Fuel subsidy –When will price modulation fail? (1)
“Always bear in mind that the people are not fighting for ideas, for the things in anyone’s head. They are fighting to win material benefits, to live better and in peace, to see their lives go forward, to guarantee the future of their children…”
Amilcar Carbal, Unity and Struggle. PAIGC
WHAT is Price Modulation.? When will price modulation fail? What will the FGN do after price modulation fails? How do we solve the major problems facing our refining sector? We will answer these questions. Speaking to the press after a visit to the Kaduna refinery, Dr. Ibe Kachikwu, the Minister of State for Petroleum Resources is reported to have said: “There is energy around the removal of subsidy. Most Nigerians we talk to today will say that’s where to go. I have since left the dictionary of subsidy by going to price modulation, which is a bit more technical. …The price of refined petrol today is N87. It was N97 before it was reduced and we really have to go back to that because we don’t really have the finance to fund it. There are lots of safety barometers between the N87 and N97per litre regime.
The government does not have to fund subsidy and yet the prices would have been fairly close to what it is today…..That is the first mechanism we are going to work with. It is when that mechanism fails that we will begin to look at a total subsidy exit. We believe we can achieve that.” On January 1, 2016, the PPPRA modulated the PMS retail price and fixed it at N86.50. Dr. Kachikwu has answered the last question. We know what the FGN will try to do when price modulation fails. The FGN will look at a total subsidy exit. We will cross that bridge when we get to it. Therefore, let us proceed to answer the first two questions. Then, we will examine possible solutions to some of our refining problems.
What is Price Modulation.? The new Fuel Subsidy Removal or Fuel Price Increase by Price Modulation is an updated IMF strategy aimed at imposing fuel price deregulation on the Nigerian masses. The updated IMF strategy called for using the present low price regime to remove fuel subsidy and deregulate fuel prices. Price modulation fixes the commodity price in a market by tweaking price components. PPPRA will fix the retail PMS price while the Expected Open Market Price will vary daily depending on the Platts daily Northwest Europe PMS spot prices and freight costs. The modulated prices will be reviewed quarterly. The modulated PMS price for the first quarter of 2016 is N86.50 per litre. In reality, the fuel cabal/marketers can sell at whatever price the customer will pay given the vast number of private petrol stations and the few DPR inspectors available to monitor pump PMS prices nationally. The Nigerian fuel market is a corrupt oligopoly. The increase in fuel prices will have oligopolistic limits.
The retail fuel price that PPPRA fixes would therefore acts, in practice, as a minimum fuel price for the domestic market. Price modulation ignores corrupt practices and allows the fuel cabal to pass the cost of corruption and mismanagement directly to the masses. The FGN did not border to discuss the price modulation strategy with stakeholders, like labor unions and civil society organisation, who oppose the corruption subsidy and fuel price increase. Rather, the FGN set the modulated PMS price at N86.50 so that these stakeholders would not be able to mobilize. The FGN starts by breaking the lower boundary of its own modulated PMS price range of N87 to N97. Therefore, it will be able to claim precedent when it breaks the upper boundary of N97.
When the Expected open market price rises above N86.50/litre, the PPPRA Retail price will also increase. Beyond N86.50, there will be no subsidy payment by the FGN as the cost of corruption and mismanagement by the fuel cabal will pass on directly to the Nigerian masses. The FGN wants the Nigerian masses to pay for the corruption subsidy directly. There is actually no fuel subsidy. What we have is a corruption subsidy for the fuel cabal, which the FGN has no more money to pay. Therefore, rather than fight the corruption of the fuel cabal, the FGN wants the Nigerian masses to pay directly for it with price modulation. The PPPRA will attempt to keep the PMS Retail price below N97/litre as oil prices rebound and C+F increases by modulating the price components. Beyond a certain crude oil price, price modulation will fail and the PMS price will rise above N97/litre. The FGN plans to look at a total subsidy exit when this occurs. There will be no corruption subsidy payment.
