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Double jeopardy

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[FILE PHOTO] Oil

At the risk of sounding immodest, I should like to state that my voice had been among the “Doomsday prophets” who foresaw, with rather a mathematical exactitude, Nigeria’s extant existential woes. In the anxious months leading up to the first massive devaluation of the naira in 1986, those prophets had strongly argued that the proposed step would put the national economy into reverse.

The reason behind that argument was seemingly palpable: first, Nigeria has no industrial goods for export; second, her principal export, petroleum oil, is constrained by inelastic demand. However, notwithstanding those sprinklings of the voice of reason, the government of the day still proceeded to massively devalue the naira; thus setting the national economy on a downward spiral. Though like every other debilitating ailment, the downward spiral had been imperceptible in its early years, it no sooner quickly gathered momentum as non-traditional economic phenomena started springing up within our shores.

Today, hitherto unknown economic crimes like kidnapping for ransom, looting of whole public treasuries, sadistic bloody banditry, trading in whole humans and human limbs, blackmail for financial gains, wholesale selling and buying of electoral votes, etc have all become the new normal in our culture.

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Of course, these were all expected to happen for the simple reason that human beings are inexorably driven by little else than economic forces. A sage had once mused that human beings are essentially economic animals; which was another way of saying that the portrait of human societies is invariably painted by economic forces. Therefore, any person looking to effectively preside over any human setting must first acquire the knowledge of stabilising the economic forces of the particular human setting. This is a desideratum of which Nigeria’s post-1986 experience provides ample evidence.

Thirty-three years following that first massive devaluation, the prices of all goods and services in Nigeria have moved far from equilibrium levels. What is worse confounding is to observe that there is no foreseeable check for that destabilising trajectory.

Only recently, a report by the Bureau of Consumer Statistics put the current market price of Kerosene (a common consumer product) at an aggregate of ₦400.00 (four hundred naira) per litre. This is simply alarming. Kerosene is universally classified as a straight-run-product by petroleum refineries because it is among the simplest to produce. Diesel (AGO), Light Pour Fuel Oil (LPFO), and Naphtha are also in the straight-run stream.

Each of the aforesaid should not realitically cost more than a couple of naira per litre, in an efficient high-capacity-utilization domestic production. It should be recalled that petroleum refining feasibility studies are premised on 24×7-hours-yearly operations; breakeven/profitability points are strictly hinged on sheer volumes. That is the reason the prices of petroleum products inefficient economies cost a mere couple of their respective currencies per litre.

For example, in Britain, Canada, and the USA, petroleum products cost less than two of their respective currencies per litre; yet petroleum refining business has remained lucrative in those countries for generations. This is a point to remember when deliberating on the ills of the Nigerian economy.

In point of fact, petroleum products have also cost a mere couple of naira per liter in Nigeria in living memory. But since the 1986 infamous devaluation, computations for petroleum product prices have curiously tilted towards landing unit cost, without reference to refining/delivery efficiencies.

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Also, and very significantly, the Domestic Market Obligation (DMO) factor on crude oil as enjoined by extant Production Sharing Agreements (PSA) between Nigeria and her IOC partners is not reflected in those computations. (Who are the silent beneficiaries of the generous DMO discounts on crude oil productions???) The apparent omission in computing could pass as fraud against Nigerians because it is at cross-purposes with international best practice; it at once partly accounts for the growth-stifling prices of petroleum product prices in Nigeria.

Thinking Nigerians could well readily figure out why petroleum oil theft and “illegal refineries” have rapidly ballooned into a multi-million dollar industry in Nigeria. Why not? If straight-run-products could be so cheaply produced, with official market prices of selfsame products prohibitively, actually artificially, fixed at an aggregate of ₦200.00 (two hundred naira) per liter, it is no brainer that Nigeria’s military might has proven ineffectual in checking the economic sabotage in the Niger Delta. There is yet another ugly twist to the above-convoluted scenario. Notwithstanding the prohibitive domestic prices of petroleum prices in Nigeria, those prices are, rather instructively, deemed “cheap” in neighbouring African countries because of Nigeria’s ridiculously undervalued national currency. So, another variant of economic sabotage thrives across the borders, presenting Nigeria’s beleaguered military with yet another intractable war! Talk about double jeopardy.

Evidently, it cannot be overstated that massive devaluations of the naira over the years constitute the one storm that is viciously ravaging Nigeria’s socio-economic landscape. Consequently, a palpable consensus that the cumulative effect of that storm now constitutes an effective threat to the Nigerian State is fast crystallizing. It is, therefore, time to critically reflect on that time-tested economics doctrine, “Elasticity of demand for export and import doesn’t take the form in graphic terms of a straight line. It is more in the form of a bell-shaped curve.

The goal in policy-making terms is then to pitch the exchange rate at what is estimated to be the highest point on the bell-shaped curve…” Whilst we are thus reflecting, methinks it would do Nigeria’s ailing economy a world of good if a thought is also spared for strategies to bringing up in-country petroleum refining/delivery efficiencies to commercial levels.

Indeed, the title of this brief piece best captures the perplexing challenges of the Nigerian economy: disequilibrium foreign exchange for the naira, and artificially computed prices for petroleum products. I daresay that Nigeria’s economic woes would go from bad to worse so long as that double jeopardy persists.

Nkemdiche, a consulting engineer, wrote from Abuja.


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