Leadership (Abuja)
Jerry Uwah
9 September 2008
opinion
The fact that the price of automotive gas oil (AGO), popularly known as diesel, has spun out of control is no longer news. The price of the product is sailing perilously close to the N200-per-litre mark. The news, however, is that you can obtain the essential petroleum product at one-third its pump price if you have the right contact at the Nigerian National Petroleum Corporation (NNPC). There was a time when many people opted for the purchase of diesel-powered generators, apparently because the fuel it burns (diesel) was not only cheaper but delivers more energy than premium motor spirit (PMS), popularly known as petrol. Today, the case is different. The scene in the Nigerian energy market has changed drastically. The pump price of diesel is now more than two times that of PMS. When former president Olusegun Obasanjo assumed power in 1999, the pump price of diesel was N17 per litre. The man, who may go down in history as the Nigerian leader that effected the highest number of fuel price hikes (about 14 times), eventually used the product for his ill-fated experiment on the deregulation of the downstream sector of the nation's oil and gas industry.
The former president dreamt of a situation where marketers would import fuel and sell at a price fixed by an interplay of market forces of demand and supply. The public resistance to the deregulation policy was so stiff that the former president could only extend it to less popular refined petroleum products like diesel, cooking gas and aviation fuel which, he argued, were being largely consumed by the elite. He could not extend the policy to the pricing of PMS because of the resistance by the organised labour and the fear of inflation spinning out of control. Despite the resistance, Obasanjo managed to push the price of PMS so high that government subsidy on the product at a certain point was less than N10 per litre. Today the federal government subsidy on a litre of PMS is close to N50. That is why government has turned a deaf ear to repeated calls from even the NNPC for diesel to be slipped into the Petroleum Support Fund (PSF) to enable consumers of the product enjoy government subsidy. The way things are going, it is obvious that the suffering of diesel consumers is just beginning. Nothing short of a drastic fall in crude oil prices in the international market could force down the price of the product, because the chances of local refineries meeting the ever-rising demand for it has continued to dwindle.
Two major factors have been blamed for the surging price of diesel in the country. The first is the sudden rise in consumption rate. This factor, though, could not be traced to a commensurate increase in economic growth in the country. Instead, it is imposed on the economy by the near-total failure of public power supply. Most of the factories and private homes in the country now generate their electricity through diesel-powered generators. Consequently, the diesel consumption rate in the country has risen from 12 million litres per day in 2005 to 15 million litres now. The public power situation has been so bad that some communities spend weeks without electricity. Researchers contend that diesel accounts for 30 per cent of the overhead cost of manufacturers and financial services providers.
The second reason for the high cost of diesel is the main thrust of this article. It has to do with the dichotomy in the pricing regime of the product. There are claims and counter-claims about the NNPC paying $12 million to militants to secure the pipelines for the supply of crude to the embattled refineries. This article is not on the veracity or otherwise of that claim. However, since the story first emanated from the NNPC itself, it is almost certain that the state oil monopoly lost that huge sum to some people in the guise of settling militants. It may actually not be the militants who collected it. The only certainty is that since the controversial payment was made, there has been improvement in the flow of crude oil to the refineries.
With the free flow of crude to the refineries, and millions of dollars spent on turnaround maintenance of the refineries, there has been significant improvement in the quantity of diesel flowing from local refineries into the supply system. Ironically, the increase in supply of locally refined diesel has only succeeded in exerting upward pressure on the pump price of the product, despite the fact that NNPC has artificially held down its ex-depot price (the price at which it sells to petroleum products marketers).
The NNPC is a strong advocate of subsidy on the price of diesel. One would, therefore, be tempted to conclude that it is on this basis that the corporation had opted to keep the ex-depot price of locally refined diesel well below its market price. The corporation has resisted promptings from the Petroleum Products Pricing and Regulatory Authority (PPPRA) to mark up the ex-depot price of locally produced diesel to meet the international market rate. In fact, NNPC once argued openly in favour of government subsidy for diesel in view of the abysmal performance of the Power Holding Company of Nigeria (PHCN). There is the contention, therefore, that the corporation is maintaining the ex-depot price of locally refined diesel at an abysmally low rate as a subsidy which has to be reflected on the pump price of the product to the benefit of consumers.
Ironically, that faulty economic reasoning in a deregulated market, which the NNPC has no control over, is at the moment causing distortions in the market. It has discouraged independent marketers who have no access to cheap diesel from local refineries from importing enough of the product. The resultant artificial scarcity is partially to blame for the escalating pump price of the product. It is surprising, however, that even as the pump price of the product surges to a record N160 per litre, the NNPC still sells the little that sips out of the nation's crippled refineries to major marketers at a dubious price of N65.15 per litre. The landing cost of imported diesel now hovers around N143 per litre. Independent marketers have alleged that locally refined diesel distributed by the NNPC goes only to major marketers with the right connection to the corporation.
There is nowhere in Nigeria that diesel sells for less than N150 per litre – not even in NNPC's corruption-tainted mega stations. So, who rakes in the more than 150 per cent profit from the retail of locally refined diesel? Besides, why is the product not shared evenly among independent and major marketers if the subsidy was meant to be passed to consumers? The logical conclusion, therefore, is that some people somewhere in NNPC, and probably top politicians, have their own cut from the scandalous pricing of locally refined diesel. The corporation claims to obtain crude oil for the refineries at international prices. Why then does it sell the finished product at rock bottom price in a market that it cannot control? One thing is certain: NNPC is convinced that the dichotomy introduced into the pricing of diesel cannot transcend the ex-depot price. In other words, marketers in a jaundiced economy like Nigeria's cannot operate two different pump prices for the product, which is the only way the subsidy could be passed to consumers.
Besides, NNPC is not in a position to flood the market with locally refined diesel to enable it dictate the pump price. It therefore does not make economic sense to sell locally refined diesel below international market price. In fact, there are claims that the margin between the ex-depot price of locally refined diesel and the international market price of the product is shared with some top politicians. NNPC is short-changing the federal government by operating two sets of prices for imported and locally refined diesel.
The solution, therefore, is to ensure appropriate pricing of the product with a view to depositing the huge margin into the federation account. We cannot allow a handful of people to continue to reap huge gains at the expense of the public. In fact, the current development in the diesel market does not justify the huge sums spent by the federal government in the last 15 months to get the refineries back on stream. It is even more scandalous to notice that the price of diesel is spinning out of control after the colossal sum of $12 million was squandered by some people in the name of settling militants.
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