AF: Economic Implications of Petrol Price Reduction
The recent reduction of pump price of petrol from N97 per litre to N87 per litre was a consequence of the drop in price of refined products resulting from plummeting crude oil prices. But while some Nigerians viewed the action as politically-motivated, Ejiofor Alike examines its economic implications on the government, marketers and consumers
Since the military administration of General Yakubu Gowon increased fuel price in Nigeria in 1973 from 6 kobo per litre to 8.45kobo per litre, it has become a ritual for each successive government to tamper with the official pump price of the product.
Many of these administrations used the adjustment in the pump price of petrol as a political tool, rather than an economic measure.
Expectedly, Nigerians have always not only widely condemned this persistent hike but also protested to the streets, leading to occasional downward review by the present and past administrations.
While the late General Murtala Mohammed increased the price from 8.45 kobo to 9 kobo in 1976, the military government of General Olusegun Obasanjo also raised the price to 15.3 kobo in October 1978.
Also when former President ShehuShagari assumed office in 1979, he also increased it to 20 kobo in April 1982. General Ibrahim Babangida's administration adjusted the pump price five times, first, from 20 kobo to 39.5kobo in March 1986 and second, to 42 kobo in April 1988.
Babangida added a populist dimension to it when his government raised it from 42 kobo per litre to 60 kobo in January 1989 but the new price was applicable to only private vehicles.
However, a uniform price of 60 kobo became applicable to all vehicles in December 1989, and the uniform price was later adjusted upwards to 70 kobo in March 1991.
The Interim National Government of Chief Ernest Shonekan, also increased it in November 1993 from 70k to N5 per litre. Even though an increase in fuel price ought to be an economic decision to increase government savings for the provision of infrastructure, the reduction of fuel price in recent years has been propelled by politics, rather than economic consideration. For instance, in order to warm his way into the heart of Nigerians to facilitate his possible transmutation from a military dictator to a democratically-elected civilian president, the late General Sani Abacha adjusted the pump price three times, occasional downwards.
At first, he adjusted it downwards from N5 per litre to N3.25 in November 1993.
He later increased it to N15 in October 1994 but later reduced it to N11 per litre two days later, following public discontent.
General AbdulsalamiAbubakar's administration increased it to N25 in December 1998 and downward to N20 in January 1999. Under the civilian administration of former President Obasanjo, the price was adjusted seven times.
Obasanjo raised it to N30 in June 2000 but slashed it the same month to N22, following protests by the organisedlabour.
In January 2002, he raised it to N26 but between June and October 2003, it was N42 per litre. The pump price was further raised to N50 in May 2004; and N65 in August 2004.
The most curious adjustment of pump price by the Obasanjo government was the hike from N65 per litre to N75 in May 2007, few days to the May 29 hand-over date to the administration of the late Umaru Musa Yar'Adua.
The late President Yar'Adua expectedly took advantage of Obasanjo's ill-timed action and reduced it from N75 to N65 in June 2007.
The current administration of President Goodluck Jonathan apparently under-estimated the sensitive nature of the politics surrounding the pump price that it removed the entire subsidy element, increasing the price from N65 to around N140 per litre in one fell swoop.
Hell was let loose as the organised labour and other civil society coalitions mobilised Nigerians into a one-week street protests and mass action that shut down the entire social and economic activities of Nigeria.
It is believed that this singular decision tainted the popularity of the administration, as it raised doubts in the minds of the people on the sincerity of the government on issues concerning their welfare.
Latest price reduction The issue of petrol subsidy, which is the difference between the expected open market price (EOMP) of petrol and the official price came into national limelight when crude oil price rose to $100.
With the resultant increase in the price of refined products at the international market, the claims arising from subsidy shot up to sustainable levels.
It became a subject of legislative and executive probes in 2011 when N286 billion was budgeted but close to N2 trillion was paid.
With the rising price of crude oil at the international market, all attempts by the federal government to reduce the subsidy element in the annual budget failed.
When the international market price of crude oil dropped from $115 in June 2014 to less than $50, with corresponding drop in the price of refined products it was a curse and at the same time, a blessing to the federal government.
Curse, in the sense that crude oil revenue on which the country's economy depends has fallen sharply, threatening the capacity of the government to fund the 2015 budget.
Indeed, since the oil price began its free fall, the federal government has revised the 2015 budget benchmark three times, yet the falling price has already surpassed government's projection in the latest revised budget, which is predicated on $65 per barrel.
The falling price of crude oil is also a blessing for the federal government as it has equally led to a drastic drop in the price of petroleum products, thus reducing the government's huge subsidy burden, which has become unsustainable over the years.
