Nigeria and the irony of rising crude oil prices

The last few days have been hard on Nigerians; not to say that the last six years, or the decades before have not been, but it is particularly difficult because while other oil-producing countries rejoice at the rebound of fuel prices after the all-time low caused by COVID-19, Nigerians mourn.

This is because as prices of crude rise globally, the price of petrol at filling stations in Nigeria rise astronomically, with no safety net. Only a few days ago, they went as high as N212, with some filling stations even selling at higher prices.

Nigeria, Africa’s largest crude producer, has the 10th largest crude reserves in the world, yet imports refined petroleum products and is reported to have spent at least N10 trillion (over US$26 billion) on subsidizing petroleum in 12 years. While there have been attempts to remove petroleum subsidies, the moves have been largely unsuccessful, culminating in the eventual subsidy removal by President Buhari last year—a move that also did not last long.

However, subsidies are not the primary cause of Nigeria’s woes. Nigeria currently exports at least 1.5 million barrels per day of crude. Research by the Nigeria Extractive Industries Transparency Initiative (NEITI) shows that in 2018, Nigeria earned US$32.6 billion from crude sales; with peak prices now, more revenue is expected. Yet, with no functioning refineries, the country continues to export unrefined crude, which gets sold back at a premium as petroleum products, with all the attendant costs of production, shipping, demurrage, security, as well as the exporter’s profit factored into it.

The effect is that the downstream marketer who sells the products in Nigeria will do so at cost plus, thus the average Nigerian end user has to pay high prices for the products, unless the Federal Government subsidizes it, which in turn also takes up a large share of the budget, depriving other sectors of development funding and deepening poverty.

As it happens too, a lot of the money allocated for the subsidy does not go to subsidy costs. In 2011, the country spent N2.6 trillion on fuel subsidies, an amount 900 percent more than the N245 billion earmarked for it in the budget. Worse off, the Nigerian National Petroleum Corporation (NNPC), the state-owned oil company, is a cesspit of corruption. In 2011, the Petroleum Revenue Special Task force, a Federal investigative task force indicted NNPC for not being able to account for $1 billion paid to it by oil companies. This is just one of numerous indictments of the institution.

Unfortunately, the only document that can effectively disband the NNPC and create a more transparent and market-driven state oil company—the Petroleum Industry Bill—is in limbo in the House of Representatives.

The irony of rising crude oil prices is then clear—with increased prices on the global market, we earn upstream and lose downstream, and the consumers who are fed by the downstream sector feel the biting effects, all because we cannot develop local refining capacity.

It is even more unfortunate that the Federal Government sees the Dangote refinery as the silver bullet to its problems. With the Dangote refinery only able to refine 650, 000 barrels per day, what happens to more than half of the crude oil the 1.74 million barrels the country produces? What is the plan for refining locally outside Dangote?

While the corrupt subsidy regime has for long-hidden the real quagmire Nigeria is in from the average Nigerian, the proposed subsidy removal has made it obvious how much the Nigerian economy is a sitting duck. As the country struggles to recover from the effects of the pandemic on the economy, it equally has to deal with the backlash it will get from removing subsidies at this time, as well as the toll it will take on its people—the oil-fed nation that the country is. Yet, we cannot continue to subsidize fossil fuels, as the global consensus around it is that it is unsustainable, and development finance organisations are unwilling to fund such economies.

Interestingly, it does not take much for Nigeria to balance these interests. By utilizing the billions of naira earmarked for subsidies every year to fund low cost, efficient, decentralized electricity; improve grid power; make cooking gas more available and scale autogas-powered vehicles, it will be significantly providing alternatives and lifting people out of poverty, while at the same time achieving sustainable energy.

Additionally, in January this year, the country’s first methanol project achieved FID. Methanol technology is a viable investment vehicle, which can be used to scale methanol fuel production and like China and Italy, the country can make it a major fuel. Until Nigeria achieves that level of epiphany, the irony of rising crude oil prices will always bite at its economy, and the average citizen will pay dearly for it.