Adewale Sanyaolu
The global oil community appears to be in a celebratory mood as the threat of sanctions on Iran by the United States has spiked Brent crude to nearly $90 per barrel, the highest since 2014.The rise in oil price signifies increased revenue for oil producing countries but, regrettably, Nigeria may not benefit from this largesse.
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)
The news is even more cherry for members of the Organisation of Petroleum Exporting Countries (OPEC), who have had to bear the brunt of oil production cut in the past in a bid to rally up prices.
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 petroleum products due to the poor state of the country’s refineries.
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With such level of dependence of imported petroleum products, the gain that ought to have accrued to Nigeria is subsequently ploughed back into the payment of subsidies or what government has recently termed under recovery.
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.
FG to pay more in subsidy
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.
For instance, the three refineries produced 214,328MT of finished petroleum products and 131,810MT of intermediate products out of the 378,634MT of Crude processed at a combined capacity utilisation of 20.12 percent compared to 7 percent combined capacity utilization achieved in the month of April 2018.
The Corporation also claims to be making under-recovery due to the amount it spends in subsidising petrol, a development that is faulted by the state governors due to its negative impact on the Federation Account.
Nigerians at crossroads
While rising oil prices are welcomed by oil producers, consumers might not be that excited as higher crude price mean potential increase in petrol pump price.
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The general tendency is that when oil price falls, consumers are happy while producers are unhappy.
According to the US Energy Information Agency (EIA) crude oil prices make up 71 per cent of the price of petrol. The rest of what consumers pay at the pump depends on refinery, distribution costs and other associated costs which usually remain stable.
Analysts predict a surge in petrol prices is inevitable as crude price spikes higher.
President of the Nigerian Association for Energy Economists (NAEE), Prof Wunmi Iledare, 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.
Chairman, Independent Petroleum Marketers Association of Nigeria, Ore Depot, Mr. Shina Amoo, said the rising price is also a double-edged sword, If we continue to import large volume of refined products, the gain will be lost because Nigerians will have to pay more for petrol, diesel and other products which we are not refining here in the country.
‘‘But we will make more gains if we export more crude, refine crude oil for our local consumption and even export refined products to other countries. That is the time we can maximise the opportunities presented by this situation.
The Investor Relations Head at UBA, Mr. Abiola Rasaq, also concurred that that one of the negative impact of the surge in crude price is that because Nigeria still remains an importer of refined petroleum product, the naira landing cost of fuel will increase.
“The compromise not to deregulate also means that the government would have to pay subsidy in some ways either by way of lower exchange rate to the importers or by direct subsidy to them,” he said.
Also commenting, an Energy analyst with Ecobank, Mr. Jubril Karrem, said the cap on petroleum products by the Federal Government is a negative one for the country at this time of oil boom as they are forced to augment the shortfall in the landing and selling price of petrol.
He said countries with higher refining capacity are happy with the current development because they can pump in more crude oil into the market in order to earn more revenue.
Stakeholders demand buffers, transparency
A former Deputy Chairman, House Committee on Finance, Mr. Yomi Ogunnusi, said while some can argue that if we have more money in our foreign reserves, it will help our image and the value of the naira which is fine.
‘‘But our priority now should be how can we resolve our problem locally and make more money available locally and stop borrowing
We keep borrowing money while the standard of living and the GDP are not improving and then you say you have a lot of money abroad. That is laughable. You will also recall that the Natural Resource Governance Institute recently ranked Nigeria’s Excess Crude Account as the most poorly governed sovereign wealth fund among 33 resource-rich countries around the world. So, the increasing oil price is in itself a blessing but if the way it is being managed does not change, then we will be back to square one.
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For his part, Technical Advisor, Green Energy International Limited, Mr. Sunday Babalola, 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.
Generally, about 75 to 80 per cent 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.
Head of Department of Banking and Finance, Nassarawa State University, Dr.Uche Uwaleke, 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 advised