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Fuel subsidy to reduce by N600bn

By on November 19, 2014

On the flip side of the decline in crude oil prices, which has affected the country’s revenue from oil exports, analysts expect the Federal Government’s spending on fuel subsidy to reduce by up to N600bn this year.

But the reduction in fuel subsidy, according to the analysts, would not be enough to offset the revenue shortfall arising from low oil prices since the country depends largely on earnings from crude oil exports.

The government spends about N2tn yearly on fuel subsidies, the Group Managing Director, Nigerian National Petroleum Corporation, Dr. Joseph Thlama Dawha, said at a recent conference.

The Managing Director and Chief Executive Officer, Financial Derivatives Company Limited, Mr. Bismarck Rewane, said, “Petroleum subsidy on refined petroleum products will decline from N2tn by almost 30 per cent.”

He noted that oil price fall was already having a negative effect on revenues, stating that revenues could decline in the third quarter of the year to $6.1bn from $8.84bn in the second quarter.

An energy specialist at Ecobank, Mr. Dolapo Oni, noted, in an emailed response to enquiries from our correspondent, that falling oil prices impact directly on the landing costs of petrol in Nigeria.

According to data from the Petroleum Products Pricing Regulatory Agency, the landing cost of petrol as of November 3, 2014 is N127.57 per litre and subsidy of N44.94 per litre.

Oni said, “As of November 3, Brent was still $85. However, Brent has fallen to $78 and landing costs are now around N113/litre. The subsidy element is also around N31 (when you add in margins). If prices fall below $70 to about $65 per barrel, we could see a situation where the government is no longer having any subsidy to pay.

“But the trade-off is still negative from the perspective of how much revenue we lose from sale of crude oil versus expenditure on fuel subsidies. We could lose a minimum of $10bn in crude oil revenue if prices fall to $65 on the average in 2015 but save $8-9bn in fuel subsidies. So, we end up with a loss still.”

 

[Punch]