Rising energy cost and the economy

Written by the Editorial board of The Guardian Newspaper

The scarcity of refined petroleum products by turns has lately pushed up the price of kerosene to between N200 and N300 per litre. Even diesel which used to post the deregulated price of between N110 and N130 per litre, now sells for N200 or more per litre. Under normal supply conditions in the distant past, a litre of petrol commanded a higher price than a litre of diesel, which in turn fetched a higher amount than a litre of kerosene. But owing to inadequate supply, kerosene has for many years sold at a price range close to that of diesel. The usual excuse that scarcity of kerosene is due to its diversion to fuel aeroplanes is untenable because simply dyeing household kerosene at a negligible added cost renders it unusable as aviation fuel. Because household kerosene consumers are in the main low income earners, it amounts to absolute insincerity for the Buhari administration that has budgeted huge sums for waging a war against poverty, to fail to take necessary steps to ensure that the masses get kerosene to buy at a reasonable price.

The escalating prices of refined petroleum products have been pinned on shortage of foreign exchange by the public sector. The underlying causes deserve a close look. The Federal Government used to cite the drop in crude oil price from the second half of 2014 and the drastically reduced imports of Nigerian crude oil by the U.S. as the major reasons for the oil revenue shortfall. However, the Federal Government in recent times added a third factor, the disruption of crude oil output by militants in the oil producing communities. Granted that the first and second factors were exogenous and beyond the Federal Government’s control, the third is endogenous and entirely within the Federal Government’s ambit to control.

Nevertheless, the issue of low oil price has abated somewhat. Firstly, the average price of the benchmark Brent crude oil has recovered and risen since April above the 2016 budget oil benchmark price of US$38/barrel. The current price levels of crude oil may well be within the medium term normal range. Secondly, the near-zero crude oil sales volumes to the U.S. were short-lived. In any case, as replacement, there has been a strong demand for Nigerian crude oil from India and China, both of which experienced robust GDP growth rates of 7.3 per cent and 6.7 per cent respectively in the first quarter of 2016 while Nigeria was careering into recession. Thirdly, militancy in the Niger Delta area has, one, extensively interrupted gas supply to power plants with resulting long blackouts across the country; two, disrupted supply of crude oil to the otherwise epileptic domestic petroleum refineries which have practically shut down; and three, sliced off substantial crude oil export volumes thereby gashing Federation Account dollar accruals. Today, the country is unable to meet the demand for oil exports and prospective importers of Nigerian oil are forced to look elsewhere for supply. The country now runs the risk of permanently losing some of her crude importers. It behoves the Federal Government to urgently and satisfactorily tackle the wholly endogenous issues of the Niger Delta region.

Meanwhile, it is unclear what quantity of refined petroleum products the country requires. In April 2012, the House of Representatives Adhoc Committee on Verification of petrol and kerosene subsidy requirements estimated liberally the 2011 daily national consumption volumes of refined petroleum products to be 30 million litres of petrol. 12 million litres of diesel and 10 million litres of dual purpose kerosene. Four years on (Mr. President has been Minister of Petroleum Resources in the final full year thereof), the precise national consumption figures remain publicly unknown. But the above consumption data may well be over-estimated today because the scarcity by turns of petroleum products betrays official disposition to pushing up the prices of the various products very high in order to reduce energy consumption to the barest minimum. Regrettably, considering energy consumption has very high correlation to the intensity of economic activity, the present national economic recession is attributable in part to the apparent official constriction of energy consumed.

With regard to product prices, ordinarily, the low crude oil prices should lower the pump prices of the products. A semblance of such expectation occurred on January18, 2015 when petrol pump price was reduced from N97/litre to N87/litre. As the falling international crude oil prices inflected and began to rise in January 2016, the Federal Government introduced the petrol price modulation template and adjusted the pump price to N86.50/litre. But by May 13, 2016 and notwithstanding the critical importance of energy to the economy, petrol began to sell officially at N145/litre. In the words of the Minister of State for Petroleum Resources, “Government arrived at the new price by a simple conversion of using foreign exchange at N285/$1. That N285 is from nowhere; it is basically the secondary source that people buy forex from, versus the N320, which is the black market rate”. What a pity! Even the so-called flexible inter-bank naira exchange rate adopted by CBN last month, which approximates “that N285/$1 from nowhere” is unrealistic because it is not the product of converting the country’s total export earnings as and when earned to naira funds, the legal tender, in an open forex market where demand for forex is determined by duly specified national import needs. The existing inter-bank exchange rate segment, the secondary source (parallel?) exchange rate segment and black market exchange rate segment each grossly undervalues the naira and thrives on money illusion. Needless to add, the rapid change in the prices of kerosene and diesel is a combination of the unrealistic exchange rate and artificial scarcity of forex.

The Federal Government’s fall for the money illusion has economic implications that are compounded by the age-long wrong practice whereby the apex bank substitutes deficit financing for withheld Federation Account dollar allocations. The tricked FA beneficiaries are unmindful of the steady diminution of the value of the naira and celebrate the inflation-stoking hollowed-out currency gains in the form of phoney increases of naira revenue derived from FA dollar receipts. The Buhari administration had better understand that the resultant poisoned harvest of persistent macroeconomic instability and hostile economic environment points to its economic Waterloo.

And so, amid the ensuring harsh economic conditions, the continuation by Buhari of the manipulation of the foreign exchange rate in order to cut down on imports of petroleum products as well as to bloat money-illusion naira revenue from the dwindling oil export receipts and his prolonged refusal to address the root cause of militancy in the Niger Delta area that has crippled power generation and oil export earnings jointly aid and abet ruination of the national economy. That is unacceptable.

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