Market efficiency vs petroleum regulation regime

There is certainly a place for the regulation of services across the spheres of education, financial services, fintechs, healthcare, telecoms, transport et al in progressive climes. This is to prevent the excesses of free markets, informational asymmetry, monopolistic practices, oligopolies and to safeguard public confidence. Nevertheless, a sensible balance always has to be struck between effective, necessary, proportionate and targeted regulation on the one hand, versus complex, disproportionate, excessive and stifling regulation which undermines market efficiency and harms the interests of consumers. When regulation overburdens legitimate economic activities and enterprise, impoverishes the lives of ordinary people, and worse, is harmful to their health and well-being, it is excessive, requires an intelligent recalibration and an overhaul.

Today’s case study is Nigeria. Across the length and breadth of the country, there is, yet again, a frustratingly ensnarling fuel (premium motor spirit/petrol) scarcity. It is a perennial problem, which thus far, appears to defy any enduring solution. Motorists spend hours and, in some cases, days lining up to fill up their tanks. The traffic congestion this creates nationwide in aggregate terms straddles several miles.

Invariably, motorists become sitting ducks for armed robbers and bandits. Plus, the productive time lost in these horrendous queues is worth hundreds of millions of naira which, if put to better use, would enhance the nation’s Gross Domestic Product (GDP), whilst generating necessary fiscal income for the government across the federal, state and local tiers. Compounding that, is the adverse effect of the toxic fumes and carbon monoxide emanating from diesel powered, older and environmentally unfriendly vehicles in those queues on the health and wellbeing of motorists, children and others trapped in those queues, or within the immediate environs.

This conundrum springs so many germane policy questions. Isn’t Nigeria Africa’s largest oil producer and an established member of the Organisation of the Petroleum Exporting Countries (OPEC)? To that extent, how is it that the country continually experiences perennial fuel shortages? What is the current state of the nation’s four major publicly owned refineries in Warri, Kaduna, Port Harcourt and Onne? How intractable are the bottlenecks in the downstream sector such that they routinely frustrate the seamless delivery of petroleum products to consumers and end users? Should the state be involved to any significant extent in operating refineries in 21st Century? Do existing pump prices reflect current global economic realities? Is the petroleum subsidy regime a help or hindrance to the effective and efficient distribution of petroleum products? How sustainable is it? Does the combination of visionary leadership, political will, strategic foresight and delivery capacity exist to enduringly address this problem?

One thing is super clear; petroleum is the kernel of Nigeria’s economy. It is the country’s main foreign exchange earner. Roughly 90% of Nigeria’s foreign exchange revenue, and approximately 66% of the government’s income stems from petroleum exports. According to OPEC, through 2017 and 2021, Nigeria earned over $206 billion from crude oil exports; $37.9 billion in 2017, $54.5 billion in 2018 and $45.1billion in 2019. The outlier effects of COVID-19 in 2020 yielded lower returns for the country; $27.3 billion. Regardless, that rose to $41.3 billion in 2021. Notwithstanding, crude oil exports constitutes less than a tenth of GDP.

Although adopting early incremental steps in that direction, in Lagos State especially, Nigeria is yet to have fully functioning, seamless, technology-integrated multimodal transport connectivity via roads, rail systems, trams underground networks, air and sea to serve her population of 216 million people. Road transport accounts for 90% of the country’s passenger and freight transport according to the National Integrated Infrastructure Masterplan (NIIMP). Buoyed by this assertion, the inescapable corollary therefore is that the extant perennial fuel shortages nationwide choke the arterial lifeblood of the economy. So, the importance of petroleum to the national economy cannot be overstated.

If only briefly, it bears restating that crude oil, Nigeria’s main forex earner, is a commodity that is marketed on global energy markets. As such, an international comparison is pertinent at this juncture to get a sense of the true cost of the product. As at December 19, 2022, the unit cost of a litre of petrol in Nigeria’s closest western neighbour, Benin Republic, was approximately $1.057; Chad, Nigeria’s northern neighbour $0.842; UK $1.858; USA $ 0.903; South Africa $1.351; and Nigeria $0.440, as of December 19, 2022 (oilpricez.com/us). The official central bank of Nigerian foreign exchange rates of USD 1 to the naira was N472.41. For comparative purposes in naira terms, therefore, a unit of petrol in Benin Republic was approximately N499.33; N397.76 in Chad; N877.73 in UK; N426.58 in USA; N638.22 in South Africa as of that date.

On July 19, 2022, the Nigerian National Petroleum Corporation Limited (NNPC), the regulatory agency, approved an upward review of petrol prices from N165 to N179 per litre according to this very newspaper; The Guardian. Quite clearly from this limited, albeit highly informative, sample, the unit price of petrol in Nigeria is amongst the cheapest in the world and instantly creates a tension between the market value of the commodity and the populist regulated prices. This is an illusory reality, which is not sustainable, the evidence of which is the manifested in the serpentine fuel queues criss-crossing the country.

