PMS Price: Between Subsidy and Survival

FG To End Petrol Subsidy June 2022, World Bank Condemns N2.9tn Funding
FG To End Petrol Subsidy June 2022, World Bank Condemns N2.9tn Funding

CSL Research – According to a Business Day report, Group Managing Director (GMD) of Nigerian National Petroleum Corporation (NNPC), Mele Kyari, noted the corporation can no longer bear the over N120bn monthly subsidy on Premium Motor Spirit (PMS) also known as petrol.

He noted that the NNPC pays between N100 billion and N120 billion a month to keep the pump price at the current levels. According to him, the landing cost of petrol with current fundamentals comes to N234/l but the corporation sells the product at N162/l.

He puts daily consumption at 60million litres, all imported by NNPC. He noted that negotiations with labour unions and civil organisations were ongoing as the President has given the corporation the mandate to work out appropriate pricing.

So far, in 2021, crude oil prices have continued to rise, implying an increase in the landing cost of PMS. In 2020, a steep decline in global crude prices triggered by the global pandemic completely wiped out the subsidy via significantly lower landing costs, paving the way for a reduction in the pump price of Petrol in mid-March and paved the way for talks of deregulation.

The PPPRA announced a reduction in ex-depot price to N113/litre and the official pump price to N125/litre. Between June and November 2020, the price of petrol was revised four times, rising from N121.50–N123.50 per litre in June to N140.80-N143.80 in July, N148-N150 in August, N158-N162 in September and N165-N170 in November.

Without a doubt, an attempt to revise the price to the current N234/l implied price will be strongly resisted by the populace who have been hard hit by two recessions and a pandemic in the last five years.

Unlike the time the government attempted to increase fuel prices (under the Goodluck Jonathan administration in 2012), there appears to have been little in the way of unanimous opposition to the many hikes that have been implemented under the Buhari administration.

On May 11, 2016, petrol pump prices were hiked by around 68% from N87/litre to N145/litre and many assumed this signalled full deregulation. This wasn’t the case however as the subsidy regime was still in place. The exchange rate factored into the landing cost of fuel was between N280 and N285/US$1.

A steep devaluation in the currency and an increase in crude prices in the international market-implied an increase in the landing cost which necessitated the continuation of the subsidy regime, which was now booked as under-recovery losses in the books of NNPC.

We note that deregulation of the oil sector remains a politically sensitive discourse. Deregulating the downstream sector which would many times involve raising the pump price of petrol with increasing oil price is always a challenge in a country where the subsidy on petrol prices is seen as the only source of social security.

We have always expressed concerns that the current timing by the government to get rid of the long-standing subsidies is inopportune and the government may be forced to return to the subsidy regime given the effects of the pandemic, increasing food inflation and the recent hike in electricity tariffs on the already squeezed Nigerian consumer.