The alternative model for determining fuel price is the production pricing model. In this model, the fuel price is the cost of crude oil at the refinery gate, the refining cost, the distribution and marketing cost and the taxes. Oil producing nations used the production pricing model for fuel prices in their domestic market before IMF neoliberal technocrats invented the import parity pricing model.
“Of all our studies, history is best qualified to reward our research. And when you see that you’ve got problems, all you have to do is examine the historic method used all over the world by others who have problems similar to yours. And once you see how they got theirs straight, then you know how you can get yours straight.” – Malcolm X, Message to the Grassroots, 1963
The Federal Government have been busy in the last few days trying to justify the premium motor spirit (PMS) price hike from N148/litre to N162/litre. The Federal Government argues that fuel subsidy has ended and fuel prices are now determined by market forces. They proclaim that the poor do not benefit from low fuel prices. They argue that the fuel price hike is beneficial to the Nigerian masses and the Nigerian economy. They insist that lower fuel prices encourage the smuggling of petroleum products into neighbouring West African nations. They point out that fuel prices have been increased in other nations. They deny that they are pursuing an International Monetary Fund (IMF) policy of subsidy removal. They insist that the fuel subsidy bill is unsustainable. All the arguments of the Federal Government are false. They only present limited information that fit their narrative. We will present all the facts about the fuel price hike and show that it is an IMF-inspired policy that increases the poverty of the Nigerian masses and under-develops the Nigerian economy.
The Federal Government argues that low PMS prices benefit only the rich and not the poor. This is not true. Patrick Moynihan once said “everyone is entitled to his own opinion but not his facts”. Facts do matter. The current fuel price hike will increase the poverty and suffering of the common Nigerian. Nigeria has a population of 206 million, with 52 per cent living in urban areas and 48 per cent in rural areas. In 2019, the National Bureau of Statistics (NBS) estimated that 82.9 million people (about 40.2 per cent of the population) live in poverty. A poor person was defined as a person living on N377 per day or N137,430 per year. At a street market exchange rate of N460/$1, a person living on $0.82/day in Nigeria was considered poor. Nigerian children and youths between 0-18 years made up 50.9 per cent of the population (104.85 million). Thus, out of the remaining 101 million Nigerians above 18 years of age, 82.9 million or 82.2 per cent were poor and lived on less than N377/day or N11,310/month.
How does each of these 83 million poor Nigerians survive on less than N377/day? They spend 56.65 per cent (about N214/day) on food, 11.5 per cent (N43/day) on transport and fuel, 12.3 per cent (N46/day) on health and education, 12.7 per cent (N48/day) on rent, household goods and clothing, and the remaining 6.85 per cent (N26/day) on services and water. It is important to be very concrete and have the empathy to imagine spending only N200/day on your food and using only N50/day for your transportation. The 83 million poor Nigerians and their children only use road and marine transportation to go to their offices, schools, markets and farms. They do not use the railways or airplanes. There are 195,000 kilometres of road network in Nigeria. Rural roads make up 68 per cent of the road network, while state and federal roads make up 16 per cent each. Only 55 per cent of the road are surfaced. Most of the roads are poorly maintained and are in poor shape. Poor Nigerians use these roads daily, traveling by public/private transport, buses, tricycles, motorcycles, etc.
All the daily mobile transportation done by 83 million poor Nigerians is PMS dependent. A PMS price hike therefore affects the price of transport and all commodities transported by road. For instance, when the Federal Government increases the PMS price by 11.7 per cent, the prices of transportation increases by more than 50 per cent and the price of food goes up by almost 100 per cent. The price of a bag of rice has gone up from N22,000 to N40,000 since the fuel price hike was announced. The price of health, education, rent and all other services also increase as transportation increases. Household goods and clothing cost more. The Federal Government has already increased the electric tariffs. People cannot pay the DisCos for their electricity or run their small generators. Small businesses are collapsing due to high energy costs. Yet the daily disposable income of N377 remains constant. Thus, education, health, household goods, clothing and any other purchase that can be sacrificed are eliminated from the household expenditures, thereby increasing general suffering and poverty. This is how the fuel price hike policy under-develops the masses of Nigerian people.
