FUEL PRICES, 2015

2015 FUEL PRICE REDUCTION: A JUSTIFICATION

FOR FURTHER CUTS

BY

IBIKUNLE, A. OLUMIDE

2015

O. Ibikunle, 2015

Fuel Prices in Nigeria need to be further reduced…

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TABLE OF CONTENTS

Preamble

A Snapshot Of oil Production and Consumption in Nigeria

Oil Production Metrics in Nigeria

Oil Consumption Facts for Nigeria

Evolution of PMS Prices in Nigeria

What influenced the latest Price drop?

Justification for further reduction in Prices

Summary, Conclusions and Recommendations

References


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PREAMBLE

Available and affordable energy in the form of varying fuels is critical to the provision of

fundamental and often life-sustaining goods and services, such as heating, lighting, cooking

and transport. Oil is also necessary for more complex goods and services, from the

refrigeration of vaccines and food to the supply of reliable electricity for manufacturing.

Improving energy access is therefore an important strategy for promoting economic

development. This thinking usually forms the basis of any decision to subsidize fuel. (IISD,

2012)

Major sources of fuel for basic and complex domestic and industrial activities include, but are

not limited to the following:

Dual Purpose Kerosene (DPK; referred to simply as “Kerosene”)

Automotive Gas Oil (AGO; commonly called “Diesel”)

Liquefied Petroleum Gas (LPG; also called “Cooking Gas”)

Premium Motor Spirit (PMS; or “Gasoline”, usually referred to as “Petrol”)

Information in public domain has it that of these, PMS is probably the most commonly

utilized, as it is employed in fuelling nearly 100% of motor vehicles, power generators, and a

whole lot more of industrial and domestic machinery. This perhaps serves to explain why

there is usually a public outcry, whenever there is a slight increase in the price of this

essential commodity.

It is no longer news that on January 17th

, 2015, the Federal Government of Nigeria

announced a reduction in the pump price of premium motor spirit (PMS), popularly called

petrol by 10.3%, from ₦97/ litre which it decided in 2014 to ₦87/litre.


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There is no gainsaying the fact that this is not the first of such fuel-price reductions. Indeed,

Nigeria has a history of such (almost annual) instability in fuel prices that have been dictated

by factors ranging from:

Increased cost of production/importation of refined petroleum products;

Removal/Granting of subsidies;

International fuel price fluctuations;

Series of currency devaluations;

The objective of this term paper, therefore is to examine the pros and cons of the recent price

cut in the price of PMS, and justify the need or otherwise for further reduction in the prices.

A SNAPSHOT OF OIL PRODUCTION AND CONSUMPTION IN

NIGERIA

To ensure adequate understanding of the basic reasons for which oil prices should further be

reduced in Nigeria, it is useful to have a sense of the country’s petroleum resources and

needs. What is the quantity of petroleum and its products produced? What quantity is

consumed industrially and domestically?

OIL PRODUCTION METRICS IN NIGERIA

Nigeria is the world’s sixth largest producer of crude oil, having produced 2.5 million barrels

of sweet, light petroleum crude per day in 2011 (BP, 2012). It does not have the capacity to

refine most of its crude; indeed, it exported over 98 per cent of its production in 2009

(International Energy Agency [IEA], 2010).


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Nigeria also produces natural gas, around 69 per cent of which was exported in 2009. The

remaining gas was consumed domestically, mostly by industry, and used to produce

electricity.

OIL CONSUMPTION FACTS FOR NIGERIA

When it comes to energy consumption, oil products are an important source of energy in

Nigeria: transport requires gasoline and diesel and, at the household level, kerosene is a

common fuel for cooking, heating and lighting, though some households also use gas or coal

(Desalu, Ojo, Ariyibi, Kolawole & Ogunleye, 2012). Many businesses rely on oil products as

an input to production or for electricity generation. Oil products are less important for

industry, representing only 2 per cent of industrial energy consumption in 2009 (IEA, 2010).

Since Nigeria cannot refine the majority of its crude oil, most oil products are imported from

abroad.

EVOLUTION OF PMS PRICES IN NIGERIA

Gowon, 1973: 6k to 8.45k (40.8%)

Murtala, 1976: 8.45k to 9k (0.59%)

Obasanjo, October 1, 1978: 9k to 15.3k (70%)

Shagari, April 20, 1982: 15.3k to 20k (30.71%)

Babangida, March 31 1986: 20k to 39.5k (97.5%)

Babangida, April 10 1988: 39.5k to 42k (6.33%)

Babangida, January 1, 1989: 42k to 60k Private vehicles.


