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High oil cost raises fears of petrol price hike

By on March 28, 2016

A fresh increase in the pump price of Premium Motor Spirit (petrol) may be imminent following the latest rise in the global oil prices, which has pushed the cost of petroleum products up.

And should the Federal Government retain the current prices of fuel, the nation may witness the return of subsidy on the product.

The landing cost of the product stood at N71.49 per litre as of March 18, up from N56.97 per litre on February 12, the latest data from the Petroleum Product Pricing Regulatory Agency showed. This cost of the product was a little less than N86 per litre.

The Federal Government had in December reviewed the pricing template of the PMS to make it sensitive to the price of crude oil in what the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, called price modulation.

The review of the template in December led to a slight reduction in the pump price of petrol from N87 per litre to N86 (for the NNPC stations) and N86.5 (for others).

As of the time of the review, the global oil benchmark, Brent, was trading around $36 per barrel and fell below the $30 per barrel mark in January this year.

On March 18, Brent rose to $42.31 per barrel, its highest level this year, and has been trading above the $40 per barrel mark since then.

When the Expected Open Market Price of the PMS is higher than the regulated price, it is an under-recovery (which represents subsidy). On the other hand, an over-recovery translates to earnings for the government.

The EOMP, which is the actual cost of the product, is the summation of the landing cost of the product and the margins including bridging fund, transporters’ cost, dealers’ charge and admin charge.

For instance, the template for petrol, which was posted on the PPPRA website on February 12, showed an over-recovery of N15.23 per litre, meaning that the government made a cash recovery of N16.06 on every litre of petrol sold in the country since the EOMP was N71.27 per litre.

In January, when the new pump prices came into effect, the template showed an over-recovery of N1.4 on every litre of petrol.

The last time the template for petrol was updated by the PPPRA was March 18, with the EOMP being N85.79 per litre and an over-recovery of N0.71 (using a regulated price of N86.50).

The Head of Energy Research, Ecobank Capital, Mr. Dolapo Oni, said, “If the template is updated now, subsidy for petrol kicks back in. The current template was calculated at $38 per barrel. Oil is around $41 now; it even got to $42 at a point. If they should update the template, subsidy kicks back in. And President (MUhammadu) Buhari doesn’t want to hear the word ‘subsidy’.

“Subsidy for kerosene kicks in recently, and subsidy for petrol may have to kick in soon. And there is no money for that because it is not even in the budget. So, it is likely the prices will be reviewed upwards.”

The Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, while explaining the rationale behind the introduction of price modulation in December, had said, “We have gone to find out how we will be able fluctuate this market to reflect what the reality of crude market is.

“The objective is that one, we cannot afford to continue to subsidise. We can’t even understand where those subsidies were going to. There are a lot of fraud elements in it so we need to cut that off.”

While announcing the reduction in pump prices on December 29, the PPPRA said new template would be reviewed quarterly with respect to the price of crude oil in the international market, adding that the minister would be expected to call for a review, either upward or downward.

The then Executive Secretary of the agency, Mr. Farouk Ahmed, who announced the reduction, said, “Since 2007, while crude oil price has been moving up and down, the template has remained the same. This made it necessary for us to introduce a mechanism whereby the template would be sensitive to the price of crude oil.”

The first quarter of the year will end this week on Thursday.

An energy expert and the Technical Director, Drilling Services, Template Design Limited, Mr. Bala Zakka, said, “The economy of Nigeria is very fragile today. Nigerians are already suffering and it will be very bad for the government to increase the pump price of petrol at this time.”

He said it would be better to have the subsidy return than an increase in petrol price.

On his part, Oni said, “I think it is very clear what needs to be done. I think the government is hesitant to do it. For me, the clear step to take is to fully deregulate the market. The moment you fully deregulate the market and you give people freedom to set prices, prices may initially rise very high. Clearly, in some parts of Nigeria, petrol is already selling for between N120  and N150 per litre.”

 

[Punch]