Donald Trump’s withdrawal from the Iran Nuclear deal immediately triggered a rapid increase in the price of crude oil in the international market. This is both good news and bad news for Nigeria.
The good news is that the country will earn more from crude oil, Nigeria’s major foreign exchange earner. The excess crude account (ECA) will grow, and Government will have much more revenue to spend on numerous projects.
The 2018 appropriation bill pegs the estimated crude oil price at $45 per barrel, with an estimated oil production of 2.3 million barrels per day.
As at Thursday morning, the Brent Crude is sold at $77.54 per barrel, and Goldman Sachs, an American multinational financial giant predicts that oil prices could rise to $82.50 by summer of 2018. This means Nigeria will be earning almost double the amount it had estimated in the budget.
THE BAD NEWS
Despite being among the top oil producing countries of the world, Nigeria does not have a single fully-functional crude oil refinery. Over the years Nigeria exports crude oil and imports refined petroleum products: PMS (Premium Motor Spirit), AGO (Automotive Gas Oil), DPK (Dual Purpose Kerosene), etc.
In the course of importation, the prices of refined petroleum products is determined by the price of crude oil in the international market, which means the higher the price of crude, the higher the price of refined products.
This was exactly the reason for the protracted fuel scarcity that almost crippled the country in the December of 2017.
Presently, the Nigerian National Petroleum Corporation (NNPC) is the sole importer of refined petroleum products in Nigeria. This was due to the inability of Independent petrol marketers to continue selling at the government regulated price of N145 per litre.
According to the independent marketers, the landing cost of the PMS alone stood at N154 per litre, and when added to the official exchange rate of N305 to $1, the pump price stood at between N160 and N167.
But since the federal government says it will no longer provide petrol subsidies, and has also insisted that petrol be sold at N145 per litre, the marketers say they cannot continue selling at a loss.
“When the crude price hit $59 per barrel, we could not sell petrol again at N145 per litre if we were importing on our own. It is only the government (NNPC) that is importing and can warehouse the subsidy,” Mike Osatuyi, National Operations Controller of IPMAN (Independent Petroleum Marketers Association of Nigeria) told journalists in 2017.
“Right now, the landing cost of the PMS is N154. If you are importing at N305 to the dollar, by the time you add bank charges, it comes to N307 to the dollar.
“If you apply that to the current crude price, the landing cost is N154-N155. By the time you add all the margins, the pump price is about N160-N167.
“Before private importers can resume importation, the exchange rate to a dollar must be N250 and we can sell at the price of N145 per litre.”
Ibe Kachikwu, Minister of State for Petroleum Resources, also pointed out this challenge when he said in 2017 that NNPC loses N900m daily selling fuel at N145.
Kachikwu explained, the NNPC, being the sole importer of petroleum products since October 2017, brings in about 25 million litres daily, and records a N26 loss on every litre of petrol it sells at N145.
Consequently, the company incurred a daily loss of between N800 and N900 million, translating to N85.5 billion in just over three months.
Kachikwu suggested three ways out of the incessant incidents of fuel scarcity in the country. One is for the Central Bank of Nigeria (CBN) to provide forex to fuel importers at N204 instead of the official rate of N305. This will enable them to sell PMS at N145 per barrel.
Secondly, Kachikwu suggested ‘modulated deregulation’, an arrangement that will allow independent marketers sell PMS at prices higher than the government approved N145, while NNPC fueling stations continue selling at the approved price.
Thirdly, to implement a blanket subsidy for all marketers, which would be like going back to a problem that had earlier been solved.
“The ultimate solution would be for Nigeria to be able to put its refineries in good shape, so that at least 80 percent of petroleum products consumed in the country are refined locally,” Kachikwu said.
As it stands now, with the further rise in the international price of crude oil, and the expected rise in the price of refined petroleum products, and given that Nigeria’s refineries are still almost moribund, the Nigerian government will be torn between two tough challenges, continue illegal fuel subsidy payments or increase the pump price.