Besides, Nigeria operates a dual foreign exchange (forex) mechanism with official rates, and the so-called parallel foreign exchange market with licensed forex dealers “bureau de change.” The former is scarce, strictly limited to priority areas of the economy and highly regulated by the Central Bank of Nigeria in part to manage tight forex amidst competing demands thereof. The latter is regulated albeit more flexibly allowing businesses and individuals in need to access the parallel markets. The rub is that parallel market rates are more reflectively of the true value of the local naira and are nearly always higher than the official rates. Thus, the unit prices of petrol illustrated above at parallel rates would, certainly be much higher than the CBN rates; a state of affairs which facilitates harmful arbitrage market practices and begs the key question as to why there isn’t a singular forex exchange regime in the country?

An argument can certainly be made that the average Nigerian citizen barely partakes of the dividends of citizenship and democracy in that they lack consistent access to qualitative and regular education, healthcare, clean energy, clean water, power and, of course, fuel. The implication there being that they must benefit in some shape or form from the proverbial black gold: crude oil! Yes, it is an argument; a philosophical argument. The practical and more compelling contention however, is that fuel prices, at a fraction of the market cost in neighbouring countries and further afield, will accentuate, not aid, the fuel queues in Nigeria.

The reason is simple. There is little or no incentive for marketers and retailers to sell fuel below cost price, at a loss, in the absence of a fuel subsidy regime; when they can sell in neighbouring countries for profit. The issue is economics and not politics. Simple!

Of course, the international dimension remains important. Nigeria’s four major publicly owned refineries in Warri, Kaduna, Port Harcourt and Onne are neither refining petroleum products for export markets nor for the domestic market. Not only that, between 2015 and 2019, the country spent $37.85 billion on refined petroleum products. In the same period, the country’s aggregate import bill was $220.2 billion. In other words, approximately 17% of the country’s import bill was on refined petroleum products, the raw material of which is crude oil, which she produces. In 2020, Nigeria important refined petroleum products from The Netherlands ($3.02 billion), Belgium ($1.45 billion), Norway ($659 million), India ($415 million) and UK ($392 million). The country also imports refined petroleum products from Ukraine.

The attritional Russian vs Ukrainian war (February 2022 to present) has not only cost tens of thousands of lives, but has imperilled supply chains including petroleum products to Nigeria. Besides, the Dangote Refinery, with a project capacity of 650,000 barrels per day, of which the Nigerian government is a strategic investor, is yet to take off. Added to this, is the complex and opaque petroleum subsidy regime. It costs the Nigerian economy approximately N500 billion monthly and by end 2022 will cost the country approximately $9.6 billion (International Monetary Fund/Reuters). The combined effects therein are to constrain whatever limited foreign exchange the country has to support other sectors of the economy including aircraft maintenance, agriculture, defence, healthcare, manufacturing, technology infrastructure et al.

In the 1955 digest, “the Psychology of Personal Constructs”, George A. Kelly, defined a disorder “as any personal construction which is used repeatedly in spite of consistent invalidation” In simple terms, that means repeating activities and expecting different outcomes is, politely put, unreasonable. Accordingly, the whacky orthodoxy of exporting Nigerian crude oil to refineries abroad, and then re-importing the refined petroleum products in the form of petrol, diesel, jet A1fuel, underpinned by a complex and expensive petroleum subsidy regime, is plainly unsustainable on three counts.

First, it is terribly inefficient because the supply chains from Nigeria to the Americas/Europe and then back to Nigeria defies coherent economic logic and the laws of agglomeration economics. Second, the unintended consequence here is to export jobs to those markets at the expense of the Nigerian economy at a time when the Nigerian Bureau of Statistics reports that the unemployment rate is 33%. Third, it is damaging to the economy because scarce foreign exchange is used to support a petroleum subsidy regime which not only compounds transaction costs, but spurns negative opportunity costs in that necessary forex is insufficiently utilised in critical sectors like healthcare; for instance, the procurement of alternative energy systems, anaesthesia machines, defibrillators, renal dialysis, magnetic resonance imaging, ventilators and other equipment in public hospitals.

The concluding recommendations from the foregoing therefore do not require any crystal gazing and are as follows; 1.) The petroleum opaque subsidy regime requires an urgent review as huge questions linger over its fitness for purpose and cost to Nigerian taxpayers;
2.) Market forces, counterbalanced, with effective, light-touch and nimble regulatory practices and policies should govern the administration of the downstream petroleum sector;
3.) Fuel prices should reflect market realities with a progressive tax regime for larger engines and vehicles;
4.) Dual forex regimes fuel corruption, create unhealthy arbitrage which harms market efficiency and, ultimately, consumers. Why, for instance, should an elderly pensioner requiring urgent oncology care abroad in the absence of the necessary medical facilities locally lose his/her life whilst waiting to obtain forex at the official rate?;
5.) There is a compelling argument for more private refineries to meet local demand for refined petroleum products;
6.) Private sector participants should be allowed to import refined petroleum products so long as they raise can independently raise the capital on a for profit basis;
7.) Consideration should be given to offloading the moribund quartet of Warri, Kaduna, Port Harcourt and Onne refineries to market entrants with the drive, verve, innovation and entrepreneurial capacity to make them viable businesses; and
8.) A combination transformational leadership, vision, political will and consensus building is required to drive these proposals.
Ojumu is Principal Partner at Balliol Myers LP, a firm of legal practitioners in Lagos, Nigeria.