Thursday, November 30, 2023
HomeArticleFUEL PRICE INCREASES AHEAD - By Izielen Agbon


“Leaders who don’t listen will eventually be surrounded by people who have nothing to say.”

Bill Carney

The Federal Government plans to increase fuel (PMS) prices in 2021. The plans are already in an advanced stage. In March 2020, the Federal Government asserted that it has deregulated the PMS market. However,
the PMS market is not deregulated. PMS prices are determined by a bureaucratic Price Review Committee of the FGN. In September 2020, fuel prices and electric tariffs were increased. The PMS price was increased from N148/litre to N162/litre. The Nigerian masses and organized labour opposed the fuel price and electric tariff hikes. The trade unions threatened a national strike action. The national strike threat led to discussion between representatives of the FGN and trade unions. An agreement that no further
hikes in electric tariff and fuel prices would be imposed on the nation before a planned January 25, 2021 meeting was reached. The trade unions called off their planned strike action. However, the FGN is notorious for not honoring any agreement. It was not long before the FGN increased fuel prices and electric tariffs without notifying the trade unions. In November 2020, the FGN increased PMS prices to N168/litre and further increase electric tariffs. The labour unions opposed the fuel price and electric tariff
hikes because they were contrary to the spirit and letter of the agreement. Further discussions between the FGN and labour unions leaders forced the FGN to reduce the PMS prices to N163/litre.

The FGN is planning to increase PMS prices first to a N180/litre – N202/litre range in the next few weeks, then to a N207/litre to N221/litre range a few months later. The FGN has no choice. Some of the key drivers of the upcoming FGN PMS price hikes in 2021 include the approval of vaccines and control of the covid-19 pandemic, the ensuing economic recovery in China and India as more people get vaccinated, the rising demand for crude oil as more economies recover, rising crude oil prices as the oil demand-supply gap increases, IMF pressure for continued subsidy reform as part of the unstated conditionalities of past loans, increases in the Naira exchange rates, the use of an incorrect IMF import price parity model for pricing PMS, poor implementation of domestic refining self-sufficiency policies/programs and the FGN consistent failure to honor any agreement with trade unions and Nigerian citizens. We will examine each of these factors in more detail.

A few vaccines have been approved and millions of people have been vaccinated against covid-19. The approved vaccines include mRNA- based vaccines like the BNT162b2 (Pfizer-BioNTech-Fosun-Pharma) and the NRNA-1273 (Moderna-Barda-Niaid). Inactivated vaccines like the CoronaVac (Sinovac) and BBIBPCorV (Sinopharm) have also been approved. In Russia, a non-replicating viral vector vaccine called Sputnik V (Gamaleya Research Institute) and a peptide vaccine called EpiVacCorona (Center for Virology and Biotechnology) were approved. As of January 8, 2021, more than 17.5 million covid-19 vaccination doses have been administered in 38 countries. The covid-19 pandemic will be brought under control as more people are vaccinated. Economic and transportation activities will return to normal as most nations reach herd immunity. Some nations are already on the road to recovery.

The International Monetary Fund predicts that the global economy would bounce back to 5.2% real GDP growth in 2021 with developing and advanced economies at 6.1% and 3.8% respectively. India will reach a 9% real GDP growth in 2021. China’s GDP growth is forecast at 7.5% for 2021. China is focusing on domestic circulation of money (dual circulation development model) and international trade (the belt and road initiative) to drive is 14th Five-Year Plan (2021-2025). The growth in India and China and slower recovery in Europe and North America is expected to lead to an increase in crude oil demand.

EIA forecasts that global oil demand will rebound in 2021 to an average of 98.8 million bbl/d. OPEC crude oil production will average 27.5 million barrels per day (bbl/d), up from an estimated 25.6 million b/d in 2020. OPEC forecasts that the demand for OPEC crude oil will increase in 2021 as global demand rise to an estimated 96.89 million bbl/day. Global oil demand is expected to grow at an average annual rate of 1 million bbl/d between 2021 and 2025 with China and India accounting for about half of the growth. The
increase in crude oil demand and the new OPEC production cut agreements are expected to lead to an increase in the demand-supply gap resulting in a rise in crude oil prices.

