation dialogue needs to urgently resume to save the economy from further deterioration.

Read also: Fuel queues resurface in Lagos as marketers blame NNPC for supply gap

“The outlook is that the scale of petroleum products smuggling will increase because of the impact on relative prices of the hike in crude oil price. The price differential between the cost of petroleum in Nigeria [which is heavily subsidised] and the cost of petroleum in other countries is widening by the day. Thus, the incentive for smuggling has increased. Therefore, the amount of domestic petrol consumption, which is currently above 60 million litres per day, is likely to further increase.”

The World Bank said the increasing costs of the petrol subsidy would continue to make it difficult for the NNPC to pay for the federation’s cost of production of its equity oil and gas in full, thereby keeping oil production depressed.

“Such a possibility points to the urgency of phasing out the petrol subsidy,” it added.

Many Nigerians do not support removing the petrol subsidy, and they do not trust the government to use any fiscal savings for pro-poor causes, the multilateral lender said.

It said: “The challenges associated with the petrol subsidy in Nigeria are clear: (i) it imposes an unsustainable fiscal burden, and (ii) richer Nigerians benefit significantly more from it than poorer Nigerians. Thus, redirecting spending towards health, education, and targeted social protection is better.

“Yet, in the absence of countervailing measures, many poor and vulnerable Nigerians would still lose out in the short run if the subsidy were removed and petrol prices were allowed to rise. Sequencing spending on a well-targeted social transfers program, alongside a clear, two-way communication campaign, could help overcome these constraints and generate the trust needed to build a consensus around subsidy reform.”

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