Author Topic: UNCONSCIONABLE FUEL PRICES  (Read 777 times)

Offline furtune

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« on: December 01, 2008, 04:40:30 PM »
Unconscionable fuel prices

AT a recent Executive Council meeting, the Federal Government foreclosed any reduction in the pump price of premium motor spirit (petrol) in the face of collapsing crude oil prices in the international market. According to the Minster of State for Energy, Mr. Odein Ajumogobia, the government opted not to tamper with the prevailing price regime, because the downstream sub-sector market for petrol and kerosene is still regulated.

On the other hand, the price of automotive gas oil (diesel) is deregulated, hence its price per litre has dropped from a high of about N150 to around N100, depending on the location. Officially, petrol continues to sell at N70 per litre, although there are alarming price differentials in the hinterland, especially in the northern states.

The current official price of N70 per litre for petrol was fixed in June 2007 when crude oil sold for about $80 per barrel in the international market. It was the compromise price agreed on by the Nigeria Labour Congress, which led other stakeholders in the negotiations with the Federal Government, after a nationwide strike paralysed the new administration of President Umaru Musa Yar'Adua which inherited the last peremptory hike in fuel prices by President Olusegun Obasanjo's government.

By June this year, when oil prices surged towards $140 per barrel, Mr. Ajumogobia hinted that the government would implement an upward review in the price of petrol from January 1, 2009. The reason, he said, was to reduce the burden of excessive subsidy being expended on the importation of petrol to bridge the huge shortfall in local production.

Last week, oil prices continued their free-fall, trading for below $55 per barrel, occasioned by weak energy demands in the global economic recession. Forecasts remain bleak for oil producers, despite attempts by the Organisation of Petroleum Exporting Countries (OPEC) to shore up prices by slashing their production quotas. The Federal Government has also taken cognisance of the dramatic crash in oil prices. This is why it is now bench-marking oil prices at between $30 and $40 per barrel, as a major source of financing the 2009 budget.

In the face of this new reality, it is unconscionable for the government to freeze the litre price of petrol at N70 in the name of regulation. Some other countries have been prompted by the downturn in the oil market, to reduce the prices of refined petroleum products, most especially petrol and diesel.

Indeed, five years ago, in 2003, the Nigerian National Petroleum Corporation (NNPC) cut the pump price of petrol by 50 kobo, when crude oil prices slumped, and more particularly to buttress the argument that was being made in favour of deregulation as the governing code in the downstream sector. Nigerians should be justifiably concerned that the Federal Government is now contending that the sector is regulated, and that its subsidy outlay is enormous.

It is embarrassing enough that Nigeria, an oil-producing country, imports nearly 70 per cent of its refined petroleum products. The country has four refineries located in Warri, Port Harcourt and Kaduna. In concept and design, the refineries were expected to satisfy local demand, as well as for export to earn hard currency, in addition to receipts from the sale of crude oil.

Today, as it has been for many years, those refineries are epileptic in their operation, prompting recourse to importation. This has been a huge drain on the country's resources, as Nigeria bears all the attendant costs of importation, including inflation and high labour costs in the countries of origin of refined petroleum products. Nigeria is also helping to create jobs in those other economies, while job queues lengthen at home, resulting in associated social dislocation and violent crime.

Even more worrisome is the subsidy which the government claims it expends on fuel imports. There are no precise figures of the real value of the subsidy. Last May, Mr. Ajumogobia, while canvassing the removal of fuel subsidy, estimated the cost of subsidy for 2008 at nearly N700 billion. At the time, crude oil was selling for over $100 per barrel. Thus, with the price slump, the subsidy level will equally decline, although the exact amount remains debatable. But whatever subsidy there is amounts to external payments, by which Nigeria, while groaning in penury, lubricates the economies of exporters of refined petroleum products.

Nigeria's much talked about desire to number among the world's top 20 economies by year 2020, will remain a pipedream with the current inefficiency that is the hallmark of overwhelming reliance on fuel importation. At the moment, there is nothing on the horizon to suggest government's determination to break out of the importation cycle. Rather, the dominant thinking, as reflected in the Minister of State for Energy's recent remarks, is merely to pursue deregulation.

Such an idea amounts to further importation. As has been shown with the deregulation of diesel, there has been no corresponding increment in local production. Instead, all kinds of importers have opened letters of credit, combing the world for sources where they can obtain the least prices, then offload the products in Nigeria and sell at exorbitant pump prices. The nation's economy can never grow with such trader mentality.

Part of what needs to be done urgently is the rigorous pursuit of improved local refining capacity. The government must ensure that licences granted to private refinery operators are translated into real productive ventures with multiplier effect. In particular, the government may consider it a prudent investment to reserve a portion of current subsidy expenditures, to assist private refinery operators.

That way, instead of paying such monies abroad, local investors become the beneficiaries and are able to make the requisite investments to boost their operations. Yet, in the meantime, Nigerian fuel consumers deserve a respite from the current mismatch between fallen crude oil prices and the cost of refined products at home. The price of fuel should crash.


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« on: December 01, 2008, 04:40:30 PM »


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