For Nigeria, the internal pain of rising oil price

Crude oil prices have reached the highest mark the global market has seen since 2014. Oil exporting countries are counting profit from the long desired oil price recovery. In Nigeria however, the profit is coming with internal pain.

When crude oil prices approached the $60 per barrel mark towards the end of last year, the business of importation and sales of refined petroleum products reached a break-even point. Given the fixed pump price of N145 per litre against increased landing cost, profit margin vanished and importers of the products backed out suddenly.

Typical of government institutions here, Nigerian National Petroleum Corporation (NNPC) seemed to have desired crude oil price rebound but didn’t expect it. Hence there was no preparation either by way of fixing the local refineries or for an eventual return to subsidizing importation of petroleum products. Neither was there any plan for pump price increase in a highly charged political climate.

By December 2017 when marketers stopped fuel importation, oil price had sustained recovery for about six months since the rebound in July. The breakout of fuel scarcity in December was therefore foreseeable and has been read as a confirmation that somebody in NNPC didn’t do his job.

In the ensuing embarrassment to the nation and the government, NNPC emerged overnight as the sole importer of refined products. Petroleum products scarcity is clearly unacceptable to the Buhari-led government, hoping for a second term bid next year. The cost at which it has to happen is a secondary consideration from government’s perspective.

The corporation’s initial denials of the existence of petroleum subsidy provided a temporary cover for its inefficiency and failure to act timely. Denials of subsidy soon gave way for an admission of under-recovery of cost. Technically speaking, NNPC isn’t subsidizing any importer of petroleum products neither can it subsidize itself. That places it safe with lawmakers that are anxiously looking for who should be slain for spending out of budget.

NNPC is however unable to recover the difference between the landing cost of fuel estimated at over N170 towards the end of last year and the pegged pump price of N145 per litre. That differential expectedly increases with every increase in crude oil prices. How some marketers are still able to dispense the product at slightly below N145 remains to be explained.

NNPC is losing money as per the figures disclosed but it is making everyone else to share in the losses. It charges the under recovered cost to the federation account by netting it off its remittances to the account. That again provided a temporary cover to hide the losses until the swelling cost began to dry up remittances to the federation account lately. The revenue sharing committee has just begun to learn the hard way how a good part of the consolidated revenue fund is being spent on behalf of the three tiers of government upfront, unnoticed.

The squeeze of government revenue has come at a period when the fiscal authorities need aggressive stimulatory spending to speed up the momentum of the economy just coming out of recession. It is also a time when state governments are desperate for increased federal allocations to attempt cutting down piles of salary arrears to workers.

Nigeria, though an oil rich nation, with a daily crude oil production target of 2.3 million barrels per day, suffers from a contradictory crude oil refining poverty. The country’s three refineries with a combined installed capacity of 445,000 barrels per day, worked at an average of 18% in 2017, according to data from NNPC.

Maikanti Baru, NNPC’s group managing director, said the corporation was supplying 55 million litres of petroleum products to the domestic market daily even while product scarcity persisted. He promised to nearly double the figure to 100 million litres per day, mostly by importation. According to Baru, NNPC spent N1.8 trillion on petroleum products importation in the last two months of 2017 when average daily products supply dropped from over 55 million barrels in October to 36 million barrels.

The bad news is that Nigeria is unable to maximize the gains accruing from rising crude oil prices, a good part of which is being consumed by under recovery of import cost. The country again faces a big chance of missing yet another opportunity of translating increased earnings from crude oil sales into economic development.

Crude oil price is already about $30 above the 2018 budget benchmark of $45 per barrel but how government can retain the gains and reduce the pain of fuel importation is a major challenge. Nigeria’ economy is likely to stay in the region of underperformance as long as the authorities are unable to maximize the benefits of the present crude oil price recovery.

Options open to government are quite limited for now. Oil exporters have a good chance of achieving their target crude oil price of over $80 per barrel but that means increased under recovery cost for Nigeria. Pump price increase appears to be a ‘no go’ area for government looking forward to facing a largely impoverished electorate in a general election some months away.

Neither can a new government even if formed by the opposition reasonably jerk up pump prices in the short-term. Lawmakers have directed that under recovered cost should be recognised as subsidy and duly captured in the federal budget.

How long another subsidy era will last will depend on what happens in the area of local refinery capacity building. As the state run refineries continue to falter, Nigeria may have to wait until Dangote’s 650,000 barrel-per-day refinery and petrochemical plant comes on stream in 2019, according to official schedule.