Over the past five decades, the price of petrol has been fixed by regulatory bodies such as the now-inoperative Petroleum Products Pricing Regulatory Agency (PPPRA). That changed weeks ago, following the removal of fuel subsidy. Market forces are now the main determinant of prices.
Why remove fuel subsidies?
After the pandemic, the cost of subsidising fuel surged, burrowing into Nigeria’s reserves. Some perspective: From ₦864 billion in 2020 it reached ₦1.4 trillion a year later. That wasn’t quite the end. In 2022, it ascended to a jaw-dropping ₦4 trillion.
In essence, Nigeria has spent several trillions of naira paying fuel subsidies in just a few years. Clearly, something needed to change. What might that be? The answer depends on who you ask. But for the government, the answer was an erasure of the subsidy on fuel in its entirety.
Without the government’s involvement, the market would decide. Some commentators said that an increase in prices was inevitable, but this would be followed by a decrease in prices. The market is yet to get to the decrease phase.
What factors determine pump prices?
As mentioned above, regulators used to be in charge of prices. Not anymore. In July, Mele Kyari, the Group Chief Executive Officer of the Nigerian National Petroleum Company Limited (NNPCL), explained that while the NNPCL’s marketing wing is responsible for fuel price adjustments, the body’s decision is only informed by the realities of a deregulated oil market.
These market realities take into account refining and freight, nationwide transportation, insurance, wholesaler and retailer margins, NIMASA charges, storage and other costs. Altogether, these costs provide the basis for the steadily climbing pump prices.
Now, because a lot of these costs are charged in USD, the recent decision to float the naira also plays a role in the increased price of fuel. “The price has really gone up because of the fundamentals in the market, which has to do with dollars,” said Chinedu Okoronkwo, National President of the Independent Petroleum Marketers Association of Nigeria (IPMAN).
Another consequence of the removal of subsidy is a lack of uniformity in pump prices nationwide. To understand why this is the case, one must know that fuel, like many other imported items, typically lands in Lagos. Some of it is retained; some of it is transported out of the state. The upshot is lower prices in the acclaimed centre of excellence than in other states because the farther the fuel has to travel, the higher its eventual price.
What does the future hold?
Some commentators have said that the fuel subsidy was removed without deeper consideration of consequences. All things considered, they might be correct. In June, when petrol was sold for about ₦360 per litre, some Nigerians shared their struggles with PiggyVest.
But nothing could have prepared our respondents for fuel prices that have now risen to ₦617 per litre. Indeed, since the subsidy removal, the cost of PMS has gone up 129%. This number is expected to rise as long as the naira continues to weaken against the dollar.
Already, there is data showing that Nigerians are unable to keep up with the new price of fuel. According to the Stears energy tracker, between June and July, daily PMS consumption dropped from 64.9 million litres to 52 million litres.
The government has noticed. A week ago, the NNPCL announced that it had secured a $3 billion loan from AFREXIM Bank under a special agreement. O’tega Ogra, the SSA to President Tinubu on Digital Media and New Media, explained that the loan will provide “the Federal Government with the necessary dollar liquidity to stabilise the naira.” He added that although fuel subsidies are not coming back, fuel prices will be affected because a “stronger naira will result in lower prices from the current level, making subsidies unnecessary.”
As weeks harden into months, many Nigerians will be hoping he is right.