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Oil price: Need for stabilisation fund
Ayo Olesin
The unabated bull run in the international oil market that has seen oil prices climb to new 21-year record high of $43.84 per barrel for September futures on Friday will inevitably impact on the domestic petroleum products market.
This is simply because Nigeria has unfortunately become a net importer of oil products, since our refineries are very ill, either producing well below installed capacity or not producing at all. Even if they are functioning, the total installed capacity of 18 million litre per day is just about half of national daily demand. Even with the importation regime, supply shortages have remained within the 30 to 40 per cent range.
The situation is such that when oil prices are on the upward trend as, have been experienced since the beginning of the year; the Federal Government�s purse swells, while those of citizens� shrink, since the price of fuel, impacts on that of a basket of tomatoes.
The uneasy calm in the domestic market has been due to the continuation of a costly subsidy regime, which threatens to put the Nigeria National Petroleum Corporation in the red. Marketers, which account for about 30 to 35 per cent of white products imports, have had to blend NNPC prices with prevailing landing cost to stay within the price band of N39.50 per litre and N45.50 per litre, dictated by the Petroleum Products Pricing Regulatory Agency
But this will be over soon as marketers have said that the landing cost for August at N46.00 per litre has overshot the upper price limit. So a case in being made for further increases, which of course, will be resisted, and the option would be for marketers to suspend importation, followed by fuel queues and when we are all tired of the mess, we say OK. Sell. Let us move on with our lives.
This vicious cycle is what Nigerians will have to cope with, while the refining capacity problem is sorted out, hopefully through privatisation of the government-owned four in Warri, Port Harcourt and Kaduna and investment in refining rector by indigenous operators and the majors.
Before that happens, the volatile oil market and its unpleasant effects, calls for action from the Federal Government, which has only spoken of the establishment of Oil Stabilisation Funds, to cushion the effects of the swings.
The inflationary effects of domestic price increases will not be welcome. This is well known and it is why the oil downstream deregulation policy is being stalled since there is nothing to compensate for the inevitable upward price movements, for now.
So, rather than allow the NNPC to continue to bear the burden of subsidies, especially at this time that it needs to re-organise its processes to remain relevant in the world market, government should fast track the process of a stabilisation fund, that will be funded from the excess crude revenue, instead of some odious petroleum tax, from which any subsidies would be drawn at least to ensure some level of stability in the economy.
But the most important thing here is for government to resolve the power problem by massive investments in electricity infrastructure and gas development, since aggregate demand for oil will reduce if there are alternatives.
The Punch, Monday August 02, 2004
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