When will price modulation fail? The PPPRA template of January 21, 2016 put the C+F at N59.9/litre and the landed cost at N65.01/litre. Therefore, the Trader margin + Lightering SVH + NPA + Finance SVH +Jetty Depot + Storage = N5.11 (reduced from N12.1). Distribution Margins (Retailers + Transporters + Dealers + Bridging + MTA + Adm) = N14.3 (reduced from N15.49). The expected open market price (OMP) was N79.31/litre. What is the crude oil price at which the PMS Expected OMP (with the maximum price components modulation) will rise above the N97/litre barrier? The most efficient price modulation can only reduce the difference between the landed cost and C+F to N3 (reduced from N12.1) and the Distribution Margins to N10 (from N15.49). Any further reduction will lead to hoarding strikes and resistance from transporters, Dealers and Marketers.
Therefore, beyond a C+F of (N97-N13) or N84/litre, Expected OMP will be greater than N97/litre. At a crude oil price of $45.46/bbl, the C+F price would be approximately $572/MT or N84/litre. Therefore, when oil prices rise beyond $46/bbl, the retail PMS will be greater than N97/litre. Let us assume the most theoretical possible limits in which the FGN has magically modulated the entire price differential to zero. Under this idealist scenario, the C+F = landed cost = expected OMP= Retail Price = N97/litre. At a crude oil price of $54/bbl, the C+F price would be approximately $661/MT or N97/litre.
When will future crude oil price/bbl rise beyond $46.00/bbl? Let us examine some World Bank and IMF crude oil price forecasts. The World Bank average spot price (Brent, Dubai, WTI) data for 2013, 2014 and 2015 was $104.1/bbl, $96.2/bbl and $52.5/bbl respectively. The World Bank predicts that the average spot price per barrel (Brent, Dubai,WTI) will be $51.4 in 2016, $54.6 (2017), $57.9 (2018), $61.5 (2019) and $65.3 (2020) [World Bank Commodity Forecast Price data, October 2015].
The IMF average spot price (Brent, Dubai, WTI) data for 2013, 2014 and 2015 was $104.1/bbl, $96.2/bbl and $51.6/bbl respectively. The IMF predicts that the average spot price per barrel (Brent, Dubai, WTI) will be $50.4 in 2016, $55.4 (2017), $59.8 (2018), $62.2 (2019) and $63.0 (2020)[ IMF Commodity Price Forecasts, October 2015 ]. All forecasts show that by 2017, crude oil prices would have recovered to about $55/bbl. Therefore, by 2017, the price modulation will fail and the FGN will begin looking at a total subsidy exit.
We must organize and prepare for this time of reckoning. More importantly, we must join the Nigerian masses and refuse to pay for the corruption and mismanagement of the fuel cabal during the price modulation period of PMS prices between N87/litre and N97/litre. We must demand that the FGN fight corruption to a standstill and jail all the corrupt members of the fuel cabal. By 2019, when the next election comes around we will have about $62/bbl. A crude oil price of $62/bbl will give a C+F of about $752/MT for PMS (C+F = N110/litre) leading to Expected OMP/Retail PMS price of N127/litre or higher. A ruling political party cannot win the 2019 election with a Retail PMS Price of N127/litre. It is either back to subsidy or the opposition takes over. Therefore, price modulation is a ticking political time bomb for the party in power in 2019. The likely political ramification of successful price modulation is more instability. The economic ramifications are far reaching for the Nigerian masses.
To be continued tomorrow
Agbon presented this paper at the Nigerian Labour Congress Organised Stakeholders Meeting on Fuel Subsidy and Petrol in Lagos, January 28, 2016.
[email protected]
Twitter: @izielenagbon
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1 Comments
Price modulation is a game being played by the government to effectively remove subsidy, while still offering low prices to the people. it is a game that is not based on sound economical thinking or the necessary infrastructure needed to ensure its success. From world bank and IMF date, this article says price modulation would fail in 2019. That give Nigeria government 3 years to fix the basic infrastructure that would be needed to completely deregulate the sector, end subsidy and improve the supply and distribution of fuel. We need to quickly bridge the gap of local refining by encouraging the installation of modular refineries across the country. right now we at least 10 modular refineries with processing capacity of 30-50k bpd across the 6 geopolitical zone. This would give us the supply needed while we build bigger more expensive modern refineries. we can still regulate price while we install this modular refineries, however we must deregulate the sector for bigger modern refineries to be build.
We will review and take appropriate action.