According to the IMF, “The impact of increasing domestic fuel prices on the welfare of households arises through two channels. First, households face the direct impact of higher prices for fuels consumed for cooking, heating, lighting, and personal transport. Second, an indirect impact is felt through higher prices for other goods and services consumed by households as higher fuel costs are reflected in increased production costs and consumer prices.” So, the IMF advised that governments should “implement targeted mitigating measures to mitigate the impact of energy price increases on the poor”. The Federal Government has not provided any such mitigating measure. In the past, such mitigating measures like the Subsidy Reinvestment and Empowerment Programme (SURE-P) failed due to mismanagement and corruption. Thus, the fuel price hike has made the poor Nigerian masses poorer with no safety net. Unemployment, for the second quarter of 2020, was 27.1 per cent and the underemployed made up another 28.6 per cent of the labour force. People have just come out of a lockdown, during which they received no palliatives. They have lost their jobs, used up their savings and seen their mini-businesses in the informal sector collapse. The Federal Government argues that this suffering and pain is a temporary condition imposed on the nation by market forces of supply and demand in the petroleum product market. But, unlike the theoretical supply-demand model taught in freshman economics classes, in the real world real markets are not free and prices are sticky downwards.
In May 2015, when this government took over the reins of power, WTI crude oil prices were $60/bbl and PMS sold for N97/litre. In May 2016, when WTI crude oil prices were $46.71/bbl, the Federal Government increased the price of PMS from N97/litre to N145/litre in order to raise revenue and met IMF expectations of subsidy removal. In March this year, when WTI prices were $29.21/bbl, government reduced PMS prices to N125/litre. The prices of food, electricity, health, education, rent and all other services did not come down. The minister of state for Petroleum, Timipre Sylva, explained that, “In March, when we announced the deregulation, the prices were low, so we brought down the price of petrol. The unfortunate thing is that when we brought down the price of petrol, nobody reacted in the market place. The prices were the same. Nobody reduced their prices because the price of petrol had reduced. Even bus fares, taxi fares were the same. It did not go down when we reduced the pump price of petrol. We thought that those people in the market – the transport drivers and transport owners – would reduce their prices. But nobody reduced their prices. But anytime there is even a kobo increase in the pump price of product, you see that people will increase their prices triple fold and four-fold.” In the real world, fuel induced prices are sticky downwards, and free market supply-demand equilibrium prices do not exist. Since June, PMS prices have increased for four straight months, rising from N121.50 – N123.50 per litre in June, to N140.80-N143.80 in July, N148-N150 in August and N158-N162 in September. The prices of many basic commodities and services have increased as a result of the fuel price hike. Thus, the argument that the poor will benefit when the fuel price is low and that they only suffer when the fuel price is high is wrong. The reality is that fuel price modulation in a market where prices are sticky downwards results in the permanent transfer of fund from the poor masses to government. It is, from a development point of view, a corruption/mismanagement tax on the poor. Apart from this, PMS has a fairly inelastic demand in Nigeria. Large changes in prices lead to very small changes in demand. There are very few alternatives to road transport in the movement of goods and persons. Walking is not a viable economic option.
Malcolm X teaches us that if we have a problem and we want to solve it, we should look at how other people around the world solved similar problems. Given the negative impact of subsidy removal or fuel price hike on ordinary working people and farmers, it is imperative that we examine the struggles of the grassroots in some countries against the imposition of fuel price hike by their government and the IMF.
