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FG claims untrue: Fuel price can never drop

24 May 2016, 14:07 Peregrino Brimah

There are several categories of Nigerians today who accepted the fuel price hike: some are the fanatical and diehard partisans; these will literally eat nails if the President tells them to. Then there are the plain hypocrites: these include a former labor leader turned governor, a former presidential vice candidate and pastor and the northern elders forum. These types have vested interests in the government and would be noted to have said stuff like, "we support the subsidy removal," in spite of the fact that no subsidy was removed as this was removed in entirety since January of this year. A third group are the hopeful. The many desperate Nigerians who have been starved and suffered throughout the first year of the Buhari administration with the artificial scarcity induced and maintained by NNPC and cabal marketer hoarding. It is for these hopefuls that this analysis is directed.

The truth is that just the way Kachikwu lied on March 23rd of this year when he promised that in two months, as soon as he finishes "strategically reserving" or hoarding fuel, there will be enough for the queues to disappear; that's the same way his promise that the pump price will reduce is a complete "419" sham. Do not asphyxiate waiting for Premium Motor Spirit, PMS, to decrease below the N135 lower margin set by the petroleum ministry. It wont. I'll explain:

Variables of the Regulation (not deregulation)

Firstly: the current pump price of PMS cannot fall simply because it is not deregulated and labile but fixed. Kachikwu fixed the price between N135 and N145. So it can never drop UNLESS and UNTIL Buhari and Kachikwu choose to drop it. 

Secondly, the reason why the price is where it is today is two variable factors: the first is the global oil price and the second is the strength of the dollar in the black market which Kachikwu has condemned Nigerians to source dollars from to import PMS. The current dollar rate in the black market is N320-360. The Petroleum Products Pricing Regulatory Agency (PPPRA) pushed the source rate even below parallel market rate to N285.00 which is causing enough stress for marketers.

Now with Nigeria being an oil based mono economy with the Naira strength dependent on Nigeria's only major export, oil, the strength of the Naira varies inversely with the price of oil. At ~N300 the pump price of PMS is set at N135-145. For the price at the pump to decrease, the Naira must appreciate in value. For the Naira to appreciate in value, the price of oil must rise, and if the price of oil rises, the price of PMS also rises and as such the cost at the pump will not drop but rather stay more at a constant. And if the price of oil and consequently the price to import PMS drops globally then while the import cost will drop, the cost in Naira will increase (i.e. as the value of Naira drops) and so the Nigerian pump PMS price will rise/remain constant.

In statistical terms, where global oil prices (proportional to import PMS prices) is the independent variable, the Naira value (which resonates with the final pump price) is the dependent variable. As the global oil price varies, so does the Naira value and final pump price.

To confirm this analysis, one only has to look back to 2012 when former President Goodluck Jonathan attempted to remove the oil subsidy. At that time, had he removed the subsidy, the price of PMS  per litre was going to be set at N146.00. Which is exactly where we are today. At that time while oil was high, Naira was low (i.e., it was stronger), and yet the final price of PMS by virtue of its true and unsubsidized value was N146. In 2012 the Naira-Dollar exchange rate was about 160. And then, in 2012 the PPRA’s template average the landing cost for PMS was N131.10 per litre. In 2012, the cost of a barrel of oil was ~ $86.00.

Factors that can bring pump PMS prices down

Unless the import process is subsidized by the government, the price at the pump cannot drop based on the factors as listed above. Unless Buhari and Kachikwu plan to reintroduce the subsidy they removed in January, there is no way that their promise of pump prices falling is no more than another fib. Similarly, unless the government decides to return to providing CBN forex for fuel instead of preferentially reserving the CBN dollars for the cabal and their refineries and other private projects only. We don't see this happening.

The other factors that can drop pump prices by a tiny fraction include, a miraculous strengthening of the Nigerian economy and Naira value due to trade dynamics independent of oil. This is of course rather unlikely anytime soon and not a basis for false promises and hope.

The third factor that can crash pump PMS prices is locally refined fuel. However for this to drop prices there will have to be a complete ban on oil cabal import marketers; because if locally refined fuel is to be sold at a cheaper price at the pump, the marketer cabal will not be able to sell their more expensive imported fuel. The two systems cannot exist in tandem. This is what Kachikwu is not telling you. Today as it stands, NNPC imported fuel with CBN N197 dollars can easily sell at under N100/liter. The Federal government is making a profit on the citizenry of almost N50/liter for its 50% imported product. The reason why the government set a range (regulated and did not deregulate pump prices), the N135-N145 fixed margin with the lower regulated N135 hiked limit is to enable cabal marketers import and sell at a profit. The N135 minimum is set to protect the marketers. For the pump price to drop, the cabal must be eliminated from the picture. Again I will advise Nigerians not to asphyxiate expecting Kachikwu to eliminate the cabal and reduce investor stock value in their private refinery projects. 

And then finally, in 2018 or 19 when the government and pauper subsidized Dangote refinery is functional, unless it sells PMS at considerate rates will fuel prices drop. But again, don't asphyxiate. From the record of the global highest price and double global mean that Dangote sells his cement to Nigerians after all the subsidies, tax breaks, duty waivers, free land and gifted government assets and subsidized dollars we availed him, we can easily predict that his refinery end product price will be anything but a "dropped" one.

- MyNews24

Disclaimer: All articles and letters published on MyNews24 have been independently written by members of News24's community. The views of users published on News24 are therefore their own and do not necessarily represent the views of News24. News24 editors also reserve the right to edit or delete any and all comments received.

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