As Nigerians await President Buhari’s cabinet, there is a national discourse around the need or otherwise for a decision to be taken on the deregulation of the oil sector if the economy is to move forward. Proponents of regulation or maintenance of status quo base their argument on the fact that the citizenry should not buy petroleum products based on the global pricing benchmark because it is their God-given natural resource which comes at zero cost. The price to pay should just be the cost of extraction, refining and transportation to the fuel station. In their mind, our situation should be like that of the riverine people who literally pick fish from the waters to eat anytime they so desire. All that needs to be paid for is the cost of the canoe, the bait and fishing string.
On the other hand, those who argue for deregulation rest their case on the reality that regulation, price equalization and the subsidy that goes with the duo are fraud-prone and cannot be efficiently managed to the benefit of the citizenry and the nation.
The administration of subsidy through the few importers (about 300 firms in a population of 170 million) cannot be properly monitored as demonstrated by the 2011 scandal. Also, the petrol equalization scheme which was meant to ensure petroleum products are sold at the same price across the nation is archaic, fraudulent, indefensible and unmanageable. It is a huge fraud because the nation pays transporters to deliver petroleum products in Sokoto, Gboko or Kutuwenji while most of the trucks are discharged in Sagamu and payment made on the basis of unverifiable waybills.
Since inception of the scheme, not a single person has been reported to have diverted petroleum products and prosecuted for such fraud and economic sabotage. Does it mean that such fraud does not happen? Given the nature of man and the huge arbitrage opportunity on prices, it is impossible for such fraud not to be happening on daily basis. The products in few trucks that find their way to Sokoto or Gboko would never be sold at the controlled price. Those that end up being smuggled to the neighbouring countries would be sold at near premium international prices since those countries do not subsidize their petroleum product prices. So it’s a win-win for all the parties, typical to the nature of smuggled goods.
In keeping the petroleum equalization scheme, we forgot that the carrying cost of fuel to Sokoto or Kano is about N350,000 per 33-metric-tonne-capacity trailer which translates to about N10 per litre. Today, petrol is sold at N130 per litre in most parts of Nigeria outside Lagos, N100 in Lagos suburbs and N87 in a few stations in Lagos. Subsidy removal and cancellation of equalization fund will make pricing of petroleum products more equitable across the nation assuring supplies and reflecting actual transportation cost.
As desirable as it is for Nigerians to buy fuel cheap since we have crude oil in abundance, there are other compelling reasons why we cannot sustain the present subsidy regime. We have borders we cannot police or fence, hence if our petroleum products do not reflect global market price, there will be huge incentive to smuggle them out for premium prices. We tend to forget that our circumstances are not like that of other OPEC countries that sell petroleum products to their citizenry at subsidized prices. Venezuela is largely surrounded by petroleum producing countries and it has clearly demarcated borders with its neighbours comprising Brazil, Colombia and Guyana. The Arab nations where fuel subsidy is prevalent have natural borders. You cannot drive trucks on sand dunes from Dubai to Kuwait no matter the arbitrage price opportunity. The population is small while the per capita income is very high, so there is no depravity that we have here that pushes people to commit crime.
Globally, there is a positive correlation between income inequality and crime rate. Also bigger countries tend to have large absolute number of poor people, hence crimes like smuggling tend to thrive in highly-populated countries with marked inequality. Nigeria is perhaps the only oil-producing country that has a number of neighbours who do not produce oil in commercial quantities. It’s only pricing that can prevent our products from finding their way into these countries which include Benin, Ghana, Liberia, Niger, Mali, Chad, Cameroun, amongst others because we just cannot police our open borders. In the world map of oil-producing nations, Nigeria stands out like an oasis. Personally, I have no problem in allowing our neighbours to benefit from our God-given wealth but by the time the boom is over, our people may end up seeking refuge in these less-endowed but better-managed countries if we fail to do the needful.
Nigeria has the inglorious reputation of transporting the bulk of its petroleum products with trailers that have become hazardous to its citizens as they fall off the highway killing or maiming innocent people. This is because of the selfish interest of those who benefit from the equalization fund and the private depot owners. We have the worst petroleum products transportation infrastructure in the world. None of the NNPC depots spread across the major cities and geo-political zones is working. The colonial narrow gauge rail lines have just been rehabilitated after several years of neglect while the Federal Government still retains its monopoly over ownership of rail infrastructure. NNPC would rather pay N3 per litre of products to private depot owners all massed around Apapa than keep their facilities running. For inexplicable reasons the Federal Government and NNPC refused to maintain the link road between Mosimi and Sagamu which is a distance of less than 50km that would have taken the pressure off Apapa.
Given today’s technology, it is apparent that the relevant government agencies are not doing enough to curtail the nefarious activities of pipeline vandals between Mosimi and Lagos. Same goes for pipelines across the nation built in the 70s and 80s. Deregulation will put NNPC on its toes and stimulate efficient product distribution across the nation. The downstream sector of the petroleum industry will blossom if not fettered down by unnecessary regulation.
The kerosene subsidy regime that has been running for over 8 years mirrors the failure of regulation and the need to do away with petroleum products subsidy in its entirety in Nigeria. The government, in order to curb deforestation and make life easier for urban middle and lower income class, chose to sell kerosene at N50 per litre. Nobody across the federation buys lower than N120 per litre except in media shows at prime television time aimed at keeping the scheme going. The urban lower income people and rural dwellers who ought to be the beneficiaries of the scheme still use firewood. The real beneficiaries of the scheme might be marketing companies who sell the products at their own price and refine domestic kerosene for use as aviation fuel.
Happily, our refineries are about to start production and process about 400,000 barrels of crude per day while Dangote Refinery should be running in 2016/2017 with processing capacity of 600,000 barrels per day. The time to deregulate is now so that appropriate environment for Nigeria to be a net exporter of petroleum products by 2017 can be put in place.
We also need to deregulate the petroleum products prices to curtail our demand for foreign exchange as our neighbouring countries are cut off from our supply chain. That will free up foreign exchange to import raw materials for our industries and essential finished goods as we contend with the challenges of crash in global crude oil price. The savings on subsidy money will help stem the fiscal crisis we are in at federal, state and local government levels because of the over 50 percent drop in crude oil prices which has put our over 70 percent budgetary expenditure derived from crude oil sales into jeopardy. At least another N1 trillion will be available for distribution by the three tiers of government depending on the international price of crude oil.
NNPC should build buffer stock to moderate prices at the initial stage of deregulation as demand would outstrip supply and prices may be out of tune with global landing and distribution cost. The government should commence constructive engagement of the trade unions and civil societies who are bound to oppose deregulation of petroleum product prices as they traditionally would do. Definitely there will be agitation for increased wages and palliatives. The way out is for the governments to provide mass transit for their staff and create incentives for the private sector to do the same. Also, the Railway Act should be repealed to allow states build modern rail lines in their major cities and across their geo-political zones. This will link all parts of the nation with time. That will break the monopoly of Nigerian railways and ameliorate the pains of deregulation in the medium term.
As the deregulation of the oil sector would create inflationary spiral and alter direction of various other economic variables the dimension of which may not be discernible in the short run, it is necessary for us to confront the issue before further devaluation as being canvassed because of the state of our external reserves and challenges of banks in meeting their foreign exchange obligations. The time for consensus and action on deregulation of the petroleum sector is now.
Bolade Agbola