The Federal Government promotes the argument that the subsidised fuel price in Nigeria has encouraged smuggling across the border to the neighbouring nations of Niger Chad, Cameroon, Togo and Benin. The IMF even did a study to promote the idea (IMF WP/15/17 “Unintended Consequences: Spillovers from Nigeria’s Fuel Pricing Policies to its Neighbors”). A simple input/output volume balance of petroleum products in the region shows that this argument is not supported by facts. For example, Niger’s Zinder refinery has a 20,000 barrels per day (bpd) capacity. There are presently plans to build a private refinery in Katsina State that will refine crude oil from Niger Republic. In 2015, the country produced 15,280 bpd of petroleum products and imported 3,799 bpd for an input volume of 19,079 bpd. The country consumed 14,000 bpd and exported 5,422 bpd into Mali, Burkina Faso and Nigeria for an output volume of 19,422 bpd. Niger therefore had a net output of 343 bpd. Chad produced 0 bpd of petroleum products and imported 2,285 bpd for an input volume of 2,285 bpd. It consumed 2,300 bpd and exported 143 bpd for an output volume of 2443 bpd. It had a net output of 158 bpd. Cameroon produced 39,080 bpd of petroleum products and imported 14,090 bpd for an input volume of 53,170 bpd. It consumed 45,000 bpd and exported 8,545 bpd for an output volume of 53,545 bpd. It had a net output of 375 bpd. Togo produced 0 bpd of petroleum products and imported 13,100 bpd for an input volume of 13,100 bpd. It consumed 15,000 bpd and exported 0 bpd for an output volume of 15,000 bpd. It had a net output of 1,900 bpd. Benin produced 0 bpd of petroleum products and imported 38,040 bpd for an input volume of 38,040 bpd. It consumed 38,000 bpd and exported 1,514 bpd for an output volume of 39,514 bpd. It had a net output of 1,474 bpd. The total net output of surrounding nations in the region is 4,250 bpd.
In 2015, Nigeria produced 35,010 bpd of petroleum products and imported 322,400 bpd for an input volume of 327,332 bpd. Let us assume that the net regional output of 4,250 bpd was smuggled across the Nigerian borders, this makes up only 1.3 per cent of net input volume, which does not justify a fuel price increase. However, Nigeria consumed 325,000 bpd and exported 2,332 bpd for an output volume of 258,410 bpd in 2015. There was therefore an estimated net output of 68,922 bpd which was never imported into the country and captures some of the subsidy corruption that usually occurs during an election year, as Nigeria PMS import figures get inflated to mask the theft of public funds for electoral purposes. For example, in October 2019, Nigeria was reported to have consumed 57.2 million litres per day (359,777 bpd) of PMS. This was so outrageous that the Federal Government set up the automated Downstream Operations and Financial Monitoring Centre (DOFMC) through the Nigerian National Petroleum Corporation (NNPC) to help determine the actual national daily consumption of PMS. In February, the Department of Petroleum Resources (DPR) put the national demand at 38.2 million litres per day (240,270 bpd). It is clear that the volume of PMS imported for election years 2011, 2015 and 2019 were grossly inflated to corruptly subsidise private and electoral interests. This was shown by the 2012 Farouk Lawan House of Representative Ad-Hoc Committee investigation and report. None of the persons and companies identified for corrupt practices by the Ad-Hoc Committee has been brought to justice. None of the persons accused of diverting SURE-P funds to personal use has been convicted or served a day in jail.
The Federal Government is caught up in an IMF propaganda web spin. It insists that the PMS prices are now determined by market forces. The Ministry of Petroleum Resources, NNPC and Pipelines and Product Marketing Company (PPMC) have all denied that they set fuel prices. Even the Petroleum Products Pricing Regulatory Agency (PPPRA) that used to set fuel prices and publish the monthly PMS price template now insists that fuel prices are determined by market forces. The minister of state for Petroleum Resources, Timipre Sylva, said “Government stood back from the business of fuel importation. Government would only protect the consumer so that no one profiteers on consumers. We are no longer fixing prices, we have stepped back and allow market forces to determine prices,” However, this is not true.
In March, the Federal Government set up a Price Review Committee (PRC), whose duty is to meet once a month to review the prevailing price of petrol for each month. The PRC began work in April. The executive secretary of PPPRA, Abdulkadir Saidu, explained the new function of the PPPRA. He said, “the agency no longer fixes prices but rather provides a guiding price band within which the operators are expected to operate. This takes into account prevailing market conditions by monitoring petroleum products prices daily, using the average price of the previous month and other components like foreign exchange rates to determine prices for the following month, while ensuring reasonable returns to Oil Marketing Companies (OMCs)”. Thus, the Price Review committee decided that fuel prices should increase from N148 per litre to N162 per litre. This decision was approved by the PPPRA, the Ministry of Petroleum Resources and the Federal Government. The current PMS price of N162/litre was not decided by market forces. Rather, it was a bureaucratic government decision.
