Mazi Emeka: Why NNPC is selling fuel at N145

The internet threw a question at us and we decided to answer it.

A few days ago, the Minister of state for Petroleum Resources, Ibe Kachikwu, announced that the federal government will remove subsidies on fuel and allow market dynamics to determine the price of the product.

Expectedly, this will result in an increase in the cost of fuel – which hopefully will fall in due time. The Minister also announced a ceiling price of N135 – N145 per liter of fuel, even though it expects, the much talked about, market forces to determine the price of fuel.

According to the minister the removal of fuel subsidy is aimed at freeing up (“liberalizing,” was the actual words used by Kachikwu in his interview on Channels TV) the economy so as to allow everybody to source for Forex and bring in oil into the country.

The basic objective of the subsidy removal is to ensure that government has less control in fuel provision and empower more private individuals – essentially making the sector more competitive.

However, many have questioned the rationale behind the Nigeria National Petroleum Corporation’s (NNPC), and its affiliates, decision to sell Premium Motor Spirit (PMS) at the market price of N145 – even though the government agency has more access to foreign exchange and refines a percentage of its petroleum product domestically.

The reason is twofold.

  1. Fuel queues:

Because the NNPC is hoping to compete with other oil marketers and retail outlet, the agency intends to set its price at the predominant price -N145.

If the agency sells at any price below N145 – even if its 1 kobo – their retail outlets will witness massive fuel queues from individuals hoping to buy fuel at a lower price. This essentially overrides the intention of the government in liberalizing the market by removing subsidy.

A small question for Minister Kachikwu: if the NNPC is selling at N145, how will price of the product go down considering that private oil marketers will look up to NNPC and peg their price at the same price as they (basically NNPC becomes a sort of fuel price barometer)?

2. Government is losing money

To avoid the niceties and long talk, government is going broke, it has little or no forex and is losing money from providing (sourcing, perhaps) foreign exchange for the NNPC to import oil.

In the past couple of months the earning on forex and per barrel oil has fallen from over 70%. This is caused by the drop of international price of oil, militancy in the Niger Delta and destruction of pipeline.

In the words of Kachikwu: “Government cannot give what it doesn’t have.”

By removing subsidy, government is saving itself from self-hemorrhaging in the name of importing oil. And also position itself as a player and competitor in the oil market, that will, hopefully, be revitalized by competition.

Finally, Kachikwu also pointed out that government will use the profit made from oil sell to build refineries.

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