The Federal Government has just put itself in a sticky mess. On Wednesday, last week, it attempted to justify its refusal to reduce the price of fuel products (petrol and kerosene) on the grounds that the domestic prices of both products are not deregulated.
The Minister of State for Energy (Petroleum), Odein Ajumogobia, immediately after the Federal Executive Council (FEC) said Nigeria cannot enjoy the benefits of deregulation and that we’d have to take a holistic view of the sector to see how all the petroleum products can be put in one basket and respond to price fluctuations locally in tandem with international prices.
Ajumogobia, however, admitted to reporters listening to him that the landing cost of imported petrol had fallen to N50 a litre as a result of the drop in crude oil prices in the international market. The implication is that there is spread of N20 between the landing cost of petrol and the official price of N70 a litre at which it is sold at the fuel pumps. It can therefore be safely assumed that all other expenses borne by marketers/NNPC/government to transfer fuel products from the sea ports to the pump stations, account for the N20 differential. However, what these attendant costs are, remain shrouded in secrecy because the minister was silent on distribution and marketing costs, government taxes (if any) on the product, and possibly profit margins accruable to NNPC and other marketers of petroleum products.
The spread, by any stretch of the imagination, is significant. I strongly doubt if distribution/marketing costs, taxes and marketers’ margins put together even add up to N20 per litre. This means there is sufficient room for the government to reduce the price of petrol as a mark of good faith and in keeping with earlier promises that whenever the price of crude oil drops in the international market, domestic fuel prices will drop simultaneously.
By reneging on earlier promises, the government has put itself in a very difficult situation and is rather myopic as far as fuel pricing is concerned. It is acting like the lack of a deregulated pricing regime for fuel products is the fault of the public and that of labour unions, and not the government’s. That Nigeria, a fuel import dependent nation, has continued to maintain a regulated regime is primarily as a result of the lack of political will, more than anything else. Ajumogobia’s statement last week and this article would have been rendered redundant had the government deregulated pricing just as it did fuel imports in 1998.
Added to this, the government seems to be acting on the premise that crude oil prices will remain low for an indefinite period of time. But it is very wrong. The concerted effort by the world’s leading industrialised nations to turn around their flagging economies through the passage of various economic stimulus packages and a host of market reform measures, are bound push up demand for crude oil in the foreseeable future. Increased spending by these governments will have a trickle down effect on their economies as factories produce more, new jobs are created and energy consumption rises.
Indeed, several energy analysts are predicting that falling oil prices will be short lived and may start to rally sometime next year. Some have even predicted that oil may hit $200 a barrel by 2010 and beyond. And this is despite the present credit crunch and global economic downturn. Even the US’ policy to lessen its dependence on foreign oil by amending legislation which limits drilling in certain parts of the country and investments in alternative energy fuels, still has some way to go. This will take years to materialize, and means that oil as a finite resource will face unquenchable demand.
Given that Nigeria continues to regulate its domestic energy prices, when oil prices start to rebound, the government’s subsidy burden will rise once more. Fuel subsidies may very well exceed the N800 billion ($6.78 billion) Ajumogobia said the government has expended this year alone keeping petrol and kerosene prices at government regulated prices. In the event this happens and price controls remain in place, the government will be left with no option than to increase pump prices again. Predictably, fuel increases will be resisted by labour and lead to nationwide strikes – a horrid, vicious cycle we can do without.
The Federal Government, right now, has an opportune moment to score cheap political points by keeping to promises made in the past by previous administrations. Just as it raised domestic prices of fuel under a regulated regime, it can reduce them. It does not require a deregulated environment to do so. A reduction in fuel prices will also go a long way in curbing inflationary pressure on transportation costs and food prices.
At the landing cost of N50 per litre, for the first time in decades Nigeria’s fuel subsidy burden has been eliminated and the government must be raking in billions from the price differential between the landing cost and pump price. This should be passed on to consumers, so that when the government has to increase prices in the future, it shall do so from a moral high ground.
By Ijeoma Nwogwugwu
Email:ijeomanwogwugwu@thisdayonline.com
11.24.2008
