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Praying Fervently, Let Oil Price Decline To $44

If you think this is a satire, then you are taking life too seriously. It is time to start thinking about unusual solutions to Nigeria’s unusual problems. There is no use following the regular route to address our irregular situation. For instance, conventional wisdom says Nigeria needs higher oil prices to address its cyclical budgetary woes caused by its over-reliance on the black gold. We are locked in a situation where high oil prices get us high and lower oil prices take us low. In the past, we were able to build fairly robust reserves and stabilise the naira whenever oil prices went high. Not anymore. A three-year high of $76 in July has not improved our fortune, all things considered.

Something unusual has been happening in recent times that many Nigerians are obviously unaware of or are not paying much attention to. As crude oil prices started going up, the naira started going down. Why? Higher oil prices did not amount to higher inflow of FX into the economy as you would expect. Instead, we have seen the exchange rate in both the official and unofficial markets go against the naira. Along the line, the Central Bank of Nigeria (CBN) announced that it would no longer fund bureaux de change (BDCs). Although funding BDCs has always been an anomaly on Nigeria’s long list of anomalies, not funding them tells us a bigger story of distress, so to say.

The trouble, as I see it, is that higher oil prices have hurt more than helped Nigeria in recent times. Gone are the days when we enjoyed more comfort when the prices headed for the skies. These days, the higher the price, the bigger the pain for the government and the citizens. Higher oil prices led to higher petrol prices and higher cost of living for Nigerians, with the impact manifesting in growing poverty. Outside the direct impact on Nigerians, we are also unable to produce the quantity of oil we used to because of the cut in quotas by OPEC+ in an attempt to shore up the prices. From the height of two million barrels per day, we are now constrained to 1.4mbpd or so. Do the math.

But here is the peculiarly Nigerian problem: as crude oil prices rise and the cost of petrol goes up and we continue to subsidise the product in order to, as we claim, “protect the poor”, even the little benefit we are earning from higher oil prices largely goes back into paying for the subsidy, according to the Nigerian National Petroleum Corporation (NNPC), which is now the sole importer of petrol. This administration came to power accusing previous governments of lying about subsidy, so it had to come up with its own terminology, “under-recovery”, in place of “subsidy”. But it is the same. It doesn’t matter if you say Saul or Paul: it is the same name. “Paul” in Greek is “Saul” in Hebrew.

NNPC, according to recent reports, has not remitted one dollar to the CBN since mid-April. Why? The corporation says most of the revenue from oil exports — from where Nigeria gets over 90 percent of its forex inflow — has been ploughed back into financing “under-recovery”. Let me put it this way: with crude oil going as high as $76, Nigeria did not benefit much because we had to spend the bulk of the gains to finance subsidy and keep petrol price at N162 per litre. NNPC says we are now consuming over 100 million litres per day. Last year, the Department of Petroleum Resources (DPR) put the figure at 38.2 million litres. Don’t ask how consumption tripled within one year. Please don’t.

There is a template answer to the question if you insist on asking: smuggling. Because of the price difference with our neighbours (they adjust their pump prices as crude prices change), our default assertion is that most of our imported petrol is smuggled out of the country via land borders. Petrol is about N373/litre in Republic of Benin and N630 in Cameroon. I do not dispute the role of smuggling in the burgeoning consumption figures, but I must allow myself to speculate that we can’t be rustling the difference between 38.2 million litres and 100 million litres out of the country every day. That is about 60 million daily. That comes to about 2,000 tankers crossing the borders daily.

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I do not want to go into insinuations this early morning, so let us take the NNPC figures exactly as we have been served. But Alhaji Yusuf Lawal Othman, national president of the Nigerian Association of Road Transport Owners (NARTO), recently raised questions about the daily consumption figures. “The system needs to be reorganised,” he said. “I don’t see any reason why you have 200 filling stations in a local government that does not consume more than 45,000 litres. I also don’t see how the depot which normally does programming per day will programme quite a number of trucks to a local government which does not consume more 45,000 litres per day.” Not my words. Othman’s.

