Nigeria has a problem. The country is Africa's largest producer of oil and one of the world's largest exporters. Yet it imports most of its fuel, and a lot of the time faces fuel scarcity.
In the last few years, Nigeria has produced just under two million barrels a day, yet has only been able to process less than one hundred thousand barrels a day.
Why? Our refineries are not functioning.
Oil refineries should be used to transform Nigeria's crude oil into useful petroleum products, and with a combined capacity of 450,000, Nigeria's refineries could meet its fuel needs—in theory. Instead, like many other things, we import fuel when we can produce it, and this results in scarcity when imports don't meet up to demand.
The numbers are sketchy, but previously NNPC imported about half of Nigeria's fuel, with the rest supplied by fuel marketers and importers like MOMAN (Major Oil Marketers Association of Nigeria).
In the past, scarcities arose when these marketers either refused to import fuel or hoarded the product in response to government failure to make subsidy payments.
Today, marketers do not import fuel at all, and for once, they are not at fault.
Uneconomic landing cost
Fuel marketers are not importing fuel because it is too expensive for them to do so. The landing cost of fuel (how much it costs them to import) is significantly higher than the pump price of fuel (the price they are forced to sell it).
Fuel prices are pegged at ₦145, but it costs at least ₦170 to import it into the country. The government fixed a price of ₦145 using a global crude oil price assumption of $45 and an exchange rate of ₦285/$1. Today, crude oil prices are around $75, and the exchange rate is at least ₦305/$1. With these parameters, it would cost anyone at least ₦170 to bring fuel into Nigeria. Moreover, once the fuel gets to the depot, it costs nearly ₦20 for it to get to filling stations as a result of fixed margins like bridging margin and transporters' allowance.
Considering this, fuel importers have chosen to sit on the sidelines and left the burden of importing to NNPC, whose wealth allows it to sell fuel at a loss to Nigerians. You remember those stories of the NNPC having a ₦2 billion daily subsidy in 2018? That was the estimated loss (under-recovery) of it importing fuel for ₦170 and selling it at ₦145. No wonder the corporation is leaking money.
In a nutshell, because the price of fuel is fixed, NNPC is the only one importing fuel into Nigeria.
Waiting on NNPC is a problem.
The problem is that NNPC does not have the resources or facilities to meet the fuel demand for the whole country. It has neither the storage facilities nor the distribution networks needed to ensure a steady flow of fuel in the country. Most of our fuel comes in through the Apapa port and needs to be trucked around the country.
This is why Nigeria experienced fuel scarcity in December 2017—the NNPC was unprepared to handle the extra demand during the festive season and had to quickly correct this by ramping up its imports.
But it is not all on NNPC.
Over time, it has become very profitable to smuggle fuel to neighbouring countries who have much higher fuel prices. Neighbours in Niger, Ghana and Benin Republic have relatively higher fuel prices when compared to Nigeria. Smugglers take advantage of this to divert loaded fuel tankers to service stations at this border towns to benefit from the high prices. Fuel meant to ease scarcity is passed on to other countries instead.
What can we do?
So, Nigeria suffers from fuel scarcities because the price of fuel is fixed below the clearing market price, meaning that NNPC is the only importer and a lot of fuel is smuggled out. But the price of fuel is fixed because Nigeria has to import fuel, and Nigeria imports fuels because the refineries are not working.
Africa's richest man, Aliko Dangote, has started work on a refinery in Lagos. The potential production, from gasoline to even airport fuel, could substantially support the economy and help the country. But the refinery is scheduled to be at near full capacity in 2020, and these are responsibilities that fall more to the government, than a single private investor.
The junior Petroleum Minister Kachikwu has shifted his position from promising new refineries, promising to resign if Nigeria is still importing fuel in 2019, and now pledging government support for Dangote's refinery. But as with all policy and governance in an election year, implementation ahead of the 2018 Christmas break is uncertain.
So the solution seems easy and evidently clear. In the long-term, fix the refineries. In the short-term, adjust the retail price of fuel so that it makes sense for marketers to import. Any other mechanism and we leave ourselves open to more scarcity.
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