Wednesday, September09, 2020 / 2:11 PM / by CSL Research / Header ImageCredit: TheCable Petribarometer

According to media reports, the  ExecutiveSecretary of the Petroleum Products Pricing Regulatory Agency (PPRA) AbdulkadirSaidu, speaking at a press briefing yesterday, stated that PMS priceswould  henceforth be determined by the forces of demand and supply and theinternational cost of crude oil. The agency said it would no longer releaseguiding price bands for Premium Motor Spirit (PMS). According to him, the roleof the agency would henceforth be to ensure that oil marketers do notprofiteer, as petroleum marketers  are now free to source for product andfix their prices.

There have been attempts in the past to remove the fuelsubsidy but these have not been without resistance from the populace. On May11, 2016, petrol pump prices were hiked by c.68% from N87/litre toN145/litre and many asssumed this signalled a full deregulation. This wasn'tthe case however as the subsidy regime was still in place. The exchange ratefactored into the landed cost of fuel was between N280 and N285/US$1. A steepdevaluation in the currency and an increase in crude prices in theinternational market, implied an increase in the landing cost whichnecessitated the continuation of the subsidy regime, though now booked asunder-recovery losses in the books of NNPC.

In 2020, a steep decline inglobal crude prices triggered by the global pandemic completely wiped out thesubsidy via significantly lower landing costs, paving the way for a reductionin the pump price of Petrol in mid-March. The PPPRA announced  a reduction in ex-depotprice to N113/litre and official pump price to N125/litre. Since then, thePPPRA has gone on to raise fuel pump price to N135-N145/litre in April beforeimplementing a reduction to N121.50 - N123.50/litre in June. An increase toN140.80 - N143.80/litre in July was implemented and was raised again in Augustto N148 - N150/litre to reflect rising cude prices.

The removal of the subsidy onPetrol is a critical free-market reform in our view, and we believe it isbeneficial to the economy and government finances. Asides the impact ongovernment revenues, the removal of the subsidy also removes disincentives to refinepetroleum product, and may improve the balance of payments through importsubstitution. That said, we are concerned that the timing may be inopportunegiven the effects of the pandemic and the recent hike in electricity tariffs onthe already squeezed Nigerian consumer. Also, we are concerned about possibleabuses by oil marketers.

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