PwC: why local refining won’t crash fuel prices
Price Waterhouse Coopers (PwC) has argued that in-country crude oil refining may not significantly reduce petrol prices because the costs of haulage, insurance and associated cost of importation do not constitute the most significant component of cost across the value chain.
In a report released by the global organisation which offers clients various professional business services, including accounting, auditing, human resources consulting, and strategy management, it picked holes in the general belief that local refining of crude oil could potentially eliminate the need for petrol subsidies altogether or make the market price affordable.
It argued that unless the international price of crude oil falls below a certain level, while local refining will provide a price cushion, it is not a silver bullet that would magically solve the subsidy problem.
While noting that currently, Nigeria imports its refined petroleum products due to limited or no domestic refining, it explained that this makes the country’s fuel price not only dependent on global oil prices and exchange rates, but also importation and handling charges.
“However, other than the costs of haulage, insurance and associated cost of importation, (these) materials do not constitute the most significant components of cost across the value chain.
“This implies that the pump price without subsidy would still be higher than the regulated price unless the international price of crude oil falls below a certain level.
“While local refining will provide a price cushion, it is not a silver bullet that would magically solve the subsidy problem,” the organisation stated.
PwC added that fuel subsidy in Nigeria had been fraught with issues of corruption and inefficiency while palliatives had been suggested by some as a possible way to alleviate the suffering of those that will be most affected by subsidy removal.
But it said that while palliatives may help to mitigate the immediate impact of rising prices such as cash transfers, provision of buses to the Labour Union or other forms of assistance, the effectiveness of palliatives depends on several factors.
For one, PwC argued that it is difficult to identify and sufficiently cover the vulnerable population that will be most impacted, especially given the lack of reliable demographic data.
According to the firm, in reality, palliatives can be expensive yet ineffective in addition to their being prone to corruption.
However, it suggested that a multifaceted approach that involves evidence-based identification of the most vulnerable population, and a robust palliative administration with in-built controls would provide a more sustainable and long-term solution.
Writing on the unsustainable financial cost of subsidy, it said that according to the World Bank, Nigeria’s total revenue in 2000 was $10.8 billion, explaining that by 2010, this amount increased to $67.9 billion, yet the Nigerian government had spent over $30 billion on fuel subsidies over the past 18 years.
In addition, PwC noted that this has had a significant impact on funds available for critical infrastructure and other essential sectors such as education, health, and defence.
It maintained that fuel subsidy payments have also distorted the economy, stressing that according to a report, households in the bottom 40 per cent of the income distribution account for less than 3 per cent of all fuel purchases.
Furthermore, it is pointed out that that three-quarters of all fuel sold in Nigeria is consumed by private firms, public transportation services, government agencies, and other businesses.
Most vehicles used for carrying large numbers of people (such as molue) and goods, it said, are diesel-powered, a product that is already deregulated.
Also, it said that household kerosene which is mostly used by the poor is no longer subsidised, meaning that the poor are already to a large extent paying market prices for their fuel.
“This effectively means that the government is subsidising mostly those who can afford fuel (PMS) at market rates and not the poorest of the poor who need subsidy.
“This is one of the major problems with the way fuel subsidy is being implemented in Nigeria. For the benefit of subsidy to reach its intended recipients, the current structure will need to be reviewed and creatively restructured,” it argued.
Besides, the global company said that the porous borders between Nigeria and neighbouring countries have created an enterprise for smugglers who purchase large volumes of petrol at a subsidised rate in Nigeria and sell at market prices in neighbouring countries.
It quoted a report published by Chapel Hill Denham, as estimating that 15.64 million litres of petrol are smuggled out of Nigeria daily as the retail price of Nigerian petroleum products on average is 3.7 times cheaper than those of its neighbours, which has given smugglers undue opportunities for arbitrage.
It posited that since the subsidy point for fuel is importation (or supply) rather than at the pump for eligible users only, subsidy in the current form encourages arbitrage and other forms of corruption.
It said that subsidy has also scared investors in the downstream sector of the oil and gas industry, leading its having the least foreign direct investment compared to the midstream and upstream sectors.
“ The reason for this is not far-fetched. The current subsidy regime and the legal framework of the downstream sector generally discourages investments.
“The downstream sector needs full deregulation if it would attract more private investors, and one of the impediments that will need to be removed upon full implementation of the Petroleum Industry Act (PIA) is fuel subsidy,” it asserted.
It added that the federal government’s COP26 commitment in Glasgow, Scotland in 2021, was a contradiction for the country to subsidise consumption of fossil fuel while at the same time seeking to reduce the country’s carbon footprint. “Rather than subsidising fossil fuel, the country should encourage green and renewable energy,” PwC said.
On the relationship between petrol price increases, inflation and cost of living, it said that while petrol price deregulation can contribute to higher costs of living and inflation, the impact can be moderated if complemented with effective policies and well-thought out implementation strategy.
It also opined that the argument that Nigeria, being an oil producing country should be able to sell petrol at the regulated price without incurring significant subsidy costs is not supported by evidence.
Subsidy removal, it said will lead to creation of jobs, enhance the country’s energy security and reduce dependence on imported petroleum and increase investment flow to the downstream sector as well as reduce government borrowing.
It therefore backed a fully deregulated downstream sector and complete remove petrol subsidy as well as provision of credible, evidence-based palliatives.