The Minister of Information and Culture, Lai Mohammed defended the fuel price hike by comparing Nigerian PMS prices to that of nations in the West/Central African sub-regions. This is like comparing apples and oranges. The comparison should have been to PMS prices in other OPEC nations or oil producing nations like Iran, Kuwait, Malaysia and Venezuela. Somewhere at the end of his comparison, Lai Mohammed noted that petrol sells for “N168 per litre in Saudi Arabia.” The price of PMS in Saudi Arabia on September 7 was SAR 1.63 ($0.427/litre or N162.3/litre at a N380/S1.0 exchange rate). Saudi Arabia does not agree that it is “subsidising” PMS. Rather, the kingdom insists that it is selling its PMS at an “internal price” above production costs. It wants the word “subsidy” to be removed from expert briefing during the November 2020 G20 countries summit in Riyadh. The poverty rate in Saudi Arabia (below $5.50/day or N2090/day) is 0 per cent.
In an oil producing nation like Malaysia, the current price of PMS (RON95) is RM1.71 per litre ($0.41/litre) compared to N162 per litre ($0.42/litre) in Nigeria. However, there is a petrol subsidy programme in Malaysia. Under this programme, car owners on Bantuan Sara Hidup (BSH) receive RM120 (N11,256) every four months. Motorcycle owners receive RM48 (N4,502). The subsidies only apply to cars with an engine capacity of 1600cc; unless they are over 10 years old. Similarly, the motorcycle subsidy only applies to engine capacities below 150cc, unless the vehicle is over seven years old. Malaysia’s new poverty level is RM2208 /month (N207,105/month) and only 7.6 per cent of households live on less than this. In Kawait, fuel prices are to increase in September. The price of low-octane petrol will rise by 41 per cent to KD0.085 ($0.28) per litre, compared to N162 per litre ($0.42/litre) in Nigeria. Kuwait’s poverty rate (below $5.50/day or N2,090/day) is 0 per cent. The Kuwait government expects resistance from the labour unions who had publicly expressed their rejection to the planned fuel price increase in August. It is not surprising that neither the Federal Government nor the fuel price hike proponents have dwelled on the expected grassroots pushback and resistance that fuel price hikes have met in many nations.
Malcolm X teaches us that if we have a problem and we want to solve it, we should look at how other people around the world solved similar problems. Given the negative impact of subsidy removal or fuel price hike on ordinary working people and farmers, it is imperative that we examine the struggles of the grassroots in some countries against the imposition of fuel price hike by their government and the IMF. This will tell us how best to react to the present fuel price hike. A few examples, since our fuel subsidy struggles in 2012, would suffice. In Indonesia, the government decided to increase fuel prices by 44 per cent in June 2013. Thousands of protesters rallied against the planned increase. More than 3,000 demonstrators protested in front of the national parliament, waving banners and burning tyres. The fuel price hike caused the price of everyday goods to rise. More fuel price increases came in October 2014 when the PMS prices were raised by 30 per cent to IDR 8,620/litre ($0.58/litre). More protests took place. In 2018, the president, Joko Widodo, asked his energy minister to scrap another fuel price hike a few hours after it was announced. He froze fuel prices for the next two years by increasing subsidies. The fuel price freeze is still in place. The current price of a litre of PMS is IDR 9125/litre ($0.614/litre).
The Nigerian masses and labour have always argued that a fuel subsidy does not exist. What exist is a subsidy on corruption and the mismanagement of our refineries. President Muhammadu Buhari knows that a fuel subsidy does not exist. He has said this publicly on many occasions. If this is the case, how did the IMF come about the idea of a fuel subsidy that must be eliminated with fuel price hikes? What exactly is a fuel subsidy?
In Sudan, fuel price were increased by 60 per cent on September 23, 2013. The removal of petrol subsidies was met with two weeks of daily demonstrations by the populace. Newspapers and media outlets were censored and suspended. More than 170 people were killed and thousands arrested. Although the grassroot resistance was crushed by the Omar al-Bashir regime, it showed the people that the regime was not invincible. In Yemen, the IMF offered the government a $560 million loan that was conditioned on a removal of petroleum products subsidy. In August 2014, the government increased PMS prices by 52 per cent from YER125/litre ($0.50/litre) to YER190/litre ($0.76/litre). More than 55 per cent of Yemen’s population of 30 million live under the poverty line. The grassroots resistance was fierce, as demonstrations broke out in numerous cities. The resistance continued for many weeks and contributed to more insecurity in the country.
