Too frequently, Nigerians across the country suffer severe hardship due to the scarcity of petroleum products, especially premium motor spirit (PMS). The most recent episode of PMS scarcity lingered through the tail end of 2022 into the first quarter of 2023. Despite the government’s assurances that there were enough petroleum products in stock, the scarcity persisted amid a poor electricity supply. Businesses and households had to choose between standing long hours in queues to get a rationed quantity of PMS or depending on erratic power supply from the national grid. Last year, the national grid collapsed multiple times causing total blackouts in many parts of the country. Petrol-fired generators are a common source of independent power production for households and businesses in Nigeria.
Public transportation is one of the hard-hit sectors during each episode of scarcity: private cars, commercial vehicles and motorcycles combine with individuals to create a desperate mob seeking to get ahead to buy petrol. As the scarcity lingered, the cost of a litre of petrol rose uncontrollably to N500 per litre in some parts of the country – the official petrol price moved up to N185 from N175 per litre. Soon, there were black market dealers reselling petrol at a premium across major cities in Nigeria. This would have cost-push implications for general price levels. The cost of petrol, through transport costs, is a driver of inflation in Nigeria.
What are the issues?
There are several factors responsible for this anomaly. From inadequate refining capacity to challenges with distribution, bunkering, systemic corruption, and political instability, the challenges facing Nigeria’s petrol sector are multifaceted and deeply entrenched. But I reviewed these issues from the economic dimensions of price, supply and demand.
- Unstable price
- Nigeria is an oil-producing nation but has no functional refinery. Therefore, it imports most of its refined petroleum products. This has exposed the country to the uncertainties of international crude-oil pricing. This is amplified in this period of global energy crisis occasioned by the Russia-Ukraine conflict. As the prices of imported refined products go up, the pump price of petrol and other by-products go up; it passes through transport costs to have a cost-push impact on the general price level. Also, the national debate on subsidy removal creates market uncertainties that mar price signals. Nigerians are now looking forward to how the new Dangote refinery would impact the domestic price of petrol.
- Faltering Supply side
- The lack of adequate investment in the downstream sector has made it difficult to meet the local supply requirements. Over the years, there has been a paucity of new investments in refining, distribution and storage facilities due to policy inconsistencies. Although the new Petroleum Industry Act 2021 was expected to address this, the impact of proper implementation is not yet strong enough to lure private capital to the sector. No doubt we have seen some projects coming up, but the scale needed to bridge the supply gap in the shortest possible time is still missing.
- The 4 sick sisters which are government-owned refineries have been out of operation for several years. Nigeria has had to import refined products from abroad after exporting crude oil. This situation exposes the economy to exogenous shocks in the oil market. Yet, with a combined capacity to refine 445,000 barrels of crude oil per day, the four local refineries continue to incur annual operational costs without refining a single barrel of crude oil. According to an audited statement of the Nigerian National Petroleum Cooperation (NNPC) Limited, the refineries did not record any revenue in 2021 but incurred a comprehensive loss of N69 billion.
- Corruption in subsidy management makes the entire business chain less transparent. While the landing cost of petrol is currently estimated at N400/litre, the Federal Government (FG) mandates marketers to sell at N185/litre through its subsidy programme. However, the dwindling revenues vis-à-vis foreign exchange shortfall make it difficult for the FG to sustain the subsidy on PMS consumption. The FG has mulled over the removal of subsidies over the years. It is apprehensive of the citizens’ negative reactions as there could be some immediate adverse economic implications especially for the bottom of the pyramid if not properly coordinated. Subsidy payments in the sector have been fraught with monumental fraud over the years. Several organizations were indicted for receiving payments for petrol not supplied yet no one has been punished. With prices ranging from N195 to N400 in different parts of the country a few months ago, one wonders if the subsidies are still in effect.
- The thriving business of smuggling refined products also stokes petrol scarcity in Nigeria while indiscriminately increasing the government’s subsidy bill. It is estimated that about 30 million litres of petrol per day are smuggled across Nigeria’s borders to neighbouring countries. A major incentive exists for smuggling due to the significant price disparity between Nigeria and its neighbours. While petrol was selling for N175/litre in Nigeria before the current fuel scarcity, it sold for between N400/litre and N500/litre in border countries like Benin and Niger Republics. The high price differentials create room for smuggling to these neighbouring countries.
- Bloating Demand side. What is increasing the demand?
In 2020, the NNPC reported an anticipated increase in demand for petroleum products in Nigeria from 15.1 million metric tonnes (MT) to 17.3 million MT, an increase of 14.6%. Curiously, there was no correlated corresponding increase in economic activities during this period. However, some developments are responsible for the increasing demand most of which have not attracted much attention in public discourse.
- The erratic electricity supply situation in Nigeria is endemic. It has one of the greatest grid instabilities in the world. The country has struggled with poor power supply for years, often caused by generation and transmission problems. The national grid collapsed multiple times last year alone. As a result, many Nigerians depend on power generators. These generators are mostly powered with PMS which aggregately increases the demand for PMS by both businesses and households. Without commensurate supply, scarcity often ensues.
