The Nigerian National Petroleum Corporation NNPCL has released a template for fixed pump prices of petrol ranging from N488/L in Lagos to N557/L in Maiduguri and Damaturu. But will these fixed prices stand the test of time?
Will the oil marketers abide by these pump prices fixed by the NNPCL?
The answer is NO.
When the federal government officially removed fuel subsidy two days ago, it has lost all grounds to fix the pump price of fuel. Price of petrol will now be determined by marketers based on the forces of demand and supply.
The fixed pump price of premium motor spirit a.k.a petrol will not stand and marketers will increase the price of fuel above the N557/litre ceiling set by NNPCL. This will potentially lead to more hardship in the land.
The price of petrol could potentially officially hit anywhere between N700-N800 per litter before December 2023.
Here is why:
Current estimated landing cost of PMS = N448 per litre (subject to FOREX fluctuations)
Average Official Pump price of PMS = N200 per litre
Fuel Subsidy= N448 – N200
=N248 per litre
This means that the federal government pays N248 for every litre of fuel to the marketers so as to keep the pump price of N200 per litre. This is in addition to the fact that the NNPCL also allocates CRUDE OIL to the marketers in a direct exchange arrangement for refined petroleum products (Petrol (PMS) and Kerosene (DPK). This is where the greatest grays called fuel subsidy lies. Paying cash and allocating crude oil at the same time all in the name of subsidy.
Note that there is no profit margin in computing the pump price of fuel above which implies that the landing cost could be lower than presented by the marketers since they (marketers) are not charity organisations. They are in business to make profit).
Also note that the landing cost of petrol is subject to the exchange rate of the Naira to the U.S Dollar.
The calculation above means that the federal government pays N248 for every litre of petrol which gives it (federal government) the leverage to regulate/control the price and ask the marketers to sell at N200 per litre.
Since Subsidy has been removed, the federal government has lost all grounds to compel the marketers through the NNPCL to sell at predetermined pump prices. Nigeria is now at full DEREGULATION of the downstream sector of the petroleum industry.
Fuel subsidy simply means the federal government will fix the pump price of fuel and if the landing cost is higher than the fixed price, government will pay for the difference.
With the removal of subsidy, the federal government is not paying for any difference and the marketers are at liberty to fix their own prices.
The NNPCL COO Mele Kyari had admitted in November 2022 that the landing cost of petrol is N510 per litre which means that the pump price of fuel cannot realistically be N200 as it was then (Nov 2022) unless the subsidy per litre has been increased by the federal government.
Since the landing cost per litre of petrol was N510 in 2022 when the 1 US Dollar sells for N750, it then follows that the landing cost will likely increase by the same margin as the exchange rate US Dollar to the dollar increases.
Currently, 1 USD sells for N780 and if the downward spiral of the Naira continues, the exchange rate USD to NGN could hit N1,000 by December 2023.
If the USD sells for N1,000, it means that the landing cost will increase by 30%.
30% of N510 (estimated landing cost) is N153.
N510 + N153 = N663 per litre.
If you include the fact that the marketers will add a price margin to the landing cost, the pump
price of a litre of petrol cannot be less than N750 by December 2023.
In the final analysis, the price regime set by the NNPCL is not sustainable and cannot stand the test of time. There will be a routine increase in the pump price of petrol by marketers.
THE WAY OUT: PHASED REMOVAL OF FUEL SUBSIDY
The way out is for the federal government through the National Assembly to force a supplementary budget on the medium term expenditure framework (MTEF) June -Dec 2023 to include fuel subsidy.
The 6 months window June – December 2023 will enable the government assess the impact of removing fuel subsidy and develop a PHASED REMOVAL of fuel subsidy within 5 years with minimal impact on the already struggling and overstretched families.
