Fuel Subsidy – Who Is Subsidizing Who?

By Izielen Agbon

“Who is subsidizing who? The Nigerian oil industry was developed with Nigerian capital. Most of the experts are Nigerians, if you go to the fields. It is Nigerian capital; it is Nigerian oil. What I understand that Nigeria should charge Nigerians is the cost of 1 barrel at the wellhead and then the cost of transportation to the refinery, the cost of refining it and its cost at the pump. If anybody says he is subsidizing anything, he is a fraud. So all these people talking about subsidy, who is subsidizing who?”

*Buhari 

A first year student of refinery economics knows that the “crack spread” is a simple way to determine the profitability of a refinery at the margin. The crack spread is the difference between the sales prices of the refined products (PMS, AGO, HHK) and the price of crude oil. A 3:2:1 crack spread means that at the margin, 3 barrels (bbls) of crude oil will produce 2 bbls of Premium Motor Spirit (PMS) and 1 bbl of Automotive Gas Oil (AGO) or Household Kerosine (HHK). A barrel of Nigerian oil now cost about $40. One bbl of PMS at N87/litre cost N14159 or $71.87 at a CBN exchange rate of N197/$1. The PPPRA product pricing template of December 3, 2015 put the cost of AGO at N96.91/litre or N15772 ($80.06) per bbl. 

Thus, the gross cracking margin for an average refinery in Nigeria is [(2*71.87) + 80.06 – (3*40)] or $103.8 per bbl. The 3:2:1 crack spread is $103.8/3 or $34.6 per bbl. We can substitute HHK for AGO. At N50/litre, one bbl of HHK cost N8137.5 or $41.31. Therefore, the gross cracking margin using PMS and HHK is [(2*71.87) + 41.31– (3*40)] or $65.05 per bbl. The 3:2:1 crack spread is $65.05/3 or $21.68 per bbl. It is empirically impossible to convince anyone that Nigerian refineries cannot operate profitably under an incorruptible efficient management or that a fuel subsidy exists. What exist is the looting of public resources by a cabal aided by a corrupt bureaucracy and gross mismanagement.

Today, you can buy a gallon of PMS from a Valero gas station in Houston, Texas for as low as $1.55 or N78.8 /litre. Prices range from $1.55 to $1.99 per gallon throughout the state. The $1.55/gallon price consists of USA Federal/State taxes (19%), Distribution and Marketing (11%), Refining Cost/Profits (13%) and Crude oil cost/profit (56%). Therefore, without any taxes, the PMS in Houston would cost 19% less or N63.83/litre. Unconvectional (shale) oil production has replaced all oil imports in Texas. They produce all their oil like Nigeria.