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Higher inflation concerns for consumers, firms over grim fuel market outlook

By Femi Adekoya
14 September 2022   |   4:10 am
Though the price of diesel eased a little in the past few days as a result of the drop in the global price of crude, consumers hoping to see lower diesel prices or drop in inflation rate anytime soon may be disappointed as global fuel markets are expected to stay tight for some years to come.

crude oil

Though the price of diesel eased a little in the past few days as a result of the drop in the global price of crude, consumers hoping to see lower diesel prices or drop in inflation rate anytime soon may be disappointed as global fuel markets are expected to stay tight for some years to come.

According to the latest report on the global oil-refining sector by the International Energy Forum (IEF) and S&P Global, record volumes of refining capacity have been shut down over the past two years, which will lead to tight global fuel markets that is expected to last, at least, through the middle of this decade.

The report showed that between 2020 and the middle of 2022, as much as 3.8 million barrels per day (bpd) of gross atmospheric crude distillation capacity closed, exacerbating tight markets and price volatility.

Indeed, new refinery start-ups remain delayed by issues related to supply chains, labor, and capital. Some of such refineries include, 615 kb/d Al Zour refinery in Kuwait and 650,000b/d Dangote refinery in Nigeria.

The report says global fuel markets are going to stay tight for years as new capacity takes time to ramp-up. In the medium term, investment in new refining capacity is expected to be muted by forecasts that show global petroleum demand plateauing as electric vehicles replace combustion engines.

Already, there are concerns that many developing economies may be unable to bear the shock from rising energy prices, therefore spiking inflation further. Many oil firms and analysts have projected a volatile outlook for oil prices.

Reduced refining capacity means that fuel demand, such as for petrol and diesel, cannot be met by refiners regardless of whether crude supplies increase, even as spare capacity is also running low because of a lack of investment in exploration and production.

For Nigeria, which is dependent on importation for refined fuels, the prevailing exchange rate crisis and revenue challenges are putting a strain on fuel prices and operating expenses of many firms.

Locally, governments and businesses are beginning to adjust expectations for the 2023 fiscal year, considering that energy prices will remain elevated alongside higher inflation levels, which are expected to affect consumer spending and production costs. At over N750 per litre, there are concerns that another spike in oil prices will spell doom for those dependent on diesel.

While the cost of PMS is still moderately tolerable because of the subsidy regime that is still currently being provided by the government, the federal government has denied plans to subsidise the price of diesel, considering the present high fiscal deficit in its account.

Going forward, fuel markets are expected to remain tight for years to come as new capacity scheduled to come online will take time to ramp up. More than 2 million bpd in net capacity is scheduled to come online by the end of 2023, but history shows delays and operational challenges could stall progress, the IEF report noted.

“The expectation that the energy transition could make refineries stranded assets has deterred investment. The last major greenfield fuel refineries are likely FID’d and will come onstream in the next few years,” the authors of the report wrote.

An earlier statistical review of world energy by BP, showed that global coal-fired electricity generators are producing more power than ever before in response to booming electricity demand after the pandemic and the surging price of gas following Russia’s invasion of Ukraine. Indeed, the price of gas and diesel is pushing the world to other alternatives.

Members of the Organised Private Sector (OPS) stated that the cost of operation and production have gone up from between 30 to 100 per cent as a result of the exchange rate and energy crisis.

Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, stated that high inflation and energy costs continue to take a toll on businesses in the forms of increased production costs, elevated operating costs across sectors, declined profit margins, slump in turnover and sales and risk in business sustainability in many segments of the Nigerian economy.