Energy, Politics

₦40 per Litre: Local Refining to Save Nigeria

I wonder what Danish philosopher, Soren Kierkegaard, would have witnessed to trigger his assertion that “There are two ways to be fooled. One is to believe what isn’t true; the other is to refuse to believe what is true”. Usually, a lack of information makes people susceptible to being fooled, especially when they are marinated in well-spun tales generously adorned with the best spices of propaganda. But there is another set who ordinarily should or seem to have relevant information, yet choose to be fooled. With regards to arguments about local refining in Nigeria, it is such persons that should get Soren’s hammer.

This article is being written at a time that fuel queues have returned to some parts of Nigeria, with many stations selling above the government-regulated price of ₦165 per litre of petrol, although this is about 25% of the selling price in a country like Rwanda.  I was watching a discussion on Channels TV in which a representative of one of the petrol marketers’ associations was asked if the marketers could take over Nigeria’s four public refineries and operate them to crash the price of petrol. His response and subsequent comments by other discussants, especially with regards to the belief that the upcoming Dangote Refinery would lead to petrol prices even lower than the current subsidised rate made me to wonder if those who should know are wilfully ignorant or just dancing in the Emperor’s new clothes to fool an uninformed public.

About 7 years before now, when the official price was around ₦87, a famous former Minister of Petroleum, the Late Prof Tam David-West had argued that by some sleight of hand and removal of certain fees, petrol ought to cost around ₦40 per litre. For additional context, the professor concurred with then President-Elect Muhammadu Buhari that there was nothing like petroleum subsidy in Nigeria. At this point a recently popularised meme would have made absolute sense: “if they say petrol should be ₦40, then it should be so”.

You gerrit? | Image Credit: @sabinus1_

Unsurprisingly, if you surveyed Nigerians today, a vast majority would agree with the three characters above. But does this align with the facts? First of all, a simple comparison may be helpful. If in almost every country without petrol subsidies, the price per litre is above ₦400 (even without petrol taxes), why do we think that under market forces the price in Nigeria would be lower than ₦100? Even if we assume that the price of crude oil in the international market were frozen at around US$50 per barrel for 7 years, given that we import the bulk of our refined petroleum products, would the naira price not be affected by the drastic fall in the value of the naira relative to the dollar?

A common argument is that local refining would yield a significant drop in the pump price of petrol, but this is as true as saying that filling the tank of an Innoson truck is enough to last a road trip from Lagos to London. In March 2021, the erstwhile Petroleum Products Pricing and Regulatory Agency (PPPRA) “mistakenly” uploaded a new pricing template (Explanatory Notes) on its website, which was quickly deleted amidst confusion about whether subsidy had been truly removed or not. At that time, PPPRA quoted the average selling price by European refiners as ₦169.22 per litre, while all the costs and fees associated with shipping to Nigeria amounted to a mere ₦20.39 per litre. Adding costs associated with transportation within Nigeria and allowable profit margins brought the total to ₦212.61 per litre as the maximum retail price with which any government subsidy would be calculated. Based on these simplified numbers, how much would have been saved if the cost of transportation from Europe were eliminated, and how does this compare to the total price? If you doubt this analysis, the head of the national oil company recently (March 2022) stated that it now costs between ₦15 – ₦17 per litre to bring refined products into Nigeria. If we recall that the price of crude oil in March 2021 was around $65 per barrel, compared to over $100 today, should we still be arguing that the price of petrol should be going down?

Another common argument is that local refineries would buy and sell in naira, hence, the price would be drastically lower. However, this view fails to consider the source of crude oil that would be used by the refineries. Except for a few oil fields fully owned by the government, most oil assets are jointly owned with other private companies, with the government’s share usually not exceeding 60%. When these fields were to be developed, the project economics would have been evaluated using United States Dollars at international prices, with considerations for rises and falls in the market price. Also consider that virtually all producing assets are financed with some loan components denominated in dollars. In such a situation, even if you were to mandate crude oil sales in naira, it would have to be at the naira equivalent of the dollar price since the producers would have to procure dollars to repay foreign loans and make returns to their investors.

The same thing applies to the much awaited Dangote Refinery. It is quite hopeful for people to think that a refinery heavily financed with foreign loans would sell refined products at lower than the international prices. Even if we refuse to learn from the magnanimously low prices Nigerians enjoy from the operations of Dangote Cement and Sugar, Dangote Refinery is unlikely to yield any significant price differential, except maybe the small cost of transporting crude oil to foreign refiners and bringing back refined products. Maybe the Nigerian Government, which is presently scouring everywhere for revenue to repay heavy loans, would find a way to subsidise crude oil sales to Dangote. By the way, there is a modular refinery in Delta State that is struggling to access crude oil for its operations.

As you can see, this article did not bother looking at the smuggling incentives to adjoining African countries if Nigerians were to somehow crack the elusive challenge of low prices divorced from international pricing realities. Of course, as Big Brother Naija, we can afford to subsidise petroleum products for a long list of our African brethren. Or, maybe as Philip Dick asserts, in our search for ultra-low prices, “Reality denied comes [would come] back to haunt [bite our ass]”.

Cover Image Credit:

PS. Instead of an unending demand that petrol should cost less than it currently does in Nigeria, maybe Nigerians would benefit more from seeking a functional economy where people’s incomes can accommodate their “real need” for petroleum products.

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