Ahmed Adamu, PhD
It was not a surprise the real price of petrol in Nigeria is now N212 per liter, I have predicted this in the past. In fact, it could still reach N300 per litter depending on the market situation, particularly crude oil price and exchange rate. If there are no sufficient local refining capacities, there are going to be continuous shocks in the petrol prices.
Nigerians could not cope with the exposure to the volatility of the oil markets, because petrol price is associated with the general price level and there are no cheaper alternative public transportations. Since prices are sticky in the drop, frequent volatilities push and stick prices are higher levels, thereby reducing the purchasing power of people’s income and making more people poorer.
The Nigerian government will not want more increases in petrol prices since we have had series of them from N87 per liter to now supposed N212 per liter in just 6 years. The trap is that the government had already proclaimed removal of the petroleum subsidy, which means undesirably exposing Nigerians to shocks in crude oil and money markets since 100% of the refined petrol is imported solely by the NNPC.
Though petroleum subsidy removal is generally regarded to be a right policy, the prerequisite conditions have not been fulfilled in the case of Nigeria yet. One of the most essential conditions for removing the subsidy is sufficient local refining capacities so that everything will be processed locally, from extraction to refining, and there will not be involvement of foreign currency in the supply value chain and costs of international transportation will not be involved.
Already, today’s price hike announcement had already caused long queues in many of the operating filling stations selling at N212 per liter, and other filling stations have closed waiting for the confirmation of the higher price. This untold hardship had already sent a negative ripple effect on the major macroeconomic indicators like Income, Production, Employment, and Price levels. Therefore, the damage has been done.
Even though the agency responsible for determining the petroleum prices has denied imposing the market reflective price of N212, but the market has already responded, and it is truly the appropriate market price now. But, due to political ramifications, the circular had to be stood down. If that is the case how much will now be spent on the unofficial subsidy?
Even last week, the Senate accused the NNPC of spending hundreds of billions of Naira for the subsidy, the question here is that if the government still pays for the subsidy, then why Nigerians were exposed to the continuous price hike? Was there any significant compensation or development of the sector since the removal of the subsidy? The economies of average Nigerian have worsened off since the subsidy removal. Therefore, the marginal costs of the subsidy removal outweigh its marginal benefits.
Therefore, the Nigerian government should revert to N145 per liter and reintroduce temporary subsidy until when Dangote’s refinery comes on stream. It is very good news that Dangote agreed to sell his refined petroleum in Naira, thereby uncoupling the continuous dollar inflations from the petroleum supply chain. Even then, the subsidy should be removed in phases. In my previous posts, I recommended various subsidy regimes that could be implemented to phase it out.
Dr. Ahmed Adamu
Petroleum Economist, Nile University, Abuja.
