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Daily subsidy payment on petrol drops by 80%

By BusinessNews Staff on December 16, 2014

While Nigeria’s oil revenue has taken a plunge following the falling global oil prices, the Federal Government’s daily spending on petrol subsidy has dropped to N7.93 per litre as of Wednesday, December 10, as against N44.94 on November 3.

Based on an average daily consumption of 40 million litres, the total government expenditure on petrol subsidy has thus reduced by more than 80 per cent to N317m, compared to N1.8bn on November 3.

Nigeria, which relies heavily on revenue from oil exports, depends on importation for most of its fuel needs as the country’s refineries are in poor state.

Since crude oil accounts for about 80 per cent of the final cost of petrol, the over 40 per cent decline in the price of crude oil has triggered the reduction in subsidy. Other variables that affect the price of the product include freight rate, interest rate and foreign exchange.

It should be noted that only petrol and kerosene currently enjoy government subsidy, and both imported and locally produced petroleum products enjoy these subsidies, according a report on website of the Federal Ministry of Finance.

Subsidy refers to the money paid, usually by government, to keep prices below what they would otherwise be in a free market system. For instance, the Expected Open Market Price of petrol is N104.93 per litre as of December 10, but the regulated price is N97. The difference is the subsidy.

The landing cost of petrol as of December 8, 9 and 10 was N98.15 per litre, compared to N127.57 on November 3, according to data from the Petroleum Products Pricing Regulatory Agency.

The Managing Director/Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, had in November, when oil price was still above $80, said that subsidy on refined petroleum products would decline from N2tn by almost 30 per cent.

International benchmark, Brent crude, against which Nigeria’s oil is priced, slumped to $63 per barrel on Wednesday.

An executive in the Nigerian National Petroleum Corporation, who preferred anonymity, told our correspondent that subsidy would have disappeared, but for the spike in freight rate and the devaluation of the naira, which had increased the cost of importing fuel into the country.

The Central Bank of Nigeria recently devalued the currency by eight per cent from N155 to N168 to the United States’ dollar.

“If the naira was not devalued, we would have reached a regime of over-recovery, a situation whereby the landing cost is lower than the regulated price such that some amount of money would be paid back to the government purse,” the source said.

The expected open market price and subsidy as of December 8 were put at N107.41 and N10.41, respectively, as against N141.94 and N44.94 on November 3. On December 9, the EOMP was N108.38, while the subsidy was N11.38.

High subsidy payments, devaluation of the naira and low capacity utilisation of the country’s refineries have been identified as factors denying Nigerians a reduction in the pump price of petrol.

An energy specialist at Ecobank, Mr. Dolapo Oni, said, “Nigeria already has the lowest pump price for petrol in sub-Saharan Africa at $0.52/litre (at current exchange rates). This is due to the high amount of subsidy paid by the government on fuel. Compared to our fellow SSA countries that pay an average of $1.20 per litre, we are a bit far from the point where the lower oil prices would start to benefit us.

[Punch]

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