On January 1, 2017, the Mexican government imposed a 20 per cent increase in fuel price. The price of PMS increased to 15.99 pesos/litre ($0.75/litre). Civil societies and workers unions mobilised over social media. The grassroots demonstrated in the streets and shut down petrol stations across the whole country. The labour unions blocked major highways. The attempt of the government to crack down was met with rioting and looting. Hundreds were arrested. The protesters demanded lower fuel prices, an increase in domestic refining of crude oil and the resignation of President Enrique Pena Nieto. Mexico has a population of 129 million and more than 46 per cent live under the poverty line. Although Mexico is an oil producing nation, it imported 44 per cent of its refined products from the United States because of limited refining capacity. Current PMS prices are MXN 19.06/ litre ($0.906/litre).
In March 2018, Venezuela ended its PetroCaribe programme, which enabled Carribean nations to buy petroleum products at a reduced rate. The Haiti government obtained an IMF loan that came with conditionalities. These included the removal of fuel subsidies. The price of petroleum products was increased by 50 per cent. Food prices went up. The Haitian population is 11 million and 60 per cent live below the poverty line. Unemployment is 40 per cent and an additional 40 per cent of the labour force are underemployed. The reaction of the Haitian grassroots to the fuel price hike was immediate. Demonstrators blocked the streets, fought the police, attacked government officials and put businesses and government buildings on fire. They demanded an end to corruption and the reversal of the fuel price hike policy. Hundreds were arrested and 17 citizens killed. The government backed down and reversed the fuel price increase after months of protests. The protests have continued as the government’s committee on corruption under the PetroCaribe programme reveals more information. Currently, PMS sell at HTG 59.18/litre ($0.548/litre) in Haiti.
In Zimbabwe, protests broke out after the government increased fuel prices by 150 per cent in January 2019. Zimbabwe has a population of 14.5 million and a poverty rate of 72.3 per cent. All the petroleum products consumed in Zimbabwe are imported. The fuel price increase led to massive demonstrations. Demonstrators looted shops, blocked major roads and burnt tyres. Clashes between demonstrators and security forces led to five people being killed. Soldiers patrolled the streets of the nation and crushed the mass revolts. In May 2019, another fresh round of fuel price hike was introduced. This time, the price of PMS per litre was increased by 46 per cent to $1.42/litre. Protests and demonstrations broke out again, leading to more crack down. Currently, PMS prices are at ZWD 97.93/litre ($1.175/litre). In 2019, Ecuador took a $4.2 billion IMF loan to help grow its economy. The loan came with conditionalities, which included the removal of fuel subsidies to help stop the suspected smuggling of petroleum products to neighbouring nations. Ecuador has a population of 17 million and a poverty rate of 21.5 per cent. In October 2019, the price of PMS was increased by 25 per cent from $0.64/litre to $0.80/litre under presidential decree 883. The protests began on October 3, 2019 and lasted 11 days. The Ecuadorian grassroots, consisting of the poor, indigenous people, women, youths, students, farmers and workers, occupied the streets, government buildings and the oil fields. The unrest damaged 101 wells across 20 oil fields and forced 24 rigs to stop work leading to a loss of more than $130 million. Faced with a direct threat to the next round of Ecuador’s oil bids, Lenin Moreno, the president of Ecuador, backed down after 11 days of nationwide protests and reversed the ill-fated IMF inspired policy. Currently, PMS sell for $0.462/litre in Ecuador.
