Fuel Price Increase by NLC & Govt

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That Fuel Price Increase Agreed by NLC and Government
 

By


Mobolaji E. Aluko, Ph.D.
Burtonsville, MD, USA
alukome@aol.com

 

July 18, 2003


INTRODUCTION


It was with mixed feelings that I received the announcement by the Nigerian Labor Congress (NLC) that it had accepted the increase by government of fuel prices from N26 (PMS), N24 (DPK), N26 (AGO) to N34, N32 and N32 per liter respectively.  Consequently, on July 8, 2003, the NLC called of its strike which began June 30 and which followed the increase that was announced by government on June 13.

It was mixed feelings because just the day before the end of the strike, ten people had been shot dead in a Lagos strike-related riot.  The call-off therefore averted more deaths.  I was happy for that avoidance of further needles deaths. 

What I was not happy about was that first, the highest percentage agreed was for the poor man's fuel kerosene DPK - 33.3% - in contrast to 30.7% for PMS and 23.1% for AGO.  It was also going to affect the aviation industry disproportionately.  Secondly, and more importantly, was that increases were agreed at all rather than decreases of down to possibly N21 for PMS (for example) which should have been sought.    I had made that argument in a previous essay.  ["Saturday Essay:  NNPC and Mr. President - Where is Our Subsidy?" http://www.gamji.com/aluko92.htm]

Thus, too much was being made about the fact that the government had climbed down from its original N40, N38, N38 price regime.  In fact, some ridiculous victory was claimed that government had insisted on no less than N35 for PMS, and labor had insisted on no more than N33, but then everybody finally compromised on N34. 

That is casuistry, simplicita, a big English word for "419".

The funny thing is that the Major  Oil Marketers (all 8 of them Agip, AP, Elf, Mobil, Nolchem, Texaco, Total and Unipetrol ) and even Independent Oil Marketers (about 500 or so of them) have since indicated that at the new price regime, they still cannot engage in profitable oil IMPORTATION business, and hence were not going to bother importing fuel until the official price were at least N40 for PMS, etc.   Thus, the fuel availability situation will actually not improve.

Nobody should accuse the marketers of lack of patriotism - after all they are business-people.  One cannot blame them because the economics of the situation may in fact dictate that while NNPC can import and land at a CHEAPER price because of the economy of scale, these other marketers may not be able to do so.  Their overhead structures may also be different.    

The ultimate solution to the problem is that irrespective of whether it is NNPC which does the refining or not, our domestic refineries in an oil-flush country such as ours be made to work so that NOBODY need to import fuel if they do not wish to.  That we can all agree on.


COMPUTING THE SUBSIDIES - A LA GOVERNMENT

Let us grant that we have this new price regime.  It is BETTER than the 40-38-38 regime first proposed but worse than the 26-24-26 regime that we had before.  Whatever be the case, that still means that the government will be now saving on the so-called subsidy that it had been providing - whatever that subsidy was.

Government has put that subsidy at roughly N250 billion per year.  I still have not been able to figure out EXACTLY how government arrived at that figure, but engineer that I am, I am trained to soldier on in the presence of uncertainty.

So I have made some back-of-the-envelope calculations.

Let us assume that the daily consumption of PMS, DPK and AGO are 30 million liters, 12 million liters, and 18 million liters per day respectively.   These are the numbers that keep being bandied around.  Then the amount of money that the CITIZENS of the country spent/will spend annually on fuel usage depending on the three price regimes above and assuming fully available and adequate supplies are as follows:

                                                     PMS-DPK-AGO: Total Annual Cost

          Former Price Price Regime: 26-24-26:  N560.6 billion  [A]

   Initial Government Price Regime: 40-38-38:  N854.1 billion  [B]

                   Agreed Price Regime: 34-32-32:  N722.7 billion  [C]



Since the initial government price regime was meant to wipe out the subsidy, one may then presume that the difference [B] - [A] of N293.5 billion represents the old subsidy; the difference [B] - [C] of N131.4 billion represents the new subsidy, and hence the government has been saved the amount of  N162.1 billion in subsidy.

Since N293.5 billion is close enough to N250 billion, one can presume that it is because not enough fuel has been imported into the country is that lower figure used.


A SIMPLE ASSIGNMENT FOR GOVERNMENT

Since the marketers have indicated that they will not import at the new agreed price regime, it means that government is still on its own to satisfy the daily fuel needs of Nigerians.  We should therefore request government to indicate to us how it intends to spend the N162.1 billion that it has saved by the NLC now acceding to its latest fuel increase request.  One would hope that it would be used DIRECTLY to ensure that in the following year, government would not have to subsidize, and yet Nigerians would perchance even be able to pay less for fuel.  After all, on July 16, 2003, Namibia just announced a reduction in its country's fuel prices. (See Appendix)

That would make the latest increases easier pills to swallow.

Best wishes all.

_____________________________________________________________________


APPENDIX

http://www.mbendi.co.za/a_sndmsg/news_view.asp?I=51112



Namibia announces fuel price decrease

The Namibian Ministry of Mines and Energy is herewith announcing a fuel price decrease to be implemented in the morning of Wednesday the 16th July 2003 at 00:01. This would mainly be accountable to the implementation of the new fuel import parity system, called the Basic Fuel Price, which was introduced here in Namibia on 1 April 2003. This system was accepted by the SACU region unanimously and changed the international refinery term prices to international spot prices with a resultant positive effect on the pump prices.

Since the last price review in April 2003 crude oil prices have been fluctuating up and down reacting to rumours of Iraq joining the crude oil exporters at different rates of volume flow. The Brent crude oil prices have now stabilised at a level of about 27 to 28 US Dollar per barrel, which is within the OPEC envisaged price band level of 22 and 28 US Dollar, but which is at a somewhat lower level than when the fuel prices where set in the last quarter.

Apart from the positive effects of the new import parity system the Rand has also strengthened against the US$ and has positively overtaken some of the negative effects that the Brent crude prices had inflicted on the fuel prices, which then resulted in a cumulative over-recovery on the local market prices.

This has led to the situation where the import parity prices are now 24.5c/l, 25.9c /l and 24.9c/l higher on domestic pump prices of Leaded Petrol, Unleaded Petrol (ULP) and on Diesel respectively, as at the end of June 2003 also taking into account the latest developments in the Middle East and its effects on the international crude oil markets.

These positive changes in the BFP import parity prices and the SA Rand versus the US Dollar exchange rate changes will partly be projected on the Namibian pump prices to keep them closer to the import parity cost, but to allow the National Energy Fund to strengthen from the previous negative balance.

These positive changes to the fuel prices are, therefore, supporting the policy of the Ministry of Mines and Energy to try and keep fuel prices at the absolute minimum, not to disrupt the transportation costs and, therefore, also the prices of 87% of all commodity prices imported into Namibia.

 

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