Saudi Arabia and Mexico will ditch artificially low petrol costs this year, as the increase in international oil prices combine with strained public finances to make it too expensive to maintain artificially low prices.
This is in contrast to Nigeria, which has since resisted calls to review an eight-month old petrol price template, which has been rendered obsolete due to higher crude oil prices and a weaker naira.
“Nigeria is not wedded to the free market,” FBN Quest analysts, Gregory Kronsten and Chinwe Egwim, observed in a note to clients on Friday, December 30.
“It introduces reforms when the alternative is unpalatable.”
Crude oil prices are currently at a 16-month high and are expected to rise even further, as production cuts by OPEC members swing in this January.
Brent crude traded at $56 per barrel on Friday, and investment bank, Goldman Sachs has upped its oil price outlook for the second quarter of 2017 by five percent to $59 per barrel from current levels of $56.
Meanwhile, petrol traded at $1.66 per gallon on Friday, as the rally in crude oil prices push costs up.
Jose Antonio Meade, Mexico’s finance minister defends the price hike in Mexico by arguing that keeping petrol costs artificially low, following an increase in international oil prices, was too expensive for public finances.
Mexico’s new petrol price ceiling would be 14.2 percent to 20.1 percent above current prices, while Saudi Arabia, though yet to quantify the increase, will also raise prices in a phased manner, between 2017 and 2020.
Analysts at Lagos-based Financial Derivatives Company (FDC) say it is the first time in 80 years that Mexico will review its petrol prices upwards.
“If ‘wealthy’ Saudi Arabia says it cannot afford petrol subsidies, what then is Nigeria’s justification to maintain an artificial pump price?, asked Charles Robertson, chief global economist at investment firm, Renaissance Capital, by phone.
“Nigeria has far less foreign exchange in its reserves and sovereign wealth fund, as well as exports too little oil per person, compared to Saudi Arabia. Nigeria has about $25 billion in its external reserves, while Saudi Arabia boasts of over $500 billion.
“The government can adopt a gradual price increase to ease the burden it will bring on the people,” Robertson added.
The petrol price template introduced in Nigeria on May 11 2016, after acute fuel shortages crimped economic output and fanned inflation, saw prices jump 62 percent to N145 per litre from N86.50 per litre, as officials ran out of ideas on how to sustain artificially low prices at a time of falling revenue.
However, another upward review is long due in Nigeria, but officials have since resisted calls for a market price that takes the new exchange rate and rising oil prices into consideration.
It may take another acute fuel scarcity before Nigeria reacts in line with Mexico and Saudi Arabia, according to Dolapo Oni, head of energy research at Ecobank.
Oni’s calculations put retail petrol price at about N200 per litre but says a complete deregulation of the downstream petroleum sector is the only way out of incessant fuel shortages in Nigeria, especially at a time of weak economic growth.
“If the sector is deregulated, it will attract private investments and prices can gradually begin to trend downwards on the back of competitive pricing,” Oni said by phone.
Industry sources say the governing board of the Petroleum Product Pricing Regulatory Agency (PPPRA) and the Federal Government are holding dialogue with a view to agreeing on a new petrol price.
Estimates from the PPPRA show that Nigeria needs an average of US $500 million every month to import refined petroleum products since all its three refineries are currently producing at less than 25 percent of their installed capacity.
The Central Bank of Nigeria (CBN) has had to resort to special dollar auctions to meet the demand of petrol importers and ensure the country does not run dry of petrol.
The last special auction was on December 19, as the CBN sold $1 billion to airline operators, manufacturers and petrol importers.
Lolade Akinmurele