After series of controversial probes, and failed attempt by the government to remove it in January 2012, the government was forced to revise the 2012 budget, with N656.3 billion set aside for the payment of subsidy in 2012 and additional budget of N231.8 billion as outstanding for 2011, bringing the total budget to N888.1 billion.
In 2013, the government set aside N971.1 billion for the payment of subsidy and retained the same figure in the 2015 budget, according to the first Medium Term Expenditure Framework (MTEF) and fiscal strategy presented in September 2014.
Even though the initial subsidy projection was reduced by half with the falling crude oil price, which necessitated the revision of the budget benchmark, the government will have no cause to pay huge subsidy claims in 2015.
This is because before the recent reduction of the pump price, the difference between the official price and the expected open market was only about 90 kobo per litre, and this implies that the government was paying only 90 kobo as subsidy on every litre, as against N41 before the drop in the price of crude oil.
To ensure that Nigerians enjoy higher subsidy in view of the drop in the prices of refined products, the federal government recently reduced the pump price of petrol from N97 a litre to N87 a litre, thus increasing subsidy to N10.90 per litre.
Announcing this government's rare show of magnanimity, the Minister of Petroleum Resources, Mrs. Diezani Alison-Madueke, said: "As you may be aware, there has been a lot of volatility in the oil market in the past few months and due to this the importation prices of our petroleum products have been impacted.
"Therefore, with the approval and directive of Mr. President and by virtue of Section 6 clause 1 of the Nigerian Petroleum Act, it is my responsibility as Minister of Petroleum Resources to hereby announce a reduction in the pump price of Premium Motor Spirit (Petrol) from N97 per litre pump price down to N87 per litre pump price, effective from twelve (12) midnight Sunday, 18th of January 2015," she said.
APC, MAN, NACCIMA, Labour react While the Nigeria Labour Congress (NLC) in a reaction said the reduction by just 10.3 per cent, compared to 33 per cent price reduction in most other countries, "is not sufficiently deep," the Trade Union Congress (TUC), though it commended "government's sensitivity to the plight of millions of impecunious Nigerians", added that "the N10 reduction certainly has less than significant effect on costs of transportation, goods and services."
But both the Manufacturers Association of Nigeria (MAN) and the Independent Petroleum Marketers Association of Nigeria (IPMAN) lauded the government for the reduction.
NLC, in a statement signed by its General Secretary, Comrade Peter Ozo-Eson, cited the example of the United States of America which reduced the pump price by 33 per cent.
NLC said the N10 price slash translates to 10.3 per cent reduction compared to 33 per cent price reduction in most countries.
It requested the government to effect a price reduction that would reflect the sustained price slump of crude oil in the international market in order for Nigerians to benefit from the development.
The statement pointed out that prior to this price reduction, government had substantially devalued the Naira, thus ensuring that the full benefits of falling crude price did not get to Nigerians.
"We commend the government for listening to our advice. However, beyond the issue of price reduction of PMS, the regulatory agencies in the downstream sector of the oil industry need to protect Nigerians against monopolistic exploitation. We make bold to refer to the unacceptable price manipulation by monopolies in the oil sector where prices have remained unreasonably high for diesel, the price of which is deregulated. Given the realities of the international oil market today, there is no reason for maintaining the price of diesel at N160 per litre. The regulatory agencies are called upon to break this stranglehold on consumers. Finally, we wish to appeal to transporters and transport operators alike to ensure that the benefits of this price reduction get to commuters," NLC added. TUC however insisted that selling petrol at N87 per litre would still "destabilise and bore holes in the ever-shrinking pockets of the Nigerian masses."
It argued that Nigerians deserved an even greater slash in the price of fuel, adding that all appropriate measures must be taken to strengthen the purchasing power of the common man. The President of the Manufacturers Association of Nigeria (MAN), Mr. Wale Adegbite also commended the government for slashing the pump price.
"The reduction in the price of petrol would make Nigerians to have more money in their pockets to spend on goods and services. They will spend less in fueling their cars and generators,"Adegbite said.
The All Progressives Congress Presidential Campaign Organisation (APCPCO), described the sudden slash in the pump price of fuel as a panicky political measure far too short of the people's expectation and contrary to the 50 per cent relief suggested by the Muhammadu Buhari team.
The Director of Media and Publicity of the APC Presidential Campaign, Mallam Garba Shehu said "the Jonathan-led PDP government is beginning to listen to public outcry about bad governance, extortion and exploitation of the Nigerian masses in the oil sector where billions of naira were daily being ripped off the pockets of the common men and women."