In Iran, the government raised fuel prices in September 2018. The price of PMS was increased by 300 per cent from IRR 3333/litre ($0.08/litre) to IRR 10000/litre ($0.24/litre) in response to the government’s desire to raise additional revenue, tackle fuel smuggling and give cash payments to the poorest members of Iran’s 85 million population. Drivers were allowed to purchase up to 250 litres a month at $0.24/litre. Iran’s poverty rate was 18.7 per cent. It produced 96.5 per cent of its daily petroleum products demand of 1.8 million barrels per day domestically and based its petroleum product prices on a production pricing model. It therefore sold PMS at $0.08/litre before the fuel price hike. The Iranian grassroots protested the fuel price increase. Iranian truck drivers went on strike in 240 towns and abandoned their trucks on the highways. In the towns, protesters blocked streets and burnt some banks and stores. The Iranian government shut down the internet and put security forces on the streets. Thousands of arrests were made and many protesters killed. On November 14, 2019, the Iranian government raised PMS prices by another 50 per cent. Drivers were now allowed to purchase up to 60 litres a month at IRR 15,000/litre ($0.36/litre). Any additional litre would cost IRR 30,000/litre ($0.72/litre). The Iranian masses reacted immediately. People abandoned their cars and buses on highways. Streets were blocked, gas stations set on fire, banks attacked and stores looted. The government shut down the internet and security forces employed maximum force to stop the protests. The demonstrations and street battles raged for three weeks. Fifty military bases were attacked by the protesters. Nine Islamic religious centres and 731 banks, including the Iranian central bank, were destroyed. More than 1,500 Iranians were killed and many thousands were arrested. The mass resistance was crushed. Current PMS prices are IRR 15,000/litre ($0.36/litre). A lot of peaceful protests occurred in many other countries where fuel prices were increased as a result of IMF conditionalities and pressures. We have presented some of the grassroots struggles against fuel price hike because we have to tell our own stories as we fight for lower fuel prices, more disposable income and better lives for our children.
The Nigerian masses and labour have always argued that a fuel subsidy does not exist. What exist is a subsidy on corruption and the mismanagement of our refineries. President Muhammadu Buhari knows that a fuel subsidy does not exist. He has said this publicly on many occasions. If this is the case, how did the IMF come about the idea of a fuel subsidy that must be eliminated with fuel price hikes? What exactly is a fuel subsidy? In the early 2,000, after the failure of its structural adjustment programme (SAP) model, the IMF developed an import parity pricing model for fuel consumption in developing nations. This model gave an import parity fuel price which consisted of three components. The first component was the opportunity cost of getting the fuel to the consumers. This is the cost of importing the fuel into the country and transporting it to the consumers. This cost was viewed as revenue foregone by consuming the fuel domestically, rather than exporting it. It did not matter if the crude oil was produced at a cost far below its export price and refined in the country. The second component was the environmental cost associated with the fuel consumption. The third component was a consumption tax aimed at raising revenue. The fuel subsidy was the difference between the import parity price and the actual price of the fuel. The import parity model was only applied to developing nations who were asked to impose them as part of the conditionalities of IMF loans. It does not apply to developed nations or to labour power as a commodity. It does not recognise local wages as the price or cost of imported labour power in an international labour market.
The import parity model under-develops Nigeria. It negates our comparative advantage as a crude oil producer. It makes our refineries uncompetitive and unattractive to foreign investors. From the viewpoint of a foreign investor, it makes no sense to buy the crude oil at international prices and refine it in Nigeria. It is better to refine the crude oil in their home country, where there are all kinds of tax incentives as fuel subsidies and then sell it in Nigeria. From a sustainable development point of view, Nigeria adds more value by exporting refined petroleum products (processed goods) rather than crude oil (raw materials). In 1978, at the opening ceremony of the FESTAC games, General Olusegun Obasanjo said, “When we made our first contact with the merchant adventurers from Western Europe, most of our shores became trading posts where primary products were exchanged for processed goods… We continue to be trading post which supply primary products in exchange for processed goods… The trading posts are run and maintained by our citizens. These can be grouped into four (a) intellectual (b) commercial (c) bureaucratic (d) technical. The activities of these agents constitute impediment to Black African development.” These trading post agents constitute the fuel cabal in Nigeria that ensures the continuation of a corruption subsidy under the refined petroleum product importation scheme. The cabal encourages the elimination of our capacity for domestic refining is eliminated and ensures that all our refineries are non-functional.
The Federal Government assumed that by increasing the fuel prices gradually, it would be able to avoid a response from the Nigerian masses. Unfortunately, this will not be the case. The Federal Government had increased electricity tariff by about 100 per cent the week before. VAT and Stamp duties charges had been increased earlier. Exchange rates have gone up forcing the naira value of imported commodities to increase.
