On oil exports and pricing of locally refined products

Dangote Group has reduced the price of premium motor spirit (PMS, generally known as petrol) twice within a space of 26 days. The current price at N825 per litre dropped by N65 from N890 in February. The very first time in January, it came down by N60 from N950 per litre to N890. This again is an expression of the many advantages and attractive benefits of sourcing refined products from within the economy. These moves cumulatively create confidence in the local currency exchange rate, at the end of a financial transaction cycle. Obviously, there is no gainsaying the fact that the domestic sourcing of refined products is preferred to imported products, considering its attached foreign exchange stress and other financial overhangs on the nation’s external reserves, among many other economic and financial advantages. By this commendable action of the Dangote Refinery, the instrumentalities in the economic principles of competitive pricing modalities have not yet been invoked, nor do the forces of demand and supply come into play in the nation’s energy market. It is again understood that the landing cost of imported products, through the products’ import licenses issued by the NNPCL to product marketers, stands in the neighborhood of N927 per litre.

The Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) disclosed two things on domestic consumption; that petrol’s daily consumption has dropped from 66 million litres to 50 million litres since after removal of fuel subsidy; and that the three functional local refineries (Dangote, old Port Harcourt and Warri) are not supplying enough fuel but just 50 percent of the nation’s consumption. On this particular issue of the confirmed shortfall in petrol supply, disclosed by Ahmed Farouk, the chief executive of NMDPRA, (warranting importation of petroleum products to meet up), the conflicting and confusing aspect, therefore, is the volume of Nigeria’s domestic daily demand (ddd) of petrol (as already indicated as 50 million litres, for instance), versus the cumulative production capacity of the three refining plants (Dangote, Port Harcourt and Warri) known to be far above the ddd. From their respective nameplate production capacities – 650,000 bpd, 65,000 bpd and 125,000 bpd, respectively – coming to 840,000 bpd (cumulatively), these ought to conservatively yield at least 54 million litres of petrol (at their present production capacities). 

The national oil company (NNPCL) not too long ago debunked PMS importation reports in February, while the regulators in the oil industry, the NMDPRA, through Ogbugo Ukoha, its executive director, distribution system, storage, and retailing infrastructure, maintains that the country still relies heavily on petrol imports with over 50 percent from overseas, to avoid fuel scarcity in the country. What one expects from these two organs of the federal government in the land are measures, modalities, strategies or processes that help to improve on the exports of refined products whose raw materials, sourced locally, are now being purchased and supplied in our local currency. The NMDPRA can only contribute to the nation’s economic growth when it reduces imports of refined products and at the same time supports the local refineries by increasing their crude oil local supplies in naira denomination. This strategy simply means that a total and sharp shift will be a turning point in the reversal of foreign exchange equilibrium for naira and any other foreign currency (like the United States dollar). Though the status quo has remained (especially in the recent past), the total export of Nigeria’s crude (TE) either in product swapping or outright sale in USD. On the other hand, in a reverse order, is the inward bound refined products imports (PI), fully paid in USD, either with a subsidy policy or not. However, with the ongoing improvement in the oil industry, with locally refined products (LR) being processed in naira denominated value, the refined products exports (RP) is, of course, being sold in USD denominated value as well. 

In practical terms, mathematical expression of this macroeconomic analysis of the entire financial transactions of all captured hydrocarbon businesses and economic activities in the petroleum industry is subsequently presented. Contributions from the oil industry in growing the economy and development of the nation do not in any way exclude the hydrocarbon deals on crude exports and refined products exports and imports. Historical analysis has always shown that the nation’s economy is significantly influenced by the foreign exchange earnings through the exports of crude oil. At the same time, the economy equally suffers financial stagnation and unimpressive macroeconomic performance in national development due to over dependence on virtually all domestic daily demands of consumed refined products in powering the economy. The nation’s productivity profile could therefore be measured in mathematical terms as follows; knowing that the gross domestic product (GDP) means the same as the national economic efficiency (NEE). Where NEE = Investment (Inv) + Consumer Expenditure (CE) + Government Expenditure (GE) – Imports (Imp). 

Considering the national annual budget, and the yearly product imports (PI) that service ddd, in any given year, a very huge and significant amount in USD is always being spent. Product import (PI) leaves little or nothing that was earlier earned as proceeds from the total exports of Nigerian crude/TE because it is an import element that constantly drains the nation’s foreign reserves (all being USD transactions). This uncomfortable scenario, therefore, brings the entire exercise to futility for the economy. However, with the backward integration policy of local refining (LR), and the import substitution policy of sourcing refined products locally (which completely neutralizes Imp/the import element in the NEE equation), the gains made from refined products exports (RP) therefore, add up to represent the rest of NEE equation (Inv + CE + GE) both in USD and naira denominations, to significantly improve the strength and status of the local currency, the naira. This is what both the NNPC and NMDPRA must pursue for Nigeria’s economic prosperity and the survival of the local currency; by its gaining tremendous strength in the foreign exchange market.     

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