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Babangida, December 19, 1989: moved to uniform price of 60k (42.86%)

Babangida, March 6, 1991: 60k to 70k (16.67%)

Shonekan, November 8, 1993: 70k to N5 (614%)

Abacha, November 22, 1993: petrol price drops from N5 to N3.25k (-35%)

Abacha, October 2, 1994: N3.25k to N15 (361.54%)

Abacha, October 4, 1994: price drops from N15 to N11 (-26.67%)

Abubakar, December, 20, 1998: N11 to N25 (127.27%)

Abubakar, January 6, 1999: N25 to N20 (-20%)

Obasanjo, June 1, 2000: N20 to N30 (50%)

Obasanjo, June 8, 2000: Petrol price reduced to N22 (-10%)

Obasanjo, January 1, 2002: N22 to N26 (18.18%)

Obasanjo, June to October, 2003: N26 to N42 (23.08%

Obasanjo, May 29, 2004: N50 (19.05%)

Obasanjo, August 25, 2004: N65 (30%)

Obasanjo, May 27, 2007: N75 (15.38%)

Yar’Adua, June 2007: N65 (-15.38%)

Jonathan, January 1, 2012: N97 (112.31 to 284.62%)

Jonathan, January 17, 2015: N87 (-10.3%)


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WHAT INFLUENCED THE LATEST PRICE DROP?

For much of the past decade, oil prices have been high — bouncing around $100 per barrel

since 2010 — because of soaring oil consumption in countries like China and conflicts in key

oil nations like Iraq. Oil production in conventional fields couldn't keep up with demand, so

prices increased. By 2014, oil supply was much higher than demand!

But beneath the surface, many of those dynamics were rapidly shifting. High prices spurred

companies in the US and Canada to start drilling for new, hard-to-extract crude oil in North

Dakota's shale formations and Alberta's oil sands. Then, over the last year, demand for oil in

places like Europe, Asia, and the US began tapering off, thanks to weakening economies and

new efficiency measures.

By late 2014, global oil supply was on track to rise much higher than actual demand, as the

chart below from the International Energy Agency shows.

Spot price of Brent Crude, updated on January 23, 2015 Source: (Joss Fong/Vox)

https://www.iea.org/oilmarketreport/omrpublic/


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A lot of unused oil was simply being stockpiled away for later. So, in September, prices started falling

sharply.

At present, the everyday Nigerian has the right to predict the scale of the dark storm hovering over

Nigeria’s economy as the oil price continues its free summersaults. This is only expected, as the

government of the day has refused to heed to age-old cries for diversification of the economy from

sole dependence on oil revenues. Here, is the dire situation of a country whose finances depend

mostly on a mono-product – crude oil.

The federal government of Nigeria, late 2014 as a direct fallout of globally plummeting oil prices

designed an exceptional collection of policies and announced through the Coordinating Minister for

Finance and Economy- Dr. (Mrs.) Ngozi Okonjo-Iweala, the introduction of austerity measures, to

mitigate the effects of falling oil prices on expected revenue, and reduce to the barest minimum

possible, certain government spending, in line with current economic realities.

Austerity describes policies used to tighten government expenditure, close loopholes that cause

revenue losses and a gross reduction of budget deficits during adverse economic conditions. Some of

the austerity measures introduced are shown in the table below:


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Source: Ministry of Finance, Centre for Social Justice

Others were:

Devaluation of the local currency, and a consequent increase in foreign exchange

rates.

An increase in taxes imposed on imported items, to discourage importation and

encourage local production for consumption and export.

http://media.premiumtimesng.com/wp-content/files/2014/12/Revenue-Component-page-0011.jpg


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Placing an embargo on foreign trips for training and other purposes usually embarked

upon by Public Service Officials.

All of these notwithstanding, the ordinary Nigerian however is at the receiving end of these

measures, as the prices of imported essentials, such as food items (which we are still yet to

achieve self-sufficiency in producing) are escalating beyond reach.

JUSTIFICATION FOR FURTHER REDUCTION IN PRICES

As has been established earlier in this paper, the raw material for the production of Premium

Motor Spirit (Petrol) and other products is Crude oil. Global oil prices have fallen; hence a

reduction in prices is only appropriate. However, I have taken a stand, and would attempt to

justify the need for further reduction, based on the following arguments.

1. COMMENSURATE BENEFITS

For Nigerian consumers unfortunately, the collapse of crude oil prices since October 2014

has not translated into any significant change in diesel, kerosene and PMS prices across the

country.

A little over 10% reduction in cost of the final (crude oil) product (PMS) in response to an

over 50% drop in the cost of the raw material is a good try, but Nigerians can get a better

deal.

The government needs to put measures to in place to cushion the effect of rising prices of

essentials on our pockets. One of such is fuel price reduction commensurate with the level of

falling prices.


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The bottom line here is to allow Nigerians enjoy the relief that has come to consumers of

petroleum products due to globally falling prices.

2. COST OF LIVING

The cost of energy, fuel, gas, electricity for transport, cooking, heating and manufacturing is

a direct determinant of the cost of living in any economy, as it determines to a large extent,

what prices are placed on products and services, and how far people’s wages can take them

before the next pay day.

In better economically managed oil-producing climes, the government has responded to

falling prices of oil by reducing the price of fuel, which invariably has a positive effect on the

standard of living. A few examples are outlined below.

