Why petrol pump price remains unchanged despite dollar scarcity

From left, Secretary General, Nigeria Gas Association (NGA), Mr Adebola Martins; President NGA, Mr Bolaji Osunsanya; Group Executive Director and Chief Operating Officer, Gas and Power Directorate, Nigerian National Petroleum Corporation (NNPC), Mr Saidu Mohammed and Group Managing Director, NNPC, Dr Maikanti Baru, during a courtesy visit by the Nigerian Gas Association Executives to the GMD of NNPC in Abuja recently.

Premium Motor Spirit (PMS) otherwise called petrol remain s the most important of all refined petroleum products in Nigeria. This may be due to the fact that about 40 million liters of petrol are consumed daily by Nigerians, according to  the Nigerian National Petroleum Corporation (NNPC) and it is the major source of energy for automobiles in Nigeria.

However, despite decline in crude oil price, pump price of refined petroleum products has remained high and unchanged at about N200 per liter despite decline in crude oil price. Automobile Gas Oil (AGO) otherwise called diesel is being sold between N200-N250 per liter. HouseHold Kerosene (HHK) otherwise called kerosene is being sold between N200-N350 per liter while petrol is being sold between N138-N145 per liter.

In 2014, average crude oil price was $120 per barrel, while pump price of diesel was between N120-N140 per liter. Petrol and kerosene were being sold at N97 per liter and N50 per liter (official rate) and N150 per liter (unofficial rate) respectively for kerosene.

Expectedly, pump price of petroleum products is expected to have dropped significantly due to over 100 per cent  drop in crude price per barrel. However, industry sources stated that non-availability of foreign exchange currencies, especially the dollar, to import refined petroleum products by marketers, was responsible for non reduction in pump price of petroleum products.

According to a source who pleaded anonymity, “the spread between official rate from banks and black market operators is so close that their difference is insignificant. Last week, GTBank was selling a dollar at N390 while black market rate was N415-N420 to a dollar. So sourcing for dollars at such ridiculous rate to import products especially diesel and kerosene which prices are allowed to move freely would result into higher pump price of the products.

“However, the pump price of petrol isn’t affected because the Nigerian National Petroleum Corporation (NNPC) imports almost 100 per cent of petrol. I’m sure the Corporation won’t get dollars at parallel market rate. The Corporation also has a crude swap arrangement with some refiners abroad whereby Nigerian crude is taken to refineries abroad in exchange for white products (petrol).”

By implication, he argued that most marketers buy products from the NNPC, including the major marketers, independent marketers and depot owners for onward distribution to the masses. He said they also provide logistics for the Corporation like throughput arrangement, storage facility and loading bay for product discharge.

“The Minister of State for Petroleum Resources, Dr Ibe Kachikwu, did the right thing to have deregulated the downstream sector. Although, the deregulation is still partial because of the price band the government provided which remains N138-N145 per liter. That decision was the solution to hoarding and scarcity Nigerians experienced few months ago.

“There is every indication that the current Group Managing Director (GMD) of the NNPC, Dr Maikanti Baru will sustain the legacy of the former GMD, and we the marketers are in full support of their agenda which will eventually lead to full deregulation of the downstream sector,” he stated.

When asked to explain how shortage in foreign exchange would lead to relative increase in pump price of petroleum products, he explained thus:

“Assuming a barrel of crude oil is $100 and Nigeria exports one million barrels per day. This will result into $100million as revenue for the country. Assuming also that exchange rate for a dollar is N150 as it was early 2015, the nation will earn N15 billion as revenue daily.

“Compare same scenario with now when exchange rate is at an average of N400 to a dollar, and drop in crude price to $50 per barrel and insecurity challenges in the Niger Delta region which has resulted into lesser crude exports for Nigeria. The country will earn N50 billion as against N150 billion it was earning. Now, the 1 million barrel per day is not feasible any longer because of damage to oil installations in the creek by militants.

“By implications, Nigeria is earning lesser from crude oil exports while cost of importing refined petroleum products is more expensive than before. The decision by the NNPC to be the major importer of petrol will ensure that the pump price of the white product will not change despite challenges of foreign exchange scarcity for marketers and other importers.”

Furthermore, another source who also pleaded anonymity stated that Federal Government still subsidizes petrol, through the Petroleum Equalization Fund (PEF).

He argued that during the meeting sometimes in April ahead of partial deregulation of the downstream sector, “it was agreed that the government will sustain PEF to ensure that the gap or spread between pump price of petrol in the Southern Nigeria is reasonably closed to pump price in Northern Nigeria because the ports where the products are being discharged are mainly in the Southern Nigeria.”

“PEF is still being used to bridge the gap and that’s why prices in the North are not widely spread away from pump prices in the South. But if the foreign exchange challenges are addressed, many marketers will also participate in importation of refined petroleum products because Nigeria has the market for every player in the sector to break even, irrespective of your geographical location,” he said.

PEF was established in 1975 when between 1974 and 1975, most petrol service stations nationwide were characterized by long queues due to frequent severe shortages of petroleum products. The problem was compounded by the haphazard way marketers priced the product on the basis of transportation cost incurred by them.

In an effort to solve the problem, the Federal Government set up an inter-ministerial committee comprising of the then Ministries of Mines and Power, and Transport, the Nigerian Ports Authority, the Nigerian Railway Corporation and the Petroleum Products’ Marketers to examine the situation and make appropriate recommendations.

The committee observed that the only variable element in the provision and the sale of petroleum products at uniform price nationwide was the transportation cost. It therefore, blamed the limited local refining capacity and inadequate distribution facilities for the problem.

In line with the recommendation of the committee, Government introduced the Uniform Pricing System. In cognizance of the inequality in the transportation cost of distributing products throughout the country, the Petroleum Equalization Fund (Management) Board was established. The Fund which was established by Decree No. 9 of 1975 (as amended by Decree No. 32 of 1989) was charged with the primary responsibility of reimbursing petroleum marketing companies for any losses suffered by them, solely and exclusive, as a result of sale of petroleum products at uniform prices throughout the nation.