The nagging question for any observer of the fuel business is whether or not it is realistic for diesel to sell above petrol and kerosene prices in a deregulated market space? In other words, how does NNPC account for the present huge price differentials for both products, when diesel sells for over N200/litre without subsidy?

The following is a summary of an article published in May 2016, titled “Why Petrol will exceed N200/litre this year…unless”; nevertheless, with NNPC’s seeming helplessness and confusion with petrol and kerosene prices, “Fuel price: the bone in NNPC’s throat” seems a more appropriate title for this piece. Please read on:
“The Minister for Petroleum Resources, Ibe Kachikwu, recently, repegged petrol price from N87 to N145/litre; the NNPC GMD, was however, clearly cautious to avoid a definite declaration that the petroleum downstream sector had become fully deregulated with the fresh price increase; instructively, however, NNPC’s seeming dictatorial price hike is clearly inconsistent with a deregulated market and certainly contrary to organized Labour’s position that Kachikwu’s unilateral price hike is judicially indefensible without PPPRA approval. 

Evidently, nonetheless, any cap on petrol and kerosene prices, will undeniably sustain rent seeking in the distribution chain at the expense of the public, and also negate any attempt to deregulate the market. 
Although, Kachikwu indicated that importers will source forex at about N280=$1, he did not explain how parallel market exchange rates will be restrained below this ceiling, particularly when fuel importers, who usually consume almost 40percent of CBN’s total forex supply, ultimately descend on a less liquid black market to source billions of dollars constantly required for fuel imports.

The deregulation of the petrol market will remain inchoate with severe market distortions, if fuel price and the applicable Naira exchange rate for imports remain centrally regulated. Furthermore, the surge triggered by fuel importers for parallel market dollars will certainly exceed supply and further spike the dollar exchange rate. Indeed, if for example, dollar sells for N300 and above, import bills will obviously also rise and make N145/litre petrol price unsustainable. In fact, unless the price caps for petrol and kerosene are lifted, marketers will refrain from direct import, and NNPC may once again monopolise supply as sole importer. 

However, if Naira continues to depreciate, the retention of N145/litre petrol price, will inevitably bring back subsidy, and we may, once more require a supplementary Appropriation bill to fund unbudgeted petrol and kerosene subsidies this year; consequently, the usual profligate annual subsidy provisions would inadvertently, sadly return with a vengeance of about 100percent of the current N145/litre regulated price.
Consequently, we would ultimately require over N4bn/day subsidy for the estimated daily consumption of 40million litres, i.e. about N1.5Tn provision annually!

Worse still, in place of relief, if crude oil price rises beyond $50/barrel; we will, ironically, become apprehensive that such increased revenue will ‘unfortunately’ instigate much higher fuel prices and bring back subsidy, if the price cap on petrol and kerosene remains. Consequently, if crude prices ‘fortunately’ further rebound, petrol and kerosene price must also be hiked beyond N145/litre to avoid funding subsidy.

Indeed, in several African markets, where deregulation exists, average pump price is about $1/litre, irrespective of whether these countries export crude oil. Thus, if Nigerian importers access dollars at N280, they would in turn, probably sell petrol for between N240-N300/litre. Consequently, weaker Naira exchange rates will propel higher petrol prices and drive higher inflation rates in an appropriately deregulated market.

Infact, if importers purchased dollars at N280=$1, it would be commercial suicide to sell their petrol stock for USD50cents or N145/litre, unless of course, subsidy is again re-introduced, with its warts and all, in a macabre one step forward, two steps backward movement. Furthermore, domestic pump prices below USD80cents will invariably encourage massive cross border smuggling of Nigeria’s relatively cheaper fuel.

Thus, a notably plausible resolution to the inflationary and oppressive consequences of rising fuel prices and the avoidance of oppressive subsidy values, will infact be a stronger Naira exchange rate. For example, if fuel importers could purchase dollar with N100=$1, fuel pump price may not exceed N100/litre; consequently, up to N45/litre (about N2bn from 40m litres daily consumption) can be recovered as petrol tax, if petrol price remains unchanged at N145/litre; evidently the additional N800bn annual sales tax revenue (over 12percent of 2016 budget) in place of subsidy allocations of about N1.5Tn, will certainly go a long way in remediating our decayed infrastructure.

It may seem nonsensical to suggest a stronger Naira exchange rate, when it seems apparent that unless we earn more dollars, it would be inappropriate to expect a stronger Naira. Nevertheless, no one has satisfactorily explained why the Naira exchange rate remained almost static all through the preceding bountiful years of premium crude prices, when Nigeria’s exceptionally high dollar reserves soared above $60bn. 

Media reports of the gross abuse of CBN’s farcical dollar liberalization include the weekly funding of over 3,000BDCs with US$60k. Furthermore, CBN recklessly, liberally funded outflows of $150,000.00 annually for personal spending abroad, with Naira denominated debit cards, when infact well over 100million Nigerians earn less than N1m ($5,000) annually. Worse still, several Nigerian tourists have also been apprehended abroad with Millions of dollars cash and dozens of debit cards en-route from Nigeria. Indeed, only an arch enemy of Nigeria could have come up with such a disingenuous way of emasculating our currency and destroying our economy and values. It is regrettable and inexplicable that our best ever external reserves, which reportedly provided over 20months imports cover in recent years, inexplicably, never really promoted the Naira exchange rate beyond an extremely rare 3percent appreciation at anytime.

Similarly, even if crude oil price unexpectedly spikes significantly, the expected increase in dollar revenue and reserves may not also, as in the past, translate to a stronger Naira. Indeed, the substantial additional export revenue expectation from successfully diversifying our economy will unfortunately, realistically, still take between 3-5years to materialize, that is, even if the pivotal, erstwhile elusive enabling monetary indices of inflation and cost of funds below 3percent and 7percent respectively can evolve. Thus, if crude prices remain low, the pressure on Naira exchange rate will persist for some time and higher and higher fuel prices in excess of N200/litre will invariably prevail to further drive inflation beyond limits that would promote economic stability and enhance social welfare and security.

The Naira’s lowly fate will undoubtedly remain sealed and fuel prices will continue to spiral for as long as CBN deliberately continues its monopolistic auctions of dollar rations for higher Naira bids, in a market, that is ironically already, awash with surplus Naira liquidity. Unfortunately, the sytemic ‘Nuisance’ of excess Naira supply, invariably also, compels CBN to sterilize some of the surplus funds by borrowing same at unreasonably high cost; notwithstanding the inherent drawbacks of crowding out the real sector from cheap funds, and further restraining the domestic industrial capacity to increase productivity and create more job opportunities.

So, if we cannot strengthen the Naira by improving market dollar supply in the medium term, we urgently need to identify the main cause of the curse of the persistently surplus Naira supplies that instigate both inflation and weaker Naira exchange rate, when CBN deprecates Naira value at its invariably lopsided regular dollar auctions. The continued denial of CBN betting against the Naira will condemn any hope of inclusive growth or a diversified and prosperous economy. Thus, unemployment and inflation rates will sadly remain unbridled and pose increasingly serious threats to our social welfare and national security.”