Showing posts with label Fuel Price Hike: Few Preliminary Thoughts. Show all posts
Showing posts with label Fuel Price Hike: Few Preliminary Thoughts. Show all posts

Thursday, May 12, 2016

Fuel Price Hike: Few Preliminary Thoughts

By Moses Ochonu
The astronomical hike in the price of petrol announced in Nigeria yesterday has nothing to do with the "cost of production" argument we have become accustomed to hearing. Yes, there is some cost involved in refining the crude abroad and transporting it to Nigeria, but with crude being so cheap, the previous price of 86 Naira a liter had already accounted for all the cost, give and take a few naira.


With the price of crude inching up slightly in the last few weeks, it should add no more than a few naira to the price if indeed we want to let market fluctuations modulate the pump price. This increase has everything to do with government's last ditch effort to end the scarcity, which is caused by the inability of fuel importers to secure foreign exchange, a problem which was in turn caused by the government's rigid restrictions on access to forex.

It was unrealistic to expect fuel importers without access to forex at the official rate to continue to import fuel with forex sourced from the parallel market ($1=N320) and then sell the same fuel at N86. They would have lost money. It was a disincentive to fuel importation business and many importers simply stopped importing, especially since the government announced sometime in February or March that it would no longer pay subsidy, i.e the difference between the total cost of importing fuel plus a small profit margin and the pump price. Now, with the deregulated regime, fuel importers can source forex from the parallel market, import fuel, and sell at a price that would allow them to recoup their cost and make a small margin.

In other words, the government created a problem of restricting forex, which caused many fuel importers to quit the business, and the same government is now deregulating the sector fully so that it does not have to
(1)           pay subsidy, and
(2)         subsidize forex for fuel importers.