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‘Why petrol price is high despite crude oil plunge’

By Saxone Akhaine (Kaduna), Roseline Okere and Sulaimon Salau (Lagos)
23 December 2015   |   3:38 am
Oil exporting countries including Nigeria, currently struggling to sell their crude are going to feel the direct impact of the fresh decision by the U.S. Congress to lend a 40-year ban on crude oil exports.

Oil Vessel

• Nigeria’s market faces more glut as U.S. begins export
• Kaduna refinery resumes, releases 1.5m litres for sale

GLOOMIER days seem to lie ahead for Nigeria’s crude oil market, as the United States (U.S.) is set to begin export of crude to the international market just as oil and gas experts have identified non-deregulation of the downstream sector, devaluation of naira and high cost of lending as reasons behind the high cost of petrol in the country.

Oil exporting countries including Nigeria, currently struggling to sell their crude are going to feel the direct impact of the fresh decision by the U.S. Congress to lend a 40-year ban on crude oil exports.

Meanwhile, in an effort to arrest the acute fuel scarcity across the country the Kaduna Refining and Petrochemical Company (KRPC) has resumed production n with an additional 1.5 million liters of fuel pumped into the domestic market.

The Managing Director of KRPC, Alhaji Saidu Aliyu, told journalists yesterday that the pipelines had been fixed while the plant was receiving supplies of crude oil.

Countries like the United Kingdom and the U.S. have reduced their fuel prices to amounts commensurate with the declining oil prices.

For example, the average price of a gallon of regular, unleaded gasoline in the U.S. has fallen in conjunction with global crude oil prices since June last year.

Also, petrol prices, which have fallen consistently over the previous months, currently stand at an average of 108.01p per litre in the U K.

Diesel is at 110.2p, nearing the September price of 109.8p which was its lowest since December 2009.

But the reverse is the case in Nigeria as price of Premium Motor Spirit (PMS) may still be hovering between N87 and N97 from next year, instead of actually falling.

Though the Federal Government announced a reduction in the price of petrol from N97 to N87 per litre in January this year, saying the N10 reduction in fuel price was necessitated by the reduction in crude oil prices in the international market, consumers were looking forward to further reduction since crude has fallen below $35 per barrel.

According to the GlobalPetrolPrices, a litre of fuel in Venezuela sells at $0.02; Libya, $0.14; Saudi Arabia, $0.15; Algeria, $0.20; Kuwait, $0.21; Bahrain, $0.26; Qatar, $0.27; Iran, $0.32 and Nigeria, $0.42.

Speaking with The Guardian on why petrol price is still high in Nigeria despite the declining crude oil prices, Head, Energy Research, Ecobank Development Company (EDC) Nigeria Limited, Dolapo Oni said: “The first is devaluation. As we are fully dependent on imports for our petroleum products currently, we are exposed to the higher foreign exchange rate compared to last year. As oil prices continue to drive lower, the demand for ships to buy the crude for storage till prices recover has forced the freight rate of ships to increase, thus the freight component of getting the products into the country has also increased.

“The second reason is tied to the first. The refineries are down hence the cost of the products which used to be moderated by the lower cost refinery output now comprises only high cost import products, which, based on the Petroleum Products Pricing and Regulatory Agency(PPPRA) template are still worth more than the official pump price of N87.

‘‘The government doesn’t have the funds to continue paying fuel subsidies and should not be dedicating its scarce funds to that purpose, hence the decision to raise fuel prices back to N97 would, however, not amount to subsidy removal as recovery in oil prices above $40 could see the open market price for PMS rise above N97. At that point, government would have to either increase prices again or start paying subsidies.”

Also, the Director-General of Lagos Chamber of Commerce and Industry (LCCI), Muda Yusuf, said the good news about the declining crude oil prices was that it was expected to likely moderate the cost of fuel importation.

According to him, “the share of the nation’s resources committed to fuel importation and fuel subsidy is horrendous and perhaps scandalous, since declining oil price was supposed to moderate the cost of petrol.”

On why there was no reflection, Yusuf, an economist, said the country did not have a downstream market because government fixed all the prices with all manner of interventions, like subsidies.

“We don’t have the kind of market mechanism that can easily reflect changes in some parameters. Even if it reflects, it will not show.  If we have such a market, competition will force prices to come down. In the downstream, we don’t have what is called a proper market, so the reflections happening in the global arena can hardly reflect locally.

“The cost of fund is well over 20 per cent, which is making it difficult for importers to service their loans and all these add to the cost of petrol.  There should be deregulation, which will allow competition and eventually, the price of petrol will crash. If government allows deregulation, the price of fuel should not be more than $87,” he said.

To the past Head of the Department of Petroleum Engineering and the Deputy Director, Centre for Petroleum, Energy Economics and Law, Dr. Olugbenga Falode: “It is a demand and supply scenario that you see everywhere. If the demand is high and the supply is short, the price will go up. It is quite unfortunate that Nigeria’s refineries that were built to refine the country’s crude oil are not producing up to full capacity which has made the country to depend on importation of petroleum products.”

Falode therefore called on the Federal Government to resuscitate refineries and make them work to full capacity to meet local demand for petrol.

The U.S. Congress has approved the lifting of the ban as part of a $1.1trillion spending bill, which included a provision that would allow the export of crude for the first time in more than 40 years.

The bill was later signed by President Barack Obama.

Nigeria recently lost its biggest customer, the US, which now buys only a small amount of Nigerian crude oil due to the rise in domestic shale production, and the nation has found solace in India.

The sustained decline in crude oil prices since June 2014 has exacerbated the dwindling fortunes of the Nigerian crude, with the crude differentials trading at a 11-year low as at yesterday.

U.S. crude futures fell 53 cents at $34.20 after bouncing off an intraday low of $33.98. Brent futures were down 61 cents at $36.27, falling as much as two per cent during the session to a low of $36.04 a barrel, its weakest since July 2004.