Shehu also faulted both the decrease ratio of N97 to N87 and the timing of the announcement by the Federal Government as "politically motivated, ill-timed and too little, too late."
Similarly, the All Progressives Congress (APC) also accused the Federal Government of making a show out of deceit by its so-called fuel price reduction, saying a 10.3 per cent slash in the price is a mere tokenism at a time the price of crude oil has crashed by about 60 per cent.
The National Publicity Secretary, Alhaji Lai Mohammed, said the pump price of a litre of fuel should not be more than N70, adding that at N87, the government is forcing Nigerians to subsidise the massive corruption in the oil sector by N17 for every litre of fuel.
"When crude oil was selling at 100 dollars per barrel, the landing cost of PMS without subsidy was 125 Naira per litre. Now that the oil price has crash to about 44 dollars per barrel, landing cost without subsidy is about 65 Naira per litre. The same goes for diesel which should not sell for more than 90 Naira per litre," Mohammed said.
APC also wondered why the PDP-led federal government had to wait for a widely-publicised call from the APC Presidential Candidate, Gen. Muhammadu Buhari, and some other concerned Nigerians before doing what the governments of other countries in Africa and elsewhere around the world have already done.
However, the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) commended the government for the reduction, stressing that it would ease part of the burden being faced by the private sector operators on the cost of doing business in the country.
The Acting National President of the Association, Chief Bassey Edem, expressed optimism that the slash in fuel pump price would have a positive impact on businesses and the general price level as cost of doing business will relatively drop. ? "This positive action is however, pressured by the devaluation of the Naira against all foreign currencies as a result of our central bank's inability to fully defend the Naira," he said.
A win-win situation for stakeholders Though the government's decision might have been motivated by politics as alleged by the opposition, it is a win-win situation for the government, the marketers and the Nigerian people.
The government has lost billions of naira of oil revenue due to the falling price of oil, but it has also saved billions of naira due to the reduction in subsidy claims as a result of the drop in the international market price of petroleum products.
The drop in the price of crude oil at the international market from $115 per barrel to less than $50 has drastically reduced the federal government's indebtedness to marketers on subsidy claims.
Before the price reduction by the government, subsidy claims had reduced from N44 per litreof or N1.54 billion daily to N0.90 per litre or N31.5 million daily, representing daily savings of N1.225 billion.
At the crude oil price of $115 per barrel, the expected market price of imported petrol is N141 per litre, while the regulated price is N97, translating to a difference of N44 as subsidy.
Official statistics by the Petroleum Products Pricing Regulatory Agency (PPPRA) indicates that the country consumes 35 million litres of petrol daily at regulated price of N97 per litre.
With N44 paid per litre as subsidy before the current drop in the price of oil, the government spent N1.54 billion daily.
In the same circumstance, the expected open market price had also crashed to N97.90, against the official pump price of N97 per litre.
Also before the price reduction, the PPPRA template showed that the subsidy element had equally dropped to N0.90 per litre, representing the new difference between the official pump price of N97 and the expected market price of N97.90.
With the drop in subsidy from N44 per litre or N1.54 billion daily to N0.90 per litre or N31.5 million daily, the federal government was enjoying a relief to the tune of N1.225 billion daily.
This is because it was paying N831.5million daily, against the N1.54 billion it was paying before the drop in the price of crude oil.
Though the reduction in the price of petrol has increased government's expenditure on subsidy from N0.90 kobo per litre to N10.90 per litre, this figure is still far less than the N44 per litre, which the government paid to marketers as subsidy before the drop in the price of crude oil.
Marketers and other importers are also experiencing relief as their financial exposure to banks over government's delays in the payment of subsidy has reduced from N44 per litre to just 90 kobo per litre, before the recent price reduction raised it to just N10.90 per litre.
This means that after selling the imported products at the official price of N87 per litre, the only money they would expect from the government as subsidy is N10.90 per litre, as against N44.
The implication is that the money they will owe the banks has reduced correspondingly.
To the users of petrol, it is also a relief as they are now paying N87, down from N97, as against the expected open market price, which is now slightly above N90 per litre in view of the drop in the price of crude oil.
The argument that 10.3 per cent reduction is not enough does not make a good economic decision as Nigerians ought to be paying a market price of slightly above N90 per litre in the face of the drop in the international price of crude oil, assuming the downstream sector is deregulated.
Whether motivated by politics or economics, the reduction in the price of petrol is still a relief to consumers as government is still subsidising the product to the tune of over N10 per litre.