Crude oil prices are expected to average $55/bbl in 2021. The CITI group predicted $60/bbl by December 2021 but reduced it by $5/bbl because of new waves of covid-19 confirmed cases. The OPEC+ meeting of January 5, 2021 agreed to an increase of 75000 bbl/d over January 2021 levels for Non-OPEC producers like Kazakhstan and Russia. All OPEC members were to maintain their former production levels. The expected production cut from OPEC+ during Q1 of 2021 were 7.2 million bbl/d in January 2021, 7.125
million bbl/d in February 2021 and 7.05 million bbl/d in March 2021. After the meeting, Saudi Arabia announced a surprise voluntary cut of 1.0 million bbl/d in February and March 2021. The Saudi Arabia announcement will increase the OPEC production cut to 8.125 million bbl/d in February 2021 and 8.05 million bbl/d March 2021. The surprise announcement pushed the price of Brent crude oil to $55.99/bbl on January 8, 2021. The price of Nigerian Bonny light was $54.91/bbl. Nigerian Brass River and Qua Iboe
light crude sold at $54.70/bbl. Higher prices are expected during the rest of the year. Crude oil prices influence local PMS prices. Higher crude oil prices lead to higher PMS prices. Other factors affecting PMS prices are the exchange rate, the output volumes of domestic refineries and pressure for subsidy reform/BOP balances from the IMF.

The official exchange rate as of January 8, 2021 was N380/$. The unofficial rate in the black market was 24.2% higher at N472/$. The higher black-market rate tends to push the official rate higher as the CBN tries to bridge the gap and control currency speculation. However, the existence of a functional black market signifies the lack of control of the economy by the CBN and the failure of its monetary policies. The Nigerian economy is a neocolonial single export commodity economy with a large informal sector. It is a slagflation (high unemployment and high inflation) economy with 61% of the total population living below a poverty line of $1/day. Textbook monetary and fiscal policies derived from the experiences of industrialized western nations do not often work here. Low revenues, low foreign reserves, and IMF pressure to devalue the Naira for BOP balance purposes are expected to increase the official exchange rate to N420/$ by the end of the year. The increase in the N/$ exchange rate will further increase local
PMS prices because all our PMS requirements are imported.

The Economic-Recovery-Growth-Plan-2017-2020 (ERGP) had outlined new initiatives which included revamping local refineries to reduce petroleum product imports by 60 percent by 2018. Some of the major objectives of the plan were to “boost local refining for self-sufficiency, reduce petroleum product imports by 60 per cent by 2018, become a net exporter by 2020, save foreign exchange and prevent reversion to the fuel subsidy regime.” None of these objectives were achieved. Currently, all the refineries in the
nation are shut down. The attempt to find a qualified firm to undertake repairs in 2020 failed. NTB approved 7 EPC companies to submit technical and commercial bids. Only one company (Messrs Technimont) had submitted a bid by the November 30, 2020 deadline. Therefore, NNPC cancelled the process and re-tendered the refinery rehabilitation project to all 7 pre-qualified companies. A new submission deadline of January 7, 2021 was set to ensure a fair, transparent and competitive bidding
process. The Medium-Term National Development Plan: 2021-2025 and Agenda 2030 are under preparation. It is not clear if the goal of achieving self-sufficiency in local refining will be included in these plans or if all efforts at meeting local PMS demand has been left to the upcoming Dangote refinery.

The pressure from IMF to remove all fuel subsidy and ensure BOP balance is also a key driver of PMS price hikes. In March 2020, 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. In the following month, the Executive Board of the IMF approved Nigeria’s request for emergency financial
assistance of $ 3.4 billion, under the RFI to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic. IMF loans always come with conditionalities; official and unofficial.
In Nigeria, one of those conditionalities has always been the removal of fuel subsidies with fuel price hikes.

