Amidst the heat of a global health pandemic – the corona virus and battle of power between oil giants – Saudi Arabia and Russia, the federal government of Nigeria made the decision to slash the pump price of fuel from N145/litre to N125/litre. President Muhammadu Buhari has always seen himself through the lens of a socialist; hence, this move, perceived to improve welfare of common Nigerians attracted some euphoria after its announcement.
My reservation on this cut in fuel price is that it is not the best thing for Nigerians.
A little background to crude oil pricing in Nigeria. Crude oil is extracted in Nigeria creeks, but refined abroad because local refineries are rusty and inept. Therefore, Nigeria with its huge crude oil deposits literally imports refined crude oil at exorbitant landing cost. Since the government wants fuel to be sold at the landing cost, they must pay oil marketers the difference between the determined market price and the landing cost. This is termed fuel subsidy
According to recent data released by Petroleum Products Pricing Regulatory Agency, PPPRA, landing cost of fuel (which comprises the production and freight cost) dwelled at N141.07/litre in January 2020 dropped to N92.89/litre as at 11th March 2020.
Alluding to these figures, the recent directive to reduce oil price is simply because the landing cost dropped to N92.89 – nothing more! The danger with this move is this – When the oil market recovers and the landing cost rises again, the Nigerian government will have to pay more subsidy to oil marketers to keep pump price at N125. This extra burden will wear out fiscal revenue and hinder capital expenditure development in Nigeria.
More so, if the government tries to raise the price back to N141/litre, there will be far too much outcry, protest and civil unrest.
Another reason I don’t share the ecstasy of the slash in fuel price is because Nigeria’s 2020 budget is severely threatened by the crash in oil price and oil demand. The government, looking for alternative means to raise money, has probably found solace in oil revenue from domestic sales. To grow fiscal revenue through revenue from domestic sale of crude oil, the slash in pump price would lend support.
Again, my concerns with this probable motive are these:
- Even if the federal government raise some extra cash through domestic sales, these would go into recurrent expenditure, which raises consumption and inflation, reducing the real income and welfare of Nigerians
- Nigerians would likely buy more fuel in their cars and generators and this only means it will take a longer time to effect any significant improvement in our power sector, air pollution soars and global warming exacerbates
Reducing fuel price is suited in a country where the market price is originally unsubsidized. It should also not be a reaction to a ‘crashing’ oil market to create tangible welfare effects.
Since this is the case in Nigeria, the slash in oil price is not worth the noise.