The import parity pricing model governs the pricing of Nigerian fuel prices and forms the basis of the PPPRA PMS price template. The import parity PMS price is the Expected Open Market Price (EOMP). The EOMP is the sum of the benchmark landing cost, the distribution margins and the taxes. The opportunity cost is the sum of the benchmark landing cost and the distribution margins. The Benchmark Landing Cost is made up of the cost plus freight, trader’s margin, lightering expenses, NPA, financing, jetty depot thru’put charge, storage charge, bridging fund, marine transport average and the administration charge. The cost plus freight is made up of the free-on-board price (FOB) as quoted in Arab Gulf market and reported by Platt and Argus, the premium/discount as published in Platt and Argus, the Ocean freight from mid port in the Arab Gulf to Indian ports, insurance, exchange rate, custom duty, ocean loss, wharfage and port charges. The distribution margins is made up of the retailers margins, the transporters margins and the dealers margins. There are no environmental costs or consumption taxes imposed on PMS prices in Nigeria. The so-called fuel subsidy is therefore the difference between the EOMP and the actual PMS price. The logical conclusion of this model is the importation of all refined petroleum products because it allows and presents many opportunities for mismanagement and corruption. The bureaucratic PMS price of N162/litre was decided on the basis of the import parity pricing model.
The alternative model for determining fuel price is the production pricing model. In this model, the fuel price is the cost of crude oil at the refinery gate, the refining cost, the distribution and marketing cost and the taxes. Oil producing nations used the production pricing model for fuel prices in their domestic market before IMF neoliberal technocrats invented the import parity pricing model. The production pricing model is still used in U.S.A for the determination of fuel prices. In Texas, USA, crude oil cost makes up 51 per cent of the PMS prices, refining cost make up 21 per cent, distribution and marketing make up 11 per cent and taxes make up the remaining 17 per cent. Fuel subsidies are given by government in the production stage as tax allowances such as the percentage depletion allowance, domestic manufacturing tax deduction, the foreign tax credit and expensing intangible drilling costs. Production subsidies were given to Nigerian refineries prior to 2002, when President Obasanjo was convinced to impose an IMF import parity pricing model on the downstream sector. The Nigerian downstream should operate on a production pricing model. The refineries should be repaired and put under a private manage and maintain modified LNG operational model. Government participation should be reduced to a minimum. Production subsidies should be introduced into the production sphere of the 445,000 bpd of crude oil devoted to domestic consumption. More refineries should be built. Cheap energy is a necessary condition for the survival of small-scale businesses and the accelerated industrial development of the nation.
The present fuel price hike to N162/litre is a product of IMF pressures on the Federal Government. The IMF had advised the Nigerian government that, “lower oil prices provide an opportunity to phase out fuel subsidies. The recent drop in crude oil prices (and lower petrol and kerosene prices) could facilitate the completion of the subsidy reform, which started in 2012. Staff recommends introducing an independent price-setting mechanism to smoothly pass through international price changes to domestic prices and gradually eliminate fuel subsidies….” The IMF fuel price hike strategy was to (i) develop a comprehensive reform plan with clear objectives; (ii) develop an effective communication strategy; (iii) appropriately phase and sequence price increases; (iv) improve the efficiency of energy state-owned enterprises (SOEs); (v) implement targeted mitigating measures and; (vi) depoliticise energy pricing by establishing an automatic pricing formula for fuel products that links domestic energy prices to international energy prices and distance the government from the pricing of energy. The IMF in its 2019 Article IV Consultation on Nigeria, “noted that phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable would help reduce the poverty gap and free up additional fiscal space in the country.”
In April 2019, during the Joint Annual Spring meeting of the World Bank, the IMF managing director, Christine Lagarde asked the Federal Government to remove fuel subsidy. She said, “We believe that removing fossil fuel subsidies is the right way to go.” Later in the year, an IMF staff team visited Lagos and Abuja to discuss economic/financial development and review reform implementation with Nigerian government officials. At the end of the meeting, the IMF team said, “Fuel subsidies tend to be poorly targeted, foster over-consumption, curtail investment and maintenance in related sectors, and crowd out more productive government spending.” The team insisted that fuel subsidy reform should be pursued vigorously. The Nigerian government explained that while they agreed in principle with the need to increase fuel prices, the timing was not right.
