The Return of Fuel Queues and the Subsidy Debate

Nigeria is once again gripped by tension as fuel scarcity rears its head, igniting long queues at petrol stations across Lagos and beyond.

The resurgence of this issue prompts us to reflect on one of the main drivers for the removal of fuel subsidies in the downstream sector of the oil industry.

Stakeholders, such as the Depot and Petroleum Products Marketers Association of Nigeria (DAPPMAN), have advocated for the elimination of subsidies, with the belief that this would end persistent fuel shortages, reduce hardships on citizens, prevent cross-border smuggling, and promote responsible consumption.

The hope of these fuel marketers was undoubtedly pinned on full deregulation, where market forces would dictate petroleum product prices. They expected the government to provide a level playing field for importers to access foreign exchange, similar to the rate used by the Nigerian National Petroleum Corporation Limited (NNPCL) for calculating forex from crude oil exports. However, reality paints a different picture as Nigeria faces yet another bout of artificial fuel prices. This occurs amid a sliding exchange rate of the naira against the dollar on the parallel market and an increase in crude oil prices worldwide while the domestic pump price remains stagnant.

What we are witnessing is not in line with the industry’s expectations but rather a dangerous drama. The harsh reality today is that fuel supply is under pressure, if not experiencing a full-blown scarcity. Many fuel stations have ceased operations due to the lack of supply, and the blame seems to squarely fall on the Nigerian National Petroleum Company Limited (NNPCL). Reports from credible sources indicate that NNPCL’s fuel reserves have significantly depleted. Recently, a decision to supply petrol to only those fuel marketers owning at least 50 petrol stations was made. This sudden change should have been preceded by a sufficient transition period. It’s worth noting that NNPCL, just last week, claimed to have over one trillion litres of petrol.

NNPCL has now prioritized its own retail stations for supply, which is far from sufficient to meet the nation’s fuel needs, leading to delays and fuel queues. This selective approach to supply raises questions about the transparency of NNPCL’s communication on the state of fuel supply. Independent fuel marketers with a smaller number of stations rely on NNPCL’s supply and lack the forex resources for importing petrol, resulting in the return of queues.

A significant contributor to this erratic fuel supply is the ongoing debate around fuel subsidy removal. Presently, petrol prices vary between N580.00 and N617.00 per litre, depending on the location of purchase. These prices have remained unchanged for approximately three months. During this period, the naira’s value has consistently fallen against the dollar on the parallel market. On October 20, 2023, the exchange rate reached an alarming low of N1,160 to $1. Furthermore, the price of crude oil has been on the rise. Yet, the domestic pump price of fuel in Nigeria remains fixed at N580 and N617.

The reason cited for this unchanged price is the existence of an unspoken subsidy. According to the National President of Petroleum and Natural Gas Senior Staff Association of Nigeria (PENGASSAN), fuel is effectively subsidized because the initial price of N570 was set when international crude prices were around $80 per barrel, which has since risen to $93 to $94 per barrel. In essence, given the current exchange rate and international crude oil prices, Nigeria has indirectly reintroduced subsidy. Industry stakeholders and data analysis suggest that the government may end up paying as much as N1.68 trillion as subsidy between September and December.

In light of this, petroleum dealers argue that the price of fuel should be around N890 to N900 per litre to reflect the actual market dynamics. A breakdown of this pricing shows that with the current exchange rate of N1,160/$ and a crude oil price of $92.51 per barrel, the landing cost of petrol is N796 per litre. The ex-depot price should be at least N820 per litre, and the ex-pump price should be between N890 and N900 per litre. However, some suggest that with a more favorable forex rate provided by the Central Bank of Nigeria (CBN) at NAFEM rate – N808.27/$ – the landing cost could drop to N562 per litre. This would result in an ex-depot price between N580 and N590 per litre and an ex-pump price ranging from N630 to N670 per litre, considering transportation costs.

Despite denials from the Group Chief Executive of NNPCL, Mele Kyari, about the return of fuel scarcity and subsidy, prominent figures in the oil industry, stakeholders, and economists warn that any attempt to reintroduce subsidy will have dire consequences for the nation’s economy. This crisis should be seen as an opportunity to address the real market dynamics.

The removal of subsidies offers transformative prospects for Nigeria’s downstream sector and the government. It enables companies to adapt to global economic changes, unpredictable energy prices, macroeconomic conditions, and an opaque forex regime. It encourages improved supply chain management, digital technology integration, and robust risk management systems. Furthermore, it may help reduce the price of fuel and enhance its availability.

In conclusion, the ongoing fuel scarcity in Nigeria is preventable. To address it, NNPCL must ensure transparent and equitable fuel distribution, extend supplies to fuel marketers, and banish any form of opportunistic monopoly. Most importantly, the issue of fuel subsidy should be put to rest, paving the way for a transformative era of economic momentum that can benefit all Nigerians and the nation as a whole.

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