Fuel subsidy, price increase by IMF modulation (2)
Continued from yesterday
THE Ministry of Petroleum Resources emphasised President Buhari N87/litre “for now” statement and plan to begin the implementation of the updated IMF strategy in January 2016. Dr. Ibe Kachikwu, the Minister of State for Petroleum Resources is reported to have said, ” So for the first time, people will understand that the pricing modulation I was talking about is not a gimmick. It is for real….The objective is that one, we cannot afford to continue to subsidise… We can’t even understand where those subsidies were going to. There are a lot of fraud elements in it so we need to cut that off… At today’s price, there is no subsidy and that is why I have gone away from the use of the word ‘subsidy’ and have continuously said that I am more on the page of price modulation. How do we look to fluctuate the market to reflect market dynamics.” This sounds like the former Petroleum Resources Minister, Diezani Alison-Madueke, promoting the IMF fuel price deregulation policy in December 2011. The similarity is because both efforts are rooted in the IMF policy of fuel price deregulation/fuel subsidy removal.
The IMF explained why an automatic, pseudo-independent mechanism or price template is essential to the updated strategy of price modulation or phase-in (The Unequal Benefits of Fuel Subsidies Revisited: Evidence for Developing Countries. IMF Working Paper WP/15/250 November 2015). The report stated: “Depoliticize energy pricing – Successful and durable reforms require a depoliticised mechanism for setting energy prices. Establishing an automatic pricing formula for fuel products that links domestic energy prices to international energy prices can help distance the government from the pricing of energy and make it clearer that domestic price changes reflect changes in international prices that are outside the government’s control.”
So, we can see that the IMF updated fuel subsidy removal strategy is the source of Kachikwu’s price modulation or subsidy phased-out proclamations. It does not matter whether they call it fuel subsidy removal, fuel price deregulation, phase-in, phase-out, price modulation, price adjustment, price liberalisation, automatic pricing mechanism, sequential pricing or any other fancy name; it is an IMF arrangement. A rose by any other name is still a rose. Furthermore, Kachikwu declared that the Ministry could not understand how the fuel cabal operates the process of fuel subsidy corruption. On December 27, 2015, the PPPRA PMS pricing template put the expected open market price (OMP) at N93.45 a litre for a “fuel subsidy” of N5.45/litre.
At the top of the template was the declaration that the template was “based on average Platts Prices for December 24, 2015.” The template starts with the C+F or product cost. This is the monthly moving average cost of PMS for North West Europe (NWE). Thus, the foundation of the PPPRA PMS price is determined by a foreign firm/market. Labor is a commodity like crude oil, PMS, diesel and kerosene. Using the PPPRA template as a model, the NLC and TUC can develop a wage template based on a European monthly moving wage average (national minimum wage of 6.70 pound sterling per hour or N314096 per month) as quoted by HMRC (Her Majesty Revenue and Customs) in London. The template can start with this European national minimum wage as C+F or labor cost. Future national minimum wage negotiation could use such an import-parity wage template. No Nigerian family of six can live on N18000 per month with import-parity priced fuel.
Platts Oil is interested in providing information for profit and not in the development of Nigeria. In September 2015, Platts Oil launched two new assessments specifically to determine prices of PMS import from Rotterdam (NWE) to West Africa. These were the West Africa Gasoline FOB Northwest Europe and the West Africa Gasoline CIF West Africa. Platts stated: “West Africa is a significant producer of crude oil, yet due to pressures on its refinery system and increasing car ownership, the region remains a very large importer of refined products. Of those products, gasoline is the most significant. The region’s largest country, Nigeria, consumes more than 40 million litres of gasoline each day… Due to a surplus of refining capacity and specifically a surplus of gasoline production, Northwest Europe continues to provide the bulk of gasoline imports into West Africa. The new Platts CIF West Africa assessment is to be calculated as a freight net-forward from the FOB Northwest European assessment, using a basket of two Worldscale flat rates; Amsterdam-Lome and Amsterdam-Lagos.”
The fuel cabal celebrated the creation of Platts West Africa assessments because it aided the institutionalisation of fuel importation thereby supporting the enabling environment for corruption. Furthermore, no member of the fuel cabal has gone to jail for stealing and corruption. The fuel cabal therefore embarked on a permanent fuel hoarding strike. This strike was unleashed in November 2015 and it continues to date. The strike aims to kill the FGN anti-corruption policy and impose full fuel price deregulation on the Nigerian masses. This is how corruption fights back. It mobilises international and national forces that benefit from the corrupt environment to unleash events that seem random until you connect the dots.
For example, the FGN cancelled oil swap and offshore processing arrangement (OPA) bids. It replaced OPA with the Direct Sale Direct Purchase (DSDP) policy. Only companies with refining capacity will lift domestic crude oil for fuel importation. However, most trading companies, including those with refining capacity, have been engaged in contango activities since 2014. Contango opportunities exist when future oil prices are likely to be higher than oil prices today. Therefore it is more profitable for foreign companies to buy Nigerian oil, store it in tanks/floating vessels (VLCC/ULCC) and sell it in the future. For now, they can purchase PMS from the NWE markets and imported into Nigeria.
For instance, in August 2015, Vitol super tanker “Front Ariake” took Nigerian crude to an offshore storage facility in Saldanha Bay, South Africa. PDVSA, Petrobas, Royal Dutch Shell and Glencore have hired storage tankers in Saint Lucia and other Caribbean Islands. Trafigura, Vitol, Gunvor, Koch, Shell and others are hiring oil tankers for floating storage purposes. There is no economic reason for any private foreign company to invest in refining capacity in Nigeria under contango conditions, irrespective of the amount of price modulation.
President Buhari’s policy of building new refineries and fighting corruption need a new holistic approach. This holistic policy must start with production cost pricing if it is to succeed. The policy must reject IMF policies on fuel price deregulation. If the FGN proceeds with the implementation of the IMF fuel price deregulation policy on January 1, 2016, fuel prices will continue to rise in response to rising NWE crude oil and petroleum product prices and the oligopolistic greed of the fuel cabal. The Nigerian masses must prepare for a year of struggles against the fuel cabal/foreign allies and IMF fuel price deregulation policy of the FGN.
• Concluded
• Dr. Agbon, former ASUU chair, UI Branch, is an oil expert based in Texas, United States.
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1 Comments
All this is based on the fact that we continue to import fuel into our country. For Nigeria to free itself from the international pricing method, we need to refine crude oil within our border. This is a task that could be completed within a period of two years. modular refineries are cheaper, flexible and can be installed within 9 month. The federal government can finance, install and operate it for not more than a year. Then sell each one of them as a publicly traded company, so that all Nigerian’s can owe a part of it. This would bridge the gap when major refineries would be build by private investor, who are incentivize to build refineries within our borders. sale of crude oil to refineries within our border would domestically priced and even subsidized to increase production and lure more investment.
We will review and take appropriate action.