By Kuranga Abdulazeez
According to previous research on crude oil extraction in Nigeria, 40% of the extracted crude is locally refined as up to 60% is exported to be imported back in its refined form. The marketers are the major players in the importation activities. Imported fuel comes at a very high cost which causes marketers to shift part of the burden to the consumers in form of high prices. Being a valuable product and a 'necessity', government cannot leave consumers to bear the full burden of the high price directly. Therefore,
government subsidizes the price of oil to help consumers reduce the burden.
We all know that it was as a result of fluctuation in the forex market (which made the product to be scarce as well as high in price) that made the government to embark on deregulation of the downstream sector in order to justify the removal of fuel subsidy.
Around April/may this year, the federal government announced a deregulation in the downstream sector of the petroleum sector. The downstream sector is the part of the petroleum sector that is engaged in the refining and marketing of refined petroleum products (author's definition). As a result of that, the price of petrol was reviewed upwards to avoid exploitation of consumers by trade unions through such avenue.
On my way to Lagos from Ilorin, I took my time to note the average price of petrol among the filing stations i came across. The highest price was #144 while the lowest price was #139, thus making the average price of petrol among those sampled to be #141.5
Now the question is 'why is the price still fluctuating around the official price? '
The major reason for this is the scarcity of foreign exchange in the country caused by fluctuation in the forex market. If the forex market were to be stable, then the competition would have significantly drag down the price of oil.
From my own point of view, so far scarcity of dollars still persist, the policy of deregulating the downstream sector will not have significant positive effect on the economy, it will instead bring back the 'cabal' in the industry. How will the cabal come back?
Due to scarcity of forex, marketers who came in as a result of the deregulation will be forced to go out because they still cannot get the required foreign exchange. As they leave, those that can afford it will stay,form a cartel and then the cycle begins. Pressing it hard on the government that they cannot afford to import fuel at the high rate of naira to dollar, thereby bringing back the subsidy regime.
Only when the problem of scarcity of foreign exchange stops or is reduced, that we would begin to see the positive impacts of the government's decision to deregulate the downstream sector.
Measures are already in place to achieve this, one of which is the current increase in the Monetary Policy Rate( the rate at which the CBN lends money to the commercial banks) from 12% to 14%. Although I criticized this earlier on because it will reduce the level of borrowing for investment purposes in the country. But we have to think far from that. As a result of the increase in this Monetary policy rate (MPR), foreign investors will be attracted to lend money to the CBN at that high interest rate, thereby increasing the volume of dollars to be used for transactions in the economy. After that, the CBN can then reduce the MPR for local investors to borrow money in order to boost local productivity.
However, for this plan to be properly effective, we should take note of the time lag. It takes time for foreign investors to be convinced with the investment environment to make sure it is safe and friendly for them. It is when they come en masse that competition can take place thereby leading to a reduction in the MPR.
Measures might also be put in place to increase the base of foreign remittance into the economy. According to Ben Murray Bruce, Nigerians abroad remit more than $20billion yearly into the federal government coffers, so efforts can still be geared towards improving this.
Another measure is improvement of the productivity of refineries. Even if they are not capable of building new ones, the existing four would be operating at full capacities, thereby ensuring adequate supply.
In conclusion, deregulation of the downstream sector will reduce the price of PMS in the long run only if the problem of foreign exchange is being addressed critically.
Opinions, criticisms, corrections and suggestions will be highly appreciated.
Kurangaabdulazeez@gmail.com
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According to previous research on crude oil extraction in Nigeria, 40% of the extracted crude is locally refined as up to 60% is exported to be imported back in its refined form. The marketers are the major players in the importation activities. Imported fuel comes at a very high cost which causes marketers to shift part of the burden to the consumers in form of high prices. Being a valuable product and a 'necessity', government cannot leave consumers to bear the full burden of the high price directly. Therefore,
government subsidizes the price of oil to help consumers reduce the burden.
We all know that it was as a result of fluctuation in the forex market (which made the product to be scarce as well as high in price) that made the government to embark on deregulation of the downstream sector in order to justify the removal of fuel subsidy.
Around April/may this year, the federal government announced a deregulation in the downstream sector of the petroleum sector. The downstream sector is the part of the petroleum sector that is engaged in the refining and marketing of refined petroleum products (author's definition). As a result of that, the price of petrol was reviewed upwards to avoid exploitation of consumers by trade unions through such avenue.
On my way to Lagos from Ilorin, I took my time to note the average price of petrol among the filing stations i came across. The highest price was #144 while the lowest price was #139, thus making the average price of petrol among those sampled to be #141.5
Now the question is 'why is the price still fluctuating around the official price? '
The major reason for this is the scarcity of foreign exchange in the country caused by fluctuation in the forex market. If the forex market were to be stable, then the competition would have significantly drag down the price of oil.
From my own point of view, so far scarcity of dollars still persist, the policy of deregulating the downstream sector will not have significant positive effect on the economy, it will instead bring back the 'cabal' in the industry. How will the cabal come back?
Due to scarcity of forex, marketers who came in as a result of the deregulation will be forced to go out because they still cannot get the required foreign exchange. As they leave, those that can afford it will stay,form a cartel and then the cycle begins. Pressing it hard on the government that they cannot afford to import fuel at the high rate of naira to dollar, thereby bringing back the subsidy regime.
Only when the problem of scarcity of foreign exchange stops or is reduced, that we would begin to see the positive impacts of the government's decision to deregulate the downstream sector.
Measures are already in place to achieve this, one of which is the current increase in the Monetary Policy Rate( the rate at which the CBN lends money to the commercial banks) from 12% to 14%. Although I criticized this earlier on because it will reduce the level of borrowing for investment purposes in the country. But we have to think far from that. As a result of the increase in this Monetary policy rate (MPR), foreign investors will be attracted to lend money to the CBN at that high interest rate, thereby increasing the volume of dollars to be used for transactions in the economy. After that, the CBN can then reduce the MPR for local investors to borrow money in order to boost local productivity.
However, for this plan to be properly effective, we should take note of the time lag. It takes time for foreign investors to be convinced with the investment environment to make sure it is safe and friendly for them. It is when they come en masse that competition can take place thereby leading to a reduction in the MPR.
Measures might also be put in place to increase the base of foreign remittance into the economy. According to Ben Murray Bruce, Nigerians abroad remit more than $20billion yearly into the federal government coffers, so efforts can still be geared towards improving this.
Another measure is improvement of the productivity of refineries. Even if they are not capable of building new ones, the existing four would be operating at full capacities, thereby ensuring adequate supply.
In conclusion, deregulation of the downstream sector will reduce the price of PMS in the long run only if the problem of foreign exchange is being addressed critically.
Opinions, criticisms, corrections and suggestions will be highly appreciated.
Kurangaabdulazeez@gmail.com
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