Fallacy of one-price petrol comparison

By: Banji Oyelaran-Oyeyinka

THE world is experiencing a huge macroeconomic shock. According to S&P 500 Index, $5 trillion has been lost in these two weeks of the war. This is not including other measurable and unmeasurable factors.

The backdrop here is that Nigerians are somehow insulated from this crisis because we do or should enjoy, likely, the “cheapest” petrol in the world. The price of petrol is $1.4–$1.8 per litre across French West Africa. I lived in Abidjan for 7 years so I know.

However, low nominal petrol prices in Nigeria do not translate to affordability. Why? A resource-dependent, non-manufacturing nation is, as a rule, severely punished by natural and economic disasters and shocks.

We have deep structural challenges: low wages, relatively high inflation, and inevitably low purchasing power—that leave the average Nigerian more vulnerable to global oil shocks than citizens of countries paying far more for petroleum products.

There are three factors.

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PPP and Low Productivity Economy:

Purchasing power parity is made clearer not by direct currency conversion, but by how long a worker must labour to earn a given sum. Take the time required to earn $2 (poverty level measure) metric. It normalises currency fluctuations and shows the real labour cost of a transaction. For a Nigerian minimum-wage worker, earning $2 takes approximately 460 minutes, or nearly 7.7 hours.

In contrast, in the United States, where the federal minimum wage is $7.25 per hour, earning $2 takes about 16.5 minutes.

In the United Kingdom, with a minimum wage of £12.21 per hour, it takes roughly 7 minutes. This metric directly links global commodity prices to the daily reality and experience of the workforce.

Second, compare petrol price per income. A nominal comparison of petrol prices per litre shows Nigeria among the lowest globally, but this is a fallacy.

Why? Because we have to take this side by side with the country’s labour productivity, for example. I earlier cited the time required to earn $2. This is the true measure of development and underemployment. We are a low-income, fragile economy, the fragility of which throws households into a tailspin once you have an external shock!

Economic resilience is built by a sustainable domestic manufacturing production base where you have a diversified set of actors supplying goods and services; and where your FX comes from an equally strong export base of processed goods rather than exports of crude oil and exports of raw agricultural products, whose prices are fixed by others.

Productivity or time-to-earn a wage is the metric that reveals the true cost of labour and exposes the fallacy of a single-price comparison.

An underdeveloped country like us should not be compared with a superpower such as the USA or the UK, or any other OECD country, because of the simple reason that we have not earned that distinction.

When we have a low nominal petrol price, it does not necessarily translate to affordability. The price per litre in Nigeria of N1,300, which is fluctuating every week around or below ($1.00), is just one variable in a complex set of development equations.

Third, more useful is the ratio of that price to income. Citizens of low-income nations earn low incomes and, for the most part, at subsistence levels, they are in the borderline of the Trinity of Evil: disasters and shocks, hunger, diseases and deprivation of all kinds, so petrol, to be realistic, becomes a luxury item.

Why? Labour wages are so low such that the “effective cost of petrol” is relatively higher for a Nigerian worker than for a worker in any industrial nation with high income per capita. This holds true in normal times and in times of economic shocks.

In sum, it’s about the structural challenges we face whereby we have been stuck in low-level income equilibrium. 70% in subsistence agriculture. Challenging infrastructure, especially power supply, that has been a matter for frustrating decades of long lamentations. These shortcomings have solidified into a structural barrier that will require sustained efforts and honest leadership.

It’s also about our low productivity economy, where a worker takes almost 8 hours to earn $2 compared with 7–8 minutes in an OECD country.

To get a true picture, you must measure petrol cost in “hours of labour.” With this measure, it will manifest among the most expensive in the world because a Nigerian wage earner operates in a low-productivity system.

So we pay the naira price of petrol (N1,300 per litre) as Nigerians because we live in the naira “zone”, not the dollar or pounds zone, to put it starkly.

When you do a direct conversion of this naira to dollars/pounds, you generate an economic fallacy in terms of global PPP, and in that sense it confuses and misleads folks.

Nigerians are travellers and they sometimes get lost in the illusion of being who they’re not, especially when they carry some developed nation’s passport and speak in foreign dialects. The realist must situate a comparison of local currency price (of petrol, food and housing etc.) against local currency income.

Done this way, yes, Nigeria’s petrol is relatively not cheap. Food and housing prices are also not cheap.

By the way, large swathes of households in advanced nations also do not find gas or petrol prices cheap.

We remain so until we achieve structural transformation of the Nigerian economy.

•Oyelaran-Oyeyinka is a professor of Economics, Innovation and Technology Management