Coronavirus: Why Nigeria slashed fuel prices

Last week, Nigeria slashed local fuel prices by 13%, a major cut in five years, supposedly to ease economic tensions caused by the Coronavirus disease. At the time the cuts were announced, crude oil, the country’s main export product had crashed from $65USD per barrel, to $25USD per barrel.

This implied a 45% revenue shortfall for the oil-dependent West African nation. At the time, many creditors had withdrawn, and local businesses shut, dimming the country’s hopes of financing its nearly $30bn budget for 2020, anchored mainly on oil sales, taxation and borrowing . The country should have perhaps inflated prices of the refined crude, to cover existing revenue gaps.

However, the local fuel prices do not affect government earnings, says a local Oil and Gas businessman, Mr. Moses Shipi.

“Nigerian Crude Oil made of Bonny Light, Forcados and Aqua Light is owned by the Federal Government.

“Slump or fall in the prices of any of these can affect the nation’s income and budget, since it is the primary source of funding revenue.

“Refined crude – Premium Motor Spirit, Automotive Gas Oil and Dual Purpose Kerosene is imported by independent marketers and therefore has no direct effect on national income or budget,” Shipi said in an online discussion forum, Plateau Our Heritage.

Inevitably, the fallen crude oil prices, according to a former Central Bank Official, Sunday Akun, caused decrease in “some cost components that make up the domestic pump price of petroleum products.”

In Akuns’ words, “The key sources of oil revenues in Nigeria are crude oil export proceeds, taxes on domestic sales of petroleum products, petroleum profit tax, signature bonus and sundry sources from gas sales. Oil and gas revenues contribute a significant proportion of budget funds in Nigeria.

“In general, a fall in the price of crude oil in the international market will result to a decrease in some of the cost components that make up the domestic pump price of petroleum products; such cost components include purchase price of crude oil, refining margin, product shipping cost, domestic distribution cum marketing cost and finally, government tax. This simply explains the current reduction in the pump price of PMS from N145 to N125 per liter.”

Fuel price slash however, Akun said is a microeconomic strategy aimed at reducing cost of local goods.

“The benefit of a reduced pump price of PMS are: likely increase in energy consumption by consumers and reduction in the cost of energy as a component of economic production cost. Bearing the sticky nature of prices of goods and services and also market imperfections, these two above could lead to lower prices of goods and services.

“In the long run, the reduced cost of energy in the production process could lead to increase in firm profit, which ordinarily is an incentive for business to expand production and/or make new investments, leading to more employment of labour.”

A former Director General of the Nigerian Building and Road Research Institute (NBRRI), Prof. Danladi Matawal however said the fuel prices should not have been hiked from N65 to N145 per litre in 2016.

Prof. Matawal said, “It is an indictment that the former pump prices were simply intuitively and haphazardly fixed to dupe and intimidate Nigerians and make our lives uncomfortable.

“Old pump prices had no logical justification but were arbitrary changed at the whims and caprices of the powers that be.

“We welcome the new pump prices and urge that they should be lowered further to ease the suffering of the masses.

“The only consideration that may stand against us is if our refined products are pumped out of the filling stations and transported to neighboring countries because of relative cost advantage.”

The Nigerian government has not confirmed paying subsidy on the imported fuel to arrive at the new price.

Any subsidy however, perhaps might further overstretch the country’s already fragile treasury, thus depriving other sectors of funds.