Another key driver of the upcoming PMS price increases is the inability of the FGN to honor any agreement with labour unions or Nigerian citizens. In 2020, the Academic Staff Union of Universities (ASUU) embarked on a 9-month strike that ended after many weeks of negotiation with the FGN. However, a few days ago, union leaders stated that the FGN had again failed to honor its “agreement on payment of not only outstanding salaries of members ranging from five to eight months; Earned Academic Allowances
(EAA) and check off dues illegally deducted before December 31, 2020.” As of January 2021, Nigerians are still waiting for the FGN to implement the 5 demands of the EndSARS protests that it publicly accepted in October 2020. Despite the agreement between the labour unions and the FGN, electric tariffs and PMS prices were increased before the planned January 25, 2021 meeting. Electric tariffs were increased on January 1, 2021 leading to objections from organized labour and the Nigerian civil society. NERC denied the reported 50% increased and insisted that it had only “adjusted tariffs between N2 per kWh and N4 per kWh”. On Thursday 7 January, the Minister of Power, Sale Mammam, asked NERC to inform all
Electricity Distribution Companies to revert to tariffs that were applicable in December 2020. In November 2020, the FGN increased PMS prices to N168/litre despite its agreement with the labour unions to keep prices stable until the January meeting. The labour unions opposed the PMS price hike which forced the FGN to reduce the PMS prices to N162.44/litre.

The IMF import parity pricing model governs the pricing of PMS and forms the basis of the FGN 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. There are no environmental costs or consumption taxes imposed on PMS prices in Nigeria. Therefore, fuel subsidy is assumed to be 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 PMS price of N168/litre was decided by the FGN based on the import parity pricing model. So also, was the reduction of the price to N162.44/litre. It is
clear, that the PMS market has not been deregulated and that PMS prices are not determined by free market demand and supply forces.

Given all the above key drivers pushing the FGN to increase PMS prices, it is certain that the FGN would increase PMS prices before or after the January 25, 2021 meeting with the labour unions. There is a positive relationship between the price of crude oil and the Cost + Freight price under the import parity pricing model. The higher the crude oil price, the higher the Cost + Freight cost, the landing cost and the final PMS price. Since, all our PMS is imported, the higher the N/$ exchange rate, the higher the final PMS
price. Higher PMS prices lead to higher business energy cost, higher transportation costs, higher agricultural input costs, higher residential electric costs, lower productivity, less savings, and lower economic growth. The FGN will impose PMS prices of N180/litre at crude oil prices of $55/bbl and exchange rates of N380/$ and N202/litre at crude oil prices of $60/bbl based on its IMF import parity pricing model. PMS prices of N207/litre and N221/litre could be expected at an exchange rate of N420/$ and crude oil prices of $55/bbl and $60/bbl respectively. Therefore, PMS pricing under the import parity pricing model is not sustainable.

In the long run, future PMS price hikes can only be controlled by building more refineries, using a production cost pricing model and making the nation self-sufficient in PMS production. In the short term, the only mitigating factors against the planned FGN PMS price hikes is the ability of the Nigerian masses to organize and resist these measures. The FGN has a Velvet glove/Iron fist strategy against planned peaceful national strike/protests by the Nigerian citizens/labour. The velvet glove calls for meetings with national leaders of the planned protests where the FGN representatives sign agreements that the FGN has to intention of honoring. However, there is an iron fist inside the velvet glove.

For instance, during the last meeting with FGN, the labour union leaders were threatened with national security if they carried out their strike action. A national security threat against a planned peaceful
strike/protest by FGN negotiators means, in plain English, that if the strike/protest proceeds, the iron fist of the FGN will strike multiple hard blows. First, the police will be sent to attack the peaceful protesters.
Next, armed thugs will be unleashed upon the peaceful protesters by government officials/local politicians. If the peaceful protesters do not go home, the armed thugs will then be sent on black flag operations to attack/loot small businesses and burn government properties. The FGN then proclaims that the peaceful protest has been hijacked by thugs/looters and national security requires the Armed Forces/Mobil Police to clear the streets with maximum violence. The leaders of the strike/protest are arrested, beaten, brutalized and jailed. The peaceful strike/protest is drowned in blood. Given such a direct threat, couched nicely in the euphemism of national security, national leaders are forced to call off planned peaceful strikes/protests. Leadership of protests/strikes cease to be centralized/national and become decentralized/local as in the case of the #EndSARS protests. Organized peaceful national protests/wildcat strikes against the upcoming fuel price hikes may have to be decentralized, autonomous, localized, fluid, dynamic, organic mass-based formations to achieve the objectives of a fair price for PMS and sustainable national economic development for Nigerian citizens.

Izielen Agbon
Twitter: @izielenagbon
Jan. 9, 2021



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