Oil and gas analyst, Ronke Onadeko on Wednesday in a tweet chat with the Nigeria Natural Resource Charter (NNRC) and other experts unbundled the implications of falling oil prices on the Nigerian economy as the Coronavirus disease (COVID-19) rage through most countries in the world.
Recall that the Nigerian government reduced the pump price of petrol to 125 naira, as the spread of the COVID-19 pandemic weighs down financial markets, slowing economic activity globally. This has generated a lot of commentaries in the media, with many people thanking the Nigerian government for reducing the pump price of petrol.
Onadeko, in unbundling the implications of falling oil prices on the Nigerian economy, elucidated between under recovery and subsidies, and deregulation and liberalisation of the oil and gas sector.
“With liberalization, government has oversight duties to keep an eye on trade and market forces to avoid unfairness, price fixing, etc. Under recovery is what is referred to when NNPC is the only importer of petrol and funds its purchase and logistics directly from revenue generated by the nation’s crude sales. The entire cost is removed from source, ie the difference between landed cost of petrol and pump price.
“Subsidies are when the government pays for a portion of cost to customers, it is deemed to be political, popular, however, wasteful in climes when the masses don’t benefit much. We need to know that as crude oil prices increase, the cost of subsidy to the government increases, and the same goes for the increase in Dollar exchange rates. So high crude prices mean high costs of subsidy to the government.
“Deregulation and liberalization are two terms I will explain so we are clear. Deregulation is when the regulation from the government is removed to allow market forces dictate rules of price, there will be no restrictions. Liberalisation on the other hand is when the controls are relaxed,” she stated.
Onadeko went further to state that “the COVID-19 pandemic brought up some issues that means global oil prices dropped, world economy slowed down, demand for oil internationally dropped, NNPC can’t find buyers for its crude, over 50 cargoes have gone unsold, price wars between Russia and Saudi arabia have further worsened the price.
“Cheap oil prices in other countries make their cargoes more buyable so we are left with little or no income for Nigeria, with reminder that 80 percent of our Dollar revenues come from crude sales. The more NNPC deducts the less can be saved for pain days, the less that is available to fund the budget, the less that is available for development etc, government spending shrinks, it allows and covers inefficiencies, waste and corruption in some cases.
“Under recovery as I mentioned is when the landed cost of fuel is higher than what it is sold for at the pump, we lose money, the loss is augmented from revenues from crude oil sales, the deduction by NNPC impacts funding to the economy, state and local government disbursements. So, our budget for 2020 is in trouble, no revenue to fund it, we also have Dollar debts to pay so NNPC can’t afford to be the sole porter of PMS anymore, it is not the most efficient buyer, supplier of PMS to the Nigerian market”.
Speaking on if the Nigerian government has gone back on previous attempts to deregulate, Onadeko said, “liberalization is where we are now, NNPC is no longer fully in charge of buying and supplying PMS. It is not the sole determinant of landing prices. Independent marketers have now been invited by NNPC to take over and join hands to supply products into the market. The climate for importation has changed and this time, the price has had a downward review reflecting the lower crude price. Landing cost has gone from N137 in February to about N64 in March. This will keep prices at the N125 per liter price for the rest of the month.
On how often to expect new pump prices, and why Nigerians can’t be allowed to enjoy ‘oil money’ through subsidies, the oil and gas analyst said, for now the price is till end of March, and that NNPC and PPPRA will review the price in April using the PPPRA template, and that Nigerians will enjoy oil money in better ways with deregulation.
“More Nigerians can find jobs in the sector, it will open up new businesses, competition will be good and it will cause prices to be more realistic, no hidden costs or corruption. For now the price is till the end of March. NNPC and PPPRA will review the price in April using the PPPRA template. We may not see pump prices reflect immediately because of existing stock that will need to be used up. Independent marketers will start importing and we should see their cargoes entering the market in about 3 weeks. On the first working day of April there will be a review and adjustment to match the international oil price for crude and any other adjustments for forex rates using the PPPRA template.
“There will be better accountability of revenues and less shortages. We should see increased spending in other sectors from the monies not lost to subsidies and under recovery. We should start seeing independent marketers getting busier, hiring more people, refining interests should be storing and costs should start coming down, it is good news for Nigerians. The government will stop bleeding because they no longer have to pay for subsidies, the losses we incur when NNPC imports will disappear, this will help us manage our meager revenues better, there is now going to be more money to invest in health infrastructure and education.
“Liberalizing the sector will make the sector more efficient, cheaper fuel will be available, more companies will participate in the value chain, competition will drive fair prices, technology will be deployed and transparency will increase. Just as we didnt imagine how 2020 will start with COVID-19, we should plan independently of the private investment of Dangote. Privatization has worked for the eleme petrochemical plant, I can’t see why not instead of wasting money doing repeated turn around maintenance exercises,” Onadeko said.