From January 29 to February 12, an IMF staff team visited Lagos and Abuja to conduct its annual Article IV consultation discussion with Nigerian government officials. The IMF staff team recommended fuel subsidy reform and the unification of the exchange rates. The following month, the Federal Government requested financial assistance under the IMF Rapid Financing Instrument (RFI) to help with balance of payment needs and COVID-19 health expenditures. The government had obtained a $2.5 billion loan from the World Bank and a $1.0 billion loan from the African Development Bank to deal with the effects of the pandemic. It wanted another $3.4 billion loan from the IMF. The government was faced with falling oil prices, lower revenues, BOP balance problems and the COVID-19 pandemic. In April, the Executive Board of the IMF approved Nigeria’s request for emergency financial assistance of $3.4 billion (100 per cent of quota) under the RFI to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic. Nigeria is expected to pay back the loan between within 3¼ to 5 years. The commitment fee is between 0.15 per cent and 0.6 per cent. The service charge is 0.5 per cent for each withdrawal and the lending interest rate is 1.05 per cent. IMF loans always come with conditionalities, official and unofficial. The IMF unofficial conditionalities of the SAP loans under the Ibrahim Babangida regime in the late 1980s had shown this fact to Nigerians.
Once they got the IMF approval for the loan, the Federal Government introduced a downstream deregulation policy. Seizing on the WTI oil price of $16.55/bbl, the Federal Government reduced PMS prices from N145/litre to a band of N123.5/litre – N125/litre. The masses did not benefit from this because the nation was on a pandemic lockdown. In May, the minister of Finance, Budget and National Planning, Zainab Ahmed, and the CBN governor, Godwin Emefiele, assured the new IMF managing director, Kristalina Georgieva, that fuel subsidy has been permanently eliminated and will never return. These kind of promises and assurances have been made by government officials in the past. So, the IMF wanted a plan that would be implemented in the third quarter of 2020. In June, with WTI prices at $38.31/bbl, the government reduced the fuel price further to a band of N121.5/litre – N123.5/litre. In July, with WTI prices at $40.41/bbl, the PPPRA announced a fuel price hike to a band of N140.8/litre – N143.8/litre. In August, with WTI prices at $42.34/bbl, the PPPRA announced a fuel price hike to a band of N148/litre – N150/litre. Finally, in September, with WTI prices at $40.28/bbl, the PPPRA announced a fuel price hike to a band of N158/litre – N162/litre. The fuel price hikes had very little to do with the changes in the spot market for crude oil.
The Federal Government assumed that by increasing the fuel prices gradually, it would be able to avoid a response from the Nigerian masses. Unfortunately, this will not be the case. The Federal Government had increased electricity tariff by about 100 per cent the week before. VAT and Stamp duties charges had been increased earlier. Exchange rates have gone up forcing the naira value of imported commodities to increase. Unemployment and underemployment rates have doubled due to the COVID-19 pandemic and the poverty rate has increased. There is high insecurity in the nation and the cost of living has gone up. Inflationary trends in the economy are increasing. But disposable income has reduced due to the lockdown and business closures. All the refineries in the nation are shut down and undergoing repairs. At least $396.33 million was spent on TAM and the repair of the refineries from 2013 to 2017, with nothing to show for it. The Federal Government has informed the nation that the petroleum products from the 650,000 bpd Dangote Refinery will be sold at international prices. There is no political will to solve the corruption subsidy problem. The fuel price hike is thus reduced to an IMF insensitive revenue generation policy designed to transfer income from the ranks of the poor Nigerian masses into the coffers of the Federal Government. A mass-based grassroots resistance is imperative. Our survival and the sustainable development of our nation is at stake. The final fuel price will be determined by the balance of power between the Federal Government and the masses of Nigerian people.
Izielen Agbon is an expert on petrochemicals and economics based in Texas, United States. E-mail: Izielenagbon@yahoo.com; Twitter: @izielenagbon
This research work was presented as a lead paper at the Nigeria Labour Congress Round Table on Deregulation of the Oil and Gas Downstream Petroleum Sub Sector
Culled from Premium Timez