Mallam Mele Kyari, the group managing director of NNPC, gave us a pack of interesting data recently. Hear him out: “If we are to sell at the market today at current exchange rate, we will be selling the product at about N256 to a litre. What we sell today is N162, so the difference is at a cost to the nation… The difference comes back to as much as N140 billion to N150 billion cost to the country monthly. As long as the volume goes up, that money continues to increase and we have two sets of stress to face: stress of supply and stress of foreign exchange for the NNPC… There was a day we loaded out about 103 million litres of PMS across the depots.” He too is at a loss as I am.

I have, therefore, come up with what I think is a peaceful solution to the problem: by praying fervently that crude oil price should drop to $44 per barrel. Since Nigerians are not benefitting from rising oil prices, I now think we should start benefiting from low prices. Crazy? Maybe. But I will advance three reasons to support my prayers that the time has come for crude prices to plummet again. Someone will be tempted to ask: how did I arrive at $44? That was the price of crude oil as of September 2020 when petrol price was increased to N162 per litre. I will also be working with the exchange rate in the parallel market which was N450/$ at the time and N500/$ today.

Here we go. One, if oil goes back to $44, there would be no need for “under-recovery” again. In plain English, we would not be discussing subsidy. NNPC would not be giving us a subsidy bill of between N140 billion and N150 billion monthly. The recent meetings of the Federation Account Allocation Committee (FAAC) ended in tears as there was no enough money to share. The steady rise in oil prices did not come with a steady amount in the distributable pool because, as we have said already, NNPC said it had to first recover the cost of bringing the product into the country before sending the balance to the CBN for onward journey to the federation account. At $44, subsidy will be gone.

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And this leads to my second prayer point, which may be contradictory and controversial — but I know what I am doing. With oil back at $44, you would expect me to say petrol should also go back to N145 as it was in September 2020. I wouldn’t say that for many reasons. One, transport operators are unlikely to pass the benefit to commuters, so it would be a waste of effort. Two, if we insist on using pricing to curb smuggling (since the thousands of security officials at the land borders cannot see the smugglers’ 2,000 trucks driving past them every day), our petrol will become more expensive than in neighbouring countries who use crude oil prices to determine their own pump prices.

In addition to curbing smuggling through pricing — an admission that our security agencies are too corrupt to tackle the smugglers — we can even start making money from the sale of petrol. How? At N162/litre with oil at $44, we have already moved from subsidy to tax. That means we are now taxing the consumption of petrol. That also means we would be making money from selling petrol rather than spending money to sell it! That is nothing new: that obtains in advanced countries. A litre of petrol is £1.3 (N735.8) in the UK, out of which 57.95 pence (or N323) is tax. The UK government levies 20 per cent VAT on every litre of petrol as well as on the duty. Just saying.

The third point on my prayer list is that if crude oil falls to $44, NNPC will have to start remitting more forex inflow from crude oil sale to the federation. There will be nothing like “under-recovery” again. There will be no talk about smuggling. There will be no subsidy bill of N150 billion per month. That can solve a lot of problems, the least being the ability of states to pay salaries again. The CBN will have to stop “printing money” (by creating loans) to intervene in the fiscal crisis ravaging the three tiers of government. That alone should allow the naira to breathe a little — with reduced pressure from inflation along with some oxygen support from more forex inflow from oil sale.

Is this a satire? I don’t even know again. My original intention was to point out the peculiar mess in our economic management and how a bad fortune in the oil markets may be a good thing for us, but I am now taking it more seriously than I intended. When an oil-rich country has to hope that crude prices will drop so that public finances and citizens’ welfare can improve, it tells us a lot. It tells us about the warped structure of the economy, about our warped management of the petroleum resources, and about how we are locked inside what looks like a vicious cycle that must be broken. So, seriously speaking, oil dropping to $44/barrel may be a good prayer point — at least for now.

Source: Thecable

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