- After the deregulation of the diesel market in 2009, the price rose gradually from about NGN90 in September 2009 to about NGN300 in December 2021, then steeply spiked to NGN800 as of November 2022 (see the figure below). Since diesel is used by many commercial enterprises, this sharp increase has driven up the operating costs of many businesses, prompting diesel users to seek alternative sources, especially PMS and solar. The net implication is a rise in demand for PMS.
- Petrol-for-diesel fuel switch has not been given much attention. Fuel switching simply refers to the course of changing the fuel source used for energy-consuming activities. This can involve switching from one type of fossil fuel to another or from fossil fuels to renewable energy. Fuel switching is often done for environmental reasons, such as to reduce greenhouse gas emissions, but it can also be driven by economic factors, such as fluctuations in the price of different types of fuel. Since the hike in the price of diesel following the deregulation, PMS has become relatively cheaper due to the retained consumption subsidy from the government. Consequently, large households and businesses inevitably switched to PMS to power their backup generators. Many users abandoned their diesel generators for petrol-powered ones thus increasing the demand for petrol.
The graph shows a spike in diesel prices in March 2022 at the height of the energy crisis induced by the Russian-Ukraine war. Source: Nigeria Bureau of Statistics
So, are there any possible solutions?
The effects of the fuel shortage on Nigerians are numerous. Economic activities are usually paralyzed and the burden is mostly borne by people at the bottom of the pyramid. It slows down business activities as prices go up and both businesses and households tend to postpone spending decisions until prices normalize. At other times, it leads to mass protests which can get violent and lead to the destruction of properties and the loss of lives. But for how long can this continue? I discuss some ways out of the woods below.
- Concerted efforts must be made to attract private investments in the downstream business. Moving from a heavily regulated regime to a deregulated private sector regime is a challenge. Perhaps the PIA is not getting the needed publicity, especially in the international scene to attract foreign capital flows. Increasing investments in the local supply chain and improving capabilities will surely translate to improved supply. All eyes are on the Dangote refineries.
- The development of the Dangote Refineries and other modular refineries.
The Dangote Refinery is expected to eliminate the importation of petroleum products; saving about $50 billion in annual imports. The refinery, which was commissioned on 22 May 2023, by the outgoing President Buhari a week before his handover to the incoming president-elect, Bola Tinubu shows the national significance of the Dangote refinery. This single project could drastically improve the supply chain bottlenecks, cut import bills, engender foreign exchange accretion and reduce the pump price of fuel. The advantages and benefits of local refining could create the grounds for subsidy removal without harshly jeopardizing welfare – if well-coordinated.
The government should also take steps to refurbish the existing refineries in the country by allowing private investments. The process of commercialization and privatization of these assets, like the telecom sector, to credible investors could get us out of the woods. If the local refineries become fully functional, Nigeria could easily become a net exporter of refined products.
- Improving the electricity supply, especially to residential and commercial hubs will go directly into reducing the demand for petrol. After all, residential demand for petrol-to-power is a major factor driving up petrol consumption. By increasing electricity generation and enhancing transmission and distribution systems, petrol demand would be reduced by more than half. Again, if there was any time that renewable energy needed to be given more attention, that time is now.
- Is subsidy ever a good idea? Despite the position of the Brenton Woods institutions, western countries still apply subsidies to support particular sectors, especially at critical times. For instance, many countries in Europe increased subsidies on public transportation at the peak of the recent global energy crises conditioned by the Russian war in Ukraine.
For Nigeria, the government could create conditions to boost the local production of petrol and redirect subsidies to welfare-enhancing areas of the economy. One way to do this is to open up the sector to credible private investments in oil refining, increase production and supply capacity, and reduce demand for refined products by boosting electricity generation and reducing transportation demand for petrol by creating a healthy public transport system). The subsidy may then be applied to public transportation. To remove subsidies without backlash, we must reduce residential PMS demand and moderate prices by improving grid electricity supply.
The way forward
- The deregulation of the downstream sector remains a potent and lasting solution to petrol scarcity, in the hope that it attracts investments to the sector to boost supply. The government must revamp or privatize the existing refineries as it simultaneously encourages investments in the downstream sector. We need to have smaller pockets of Dangote refineries across the countries, and the goal should be to become a net exporter of refined petroleum products over the next 10 years.
- In the long term, there must be a shift in paradigm in our energy security strategy if we are to avoid energy crises in the future. We must adopt multiple approaches like diversifying the energy mix through private sector investments, modernising energy infrastructure to include smart grid solutions and green buildings and promoting energy efficiency measures aimed at reducing demand. Simple solutions, such as using energy-efficient appliances in buildings will go a long way.
No thanks to the wrong political and economic choices of the last decades, Nigerians have been plunged into multidimensional poverty. Nigerians are facing scarcity on many fronts: food, Jobs, energy, and recently, naira scarcity due to the attempt by the Central Bank to demonetize the economy. We are running on empty. The incoming administration must be innovative on all fronts to steer the local economy out of the slow economic growth. Efforts must be concerted to tackle energy scarcity and poor energy infrastructure to support SME growth and enhance the quality of life in Nigeria. While countries are gravitating towards green, clean energy alternatives, we are still grappling with distributing dirty fuels. Nonetheless, energy assurance is critical for the development of any nation. Economic advancement is hardly possible without access to sufficient energy.