Why fuel scarcity may be prolonged in Nigeria
The fuel scarcity still lingers in Nigeria, and since my last post on the (fuel scarcity in Nigeria), it had gotten worse. News received is that the fuel scarcity is fueled (pun intended..lol..) by a lack of foreign exchange. The parallel market rate of the naira to the dollar as at the 10th of April 2016 is between 320 naira to a dollar even though the CBN holds an official rate of a little below 200 naira to a dollar.
Acording to the Managing Director of NNPC (Ibe Kachukwu) NNPC imports about 50 % of the total consumption of Petrol in Nigeria, while the remaining 50% is covered by oil marketers. With the scarcity of foreign exchange and the falling naira, oil marketers are hesitant to place import orders of petrol because on selling their products in Nigeria, they would face an uphill task of converting the naira derived from the Nigerian market, back to the dollar used for placing the order.
The CBN is unwilling to help out the oil marketers because of the reduced revenue gotten from the sale of crude oil as a result of a fall in crude oil prices. Nigeria’s foreign reserve fell to a 11 year low in the beginning of 2016. Selling of forex to cover the demand for oil would eat into our foreign exchange reserves and cause other sectors with demand for foreign exchange to be neglected.
Ibe Kachukwu said in a recent video that the NNPC is still relentless in its fight for some allocation of Foreign exchange by the CBN from revenue derived from the sale of crude oil…ps (crude oil sales are made by NNPC, and the proceeds are remitted into the Federation account)
Kachukwu also said that another reason for the fuel scarcity is the backlog of subsidy payments for over a year by the previous administration of Goodluck Jonathan. The subsidy payment owed was between 500 – 600 billion naira as at august 2015. By this time, oil marketers had started reducing their level of importation. Approval for payment of the payment of subsidies was received from the present administration in November 2015; by then it was too late because although they (oil marketers) got the money, they didn’t have access to foreign exchange. This discouraged oil marketers from importing to Nigeria, and slowly the burden on NNPC to single handedly satisfy domestic demand for fuel began to build. From supplying between 45 to 50% of petrol to Nigeria, it increased to 80%, and of recent 100 % in April 2016.
The incessant vandalization of pipelines is also partly to blame for the fuel scarcity in Nigeria. In the year 2016 alone, it is reported that the amount of pipeline disruptions and vandalization eclipse the amount we have had in the past two to three years. The attacks on pipelines caused the closure of the two refineries contributing an estimated 7 million litres of petrol. It was revelaed by the NNPC that the refineries would require between $300 million to $500 million to function well.
Within this period, NNPC tried various strategies such as crude oil swaps and DSDP (Direct sales – Direct Purchase). In a crude oil swap, crude oil was exchanged for petroleum products through third party traders at a pre-determined yield pattern. In the opinion of the Managing Director of NNPC, the crude oil swap did not promote transparency and it was quickly replaced by the DSDP (Direct sales – direct purchase).
The DSDP has a projected cost savings of one billion dollars for the federal government, by eliminating all the cost elements of middlemen, and giving the NNPC the latitude to take control of sale and purchase of the crude oil transaction with its partners. Dr kachukwu said in a statement : “I and my team came up with the DSDP initiative with the aim of throwing open the bidding process. This initiative has brought transparency into the crude-for-product exchange matrix and it is in tandem with global best practices.”
Dr Kachukwu in his recent video stated that a short term solution being undertaken presently is for the upstream petroleum companies to provide a sort of forex buffer to the down stream sector for the next one year in order to encourage importation of petroleum products for the Nigerian populace.
Kachukwu hinted at a long lasting solution of letting the private sector take over. He said in a recent broadcast that: “The long-term solution is that we have to throw private initiatives to the downstream. We’ve got to have a situation where we create enough policy direction, such that people can get in there and actually do the business.
Kachukwu also said that “The business must go back to where it belongs, which is the private sector, not the public sector and until we do that deal with the issue of pricing, which our price modulation has helped us manage, but not quite completely, we’re not going to solve the problem.”
Robert F Aguilera., The price of oil.
Andrea Roconcoroni, Gianluca Fusai., Mark Cummins., Handbook of multi commodity markets and products