U.K

Drop in Price (dollar per litre): 0.52

Percentage of price drop: 23.75%

U.S.A



SINGAPORE


Percentage of price drop: 21%


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NIGERIA



Clearly, it is poor economic management to import the final product of a commodity whose

raw material (crude oil) we produce in abundance.

A refinery in Nigeria, such as the 400,000 barrel refinery we are supporting by providing land

for the Dangote Group in the Lekki Free Zone will keep jobs at home, (instead of in foreign

refineries), create income for the Nigerian Government by way of companies income tax, and

give us better control of pricing by eliminating subsidies and demurrage charges by port

delays paid to ship owners in dollars against a weak Naira; and it will eliminate many other

charges that are passed on to ordinary Nigerians

3. PROVISION FOR CAPITAL EXPENDITURE

A detailed analysis of the 2015 budget reveals a provision of ₦387.15bn made for

expenditure of a capital nature; a mere 9% of the total budget, while a whopping

₦3970.85bn, (which is composed majorly of Statutory transfers, Personnel cost and

Overheads) goes to Recurrent expenditure (BudgIT Analysis, 2014).

From my understanding of elementary economics, Capital Expenditure is that which is meant

to ensure sustainable growth and expansion of the economy, create jobs, and increase welfare

of the citizens in the long run. If 91% of the total budget of a country is spent on non-

enduring expenses, then it spells doom for future economic indices and standard of living of

the populace.


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If the cost of producing fuel has reduced considerably, Nigerians deserve a good reduction in

price of the final product, so they can create jobs for themselves, and increase their own

welfare.

4. COST OF GOVERNANCE

Members of Nigeria’s Federal legislature are globally notorious. The reason for this is not

far-fetched. Our legislators are touted as the highest paid lawmakers anywhere in the world,

with average earnings (salaries and other allowances) higher than that of even the President

of the US of A. This translates to a high cost of governance and administration charged to the

annual national budget (Rumours have it in several quarters that the real cost of governance

to Nigerians is about 25% of the national budget). Austerity measures introduced in 2014

would severely affect the ordinary Nigerian, but has failed to include policies that would see

cuts in the jumbo pay packets of Nigeria’s aristocratic class.

One more reason Nigerians deserve a further reduction in fuel price; our administrators

would not feel the impact of austerity in their pockets, we need something to smile about.


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SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

A critical and detailed analysis has been conducted into the recent fuel price reduction in

Nigeria, and some facts have been established;

The reduction would seem a direct result of globally falling crude oil prices, which is

the basic raw material for producing the subject matter (PMS).

It doesn’t seem like the end of the road for falling prices, and this would definitely

impact on the benchmark set for oil income.

Austerity measures were introduced by the Federal Government to mitigate the effect

of falling prices on the oil income, and justify every item of expenditure embarked

upon by the government.

The impact of the austerity measures would be felt more by ordinary Nigerians than

members of the ruling class.

The solutions needed in these dire times are pretty obvious. In the light of this, I hereby make

the following recommendations;

If oil prices have fallen by 50%, then at least, a reasonable level of reduction in prices

of PMS should be enjoyed by Nigerians.

The National Assembly should conduct a downward review of its running costs

remuneration packages to reflect the current economic realities.

Efforts of independent revenue-generation bodies should be doubled, to ensure

increased revenue from non-oil sources.


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The time is ripe for the highest-ranking officials in the government to sit down and

proactively strategize. We are in urgent need of a far-reaching economic

diversification blueprint, away from the mono-product economy we currently are.

To encourage a paradigm shift of focus from importation and marketing of refined

petroleum products, private sector investors (Dangote has taken a lead in the right

direction) should be incentivized to invest in local processing and refining of crude

oil.


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REFERENCES

Organisation of Petroluem Exporting Countries (OPEC). (2015). Monthly Oil Market Report.

Geneva, Switzerland: OPEC. Retrieved February 2015

Budget Office, Ministry of Finance. (2014). An Analysis of the 2015 FGN Budget. Abuja:

Ministry of Finance, Nigeria. Retrieved February 2015

Centre for Public Policy Alternatives (CPPA). (2012). A Citizen's Guide to Energy Subsidies

in Nigeria. Geneva, Switzerland: International Institute for Sustainable Development.

Retrieved February 7th, 2015

Fashola, B.R (2015). Oil Price Reduction: My Take-Aways. Vanguard news, Nigeria.

Retrieved from http://www.vanguardngr.com/2015/01/pms-pump-price-reduction-economy-

take-away/ on 7th February, 2015.

http://www.vox.com/2014/12/16/7401705/oil-prices-falling. Retrieved 7th February, 2015

http://www.vanguardngr.com/2015/01/pms-pump-price-reduction-economy-take-away/

http://www.vanguardngr.com/2015/01/pms-pump-price-reduction-economy-take-away/

http://www.vox.com/2014/12/16/7401705/oil-prices-falling

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