Downstream petroleum to deregulate or not to deregulate

Out of all the refined petroleum products, petrol is the only product not deregulated in the Nigerian market and the reason for this is fairly obvious to all Nigerians. It is regarded as the lifeline of the Nigerian economy and has an immediate effect on all parts of the economy. Rumours of shortage of petrol supply send people into purchasing frenzy, leading to hike in transport fares, foodstuffs and other services.

The Nigerian government, in order to ease the burden of petrol price, decided to embark on price modulation rather than deregulation in the case of petrol. Modulation refers to the practice where the government moves the price in accordance with the current global crude prices as well as some other economic factors.

Most countries have some form of subsidy on petrol. Angola, an OPEC member like Nigeria, and a large crude oil producer in Africa competing with her for number one position on the continent, subsidizes petrol for its citizens.

Egypt, Ghana and South Africa all have one form of control other the other over petrol prices. India deregulated their petroleum industry, but they have sufficient refining capacity and the government can intervene when the price is “getting out of hand”.

Developed countries like U.S, U.K and Canada that have no fuel subsidies, have very large refining capacity, so much so that Nigeria buys refined petroleum products from them.

Many believe Nigeria stands to gain immensely from deregulation in the long run, but that it needs to make sure certain conditions are in place. When analysts talk about the positive effects of deregulation, which includes attracting new investments, fuel crises coming to a halt, and so on, all of that is in the long run. But like John Maynard Keynes, the famous economist said, “in the long run, we are all dead.”

On the other hand, the adverse effects in the short run would be immense and Odion Omofoman, an energy expert and C.E.O of New Hamsphire Capital Ltd described it as suicidal, because of the country lacks adequate refinery capacity.
Significant local refining capacity needs to be available before deregulating completely in order to prevent bigger and uncontrollable problems.

“We don’t have significant local production. Deregulation will open us up to the international vagaries of the market; people think that when you deregulate, prices come down, it doesn’t work that way,” he said.

A major factor in the deregulation debate is the naira to dollar exchange rate. International fuel prices don’t vary for different countries, but other costs, which are also priced in dollars, like international shipping and insurance costs, vary. All these are factored into the landing cost of petrol; and there are other domestic costs included.

They include marketers’ margins, transport costs, storage costs, port charges, government taxes and levies. So Nigerians would have to bear the burden of all charges reflected at the pump price of petrol, if full deregulation is embarked on.

However, most of these costs would be bypassed if the economy was refining enough crude to meet its needs, for example, most of the international costs priced in dollars, like shipping costs, would not exist and even the refined product to be purchased can be done in local currency.

Out of these international costs, the biggest and most important variable is the international market price of petrol, which is a reflection of the price of crude. Crude price increase is, therefore, a win-lose situation for Nigeria, because on one hand, she wins because her earnings from crude sales are high; but loses because she imports over 80 percent of its fuel needs from abroad.

Also, if crude prices go up, petrol prices increases, and if crude prices go down, petrol prices still increase because foreign exchange will be scarce, Omofoman explained.

He described the current predicament of subsidy payment that the country is in as lose-lose situation because it either subsidizes and NNPC under-recovers or it deregulates and spends the money saved on subsidy on solving social woes created by the deregulation.

“We are screaming that recurrent expenditure in the budget is so high, it would also double if you deregulate. Imagine how much petrol would be if dollar hits ₦500 again, nobody can buy it,” he mused.

Making a comparison between complete deregulation and floating the naira, he said: “It is almost like when we tried floating the naira, and when it hit N520, we all had sense, and realized we couldn’t survive.”
It is another way to kill an economy that is import dependent, he noted.

Also, on the issue of supposed savings from subsidy payments, he said the revenue earned from crude sales is disbursed by FAAC and nothing except in excess crude account, so if there is no subsidy, the money saved from not having to pay subsidy goes to FAAC and FAAC shares the money to the tiers of government, the various states and FCT.
The higher allocation to states does not mean that more capital projects would be undertaken because the government increased petrol price from ₦97 to ₦145, two years ago and no significant increase in capital projects has occurred since then.

There are those who strongly believe that the failure to deregulate the downstream sector of the economy is a big problem. Egie Akpata, director at Union Capital Markets Limited strongly believes that money being spent on subsidy is not actually benefiting everyone, particularly the less privileged, who are always used as defence to keep the downstream unregulated.

“There are policies that should have been done that would significantly change the trajectory of how our economy is doing – simple things like deregulating the downstream petroleum sector and removing the drain on government resources, and fixing the power sector, fixing the tariffs, just basic fixes that can be done that are slowing the economy down.

“So number one for me would be downstream petroleum deregulation, because of the cost to the government. There is no benefit, just no advantage; it is similar to the deregulation of the telecoms industry. Government should get out of downstream and that would save hundreds of billions of naira every year and would create tens of thousands of jobs and bring the whole downstream back to life. The money saved can be used for other things that only the government can spend on, like education, health, security and the rest,” Akpata told business a.m. in an interview.

However, Omofoman said that more transparency is required on the part of Nigerian National Petroleum Corporation (NNPC) and adds that the under-recovery process is what needs to be managed.

The over-reliance on petrol as the energy source for the economy needs to be addressed and solving these three key challenges, especially refinery capacity would go a long way to prepare the economy for complete deregulation.

Having a proper and efficient mass transit system is another factor that can aid complete deregulation because people won’t depend so much on individual cars and small buses to move around. It is still one of the major reasons why queues at fuel stations keep recurring.

The other one is electricity, because people need electricity to go about their daily businesses and since power supply is irregular they resort to generators, which are powered with petrol and diesel.