A Review of the Nigerian Energy Industry

Why Nigerians are not benefiting from global oil price slump

FCT Abuja traffic
FCT Abuja traffic

Oscarline Onwuemenyi

11 January 2015, Abuja – ABUJA – Global oil prices have been in steep decline since June 2014 as a result of slow demand growth and the United States’ oil boom, which has increased supply. Just last week, the global oil benchmark, Brent, against which Nigerian oil is priced, tumbled below $58 per barrel, hitting its lowest levels since May 2009.

How far will oil prices fall? Nobody seems to know. As of yesterday, crude oil had dropped an additional $1 to $53 a barrel, following previous decreases throughout the later part of last year.

Indeed, the decline in global oil prices has meant good news for car-driving consumers in mostly Western countries who are now paying less at the pump–on average, gas is about $2.90 a gallon for consumers in the United States, marking the lowest prices in over four years. Reports further show that the global oil slump is also good for businesses, as consumers may suddenly have more money to spend.

The news isn’t all cheery, however, for millions of ordinary Nigerians who have been told by their government to tighten up their belts for rough patch ahead due to the global price slump. Also, for many small businesses in the country, the falling price of oil adds new risks and concerns, forcing them into something of a precarious balancing act.

The question, however, has been asked: how exactly are Nigerians being impacted by the global collapse in oil prices? Also, why are millions of Nigerians not feeling the global oil slump in their pocketbooks? Why, in a situation where pump price of petroleum products is at its lowest in recent history in other climes, are Nigerians made to pay more for the product, oftentimes after queuing for several hours?

SweetcrudeReports investigation revealed little surprising information, in a culture that is known for presenting conundrums that often go against the international grain, of sorts. Many analysts who spoke to our correspondent blamed greed and avarice of petroleum product importers, stressing that the system has been rigged to always serve the interest of the oil companies against the citizens. Others blame the ineffective regulation in the system, and the subsidy process, they say, is yet to deliver on the rewards for Nigerian consumers of petroleum products.

Speaking on the issue of why the global oil price slump does not impact the pump price of petroleum products in Nigeria, the General Manager, Corporate Services at the Petroleum Equalisation (Manangement) Fund, PE(M)F, Mr. Goddy Nnadi explained that for Western economies, it is easier and faster to feel the impact of the global fall in the price of oil. “But for us in Nigeria, it is not the same because we do not refine the products here, we have to go really far away to refine the products, pay for transporting it back to the country including other handling and insurance charges. Even when it gets here, there are some other things that go into the process which eventually boost the cost. And someone has to pay for all of that, and thus your prices remaining where they are in spite of what we find in other societies.”

He noted that, “Basically, we import refined products, so you pay the cost of the crude which has come down globally now, and you also pay for the refined products, including the transportation and the inefficiencies that crop up in the system. All these combined does not give you the real price of the product. If you take the United States and Europe, for instance, the refining costs are fairly constant. When the crude price goes down, it catalyses a reduction in price which they now translate to the consumers.

“However, here in Nigeria, we have our crude which is mostly exported to other countries for refining. This means additional costs for refining, which is standard, cost of transportation, and cost of the inefficiencies in the system such as when vessels bearing refined products cannot come into our ports due to their sizes, and smaller vessels now have to go in and bring in the products – that certainly comes with added costs.

“Also, the issue vandalisation of pipelines that carry crude to the different refineries in the country. This means that other modes of transportation have to be used, which may be quite costly. These are extra costs that are unnecessary and they all add up to the final cost of the product. If you remove all of these costs, you will definitely experience a reduction in the prices of petroleum products,” he added.

Nnadi posited that it woud be unreasonable for Nigerians to expect to enjoy a decrease in pump prices of petroleum products as long as most of the local refineries are not functioning up to par, or with the numerous inefficiencies in the petroleum products importation process.

“It’s like when you have leather and you send it out to China to be built into a shoe. If you go and import the shoe back into the country, you can’t expect to get it at the rate at which the leather was before it was taken out. At that point, it’s whatever price they give you that you pay, it doesn’t matter that the global price of leather has gone down,” he explained.

Nnadi further asserted that until the full weight of market forces are unleashed on the system through the removal of subsidy, the petroleum pricing system would continue to be rigged against the ordinary Nigerian.

“All the government and promoters of a fully deregulated market need to do is to clearly communicate to the consumers that they stand to gain more when there is vibrant competition in the system.

“The question consumers need to ask is what is the real cost of importing products into the country. The fact remains that if we had pursued subsidy removal to the end, you will find out that people may end up paying much lower for the petroleum products they consume,” he added.

Nnadi noted that the creation of the Subsidy Re-Investment Programme (SURE-P) which came as a result of partial removal of subsidy two years ago have seen a lot of physical and social development, but noted that government would surely be able to do more for the economy if subsidy was removed completely.

According to him, “If you remove the whole subsidy, you will see more infrastructural development including better roads for commuters and, thus, less money spent on maintaining vehicles, and government can also invest in numerous other social and welfare issues to improve the quality of life of the average Nigerian.”

Mass retrenchments looming
A number of factors have influenced the recent drop in oil prices, among them the slowdown in economies globally, from China to the European Union. An overproduction of oil has also played a role, with the U.S. producing more energy from shale oil deposits, and Organization of the Petroleum Exporting Countries (OPEC) holding its output steady, even as prices drop.

Meanwhile, as crude oil price continues its descent, and the economy falters, strong indications have emerged that workers in both private and public sectors are faced with mass retrenchment.

Stakeholders in both sectors, who spoke to our correspondent, painted a gloomy picture of the economy and the prospects of workers in the new year. They based their projections on recent happenings in the Nigerian and global economies.

Presently, reports indicate that at least 70,000 civil servants in 30 ministries, departments and agencies of the Federal Government had yet to receive up to three months salaries.

While the Federal Government is believed to owe workers of the Ministry of Labour and Productivity salary arrears ranging from one to three months, 11 state governments could not pay December salary to workers. Three of the states – Benue, Plateau and Osun – have been reported to owe workers three months’ salary arrears.

In separate interviews with SweetcrudeReports, stakeholders expressed fears that companies and public institutions were planning to address the downturn in the economy with cost-cutting measures and downsizing.

Recently, the Petroleum and Natural Gas Senior Staff Association of Nigeria gave indications to this effect when it raised the alarm that companies, especially petroleum companies, had plans to retrench staff.

According to the association, non-core employees of oil firms in the country may be asked to quit their jobs, if the fall in oil prices persists till April or May.

According to the Media Officer of PENGASSAN, Mr. Babatunde Oke, employers had grown weary of the slump. “The effect might be severe if it continues till May because some employers are already complaining that they may need to shed weight, if it persists till then. Of course, it will affect contract staff, if the slump persists,” Oke noted.

Similarly, the Deputy President, National Association of Small Medium Enterprises, Mr. Orimadegun Agboade, stated that retrenchment had already begun in some sectors.

He said, “We closed for the year earlier than usual. Ordinarily, we take a break close to Christmas. But with the way things are right now, many companies closed two weeks before the normal closing date. Based on recent events, federal, state and local governments still owe salaries of up to three months. It is an indication that things are not right at all. In fact, many of us are afraid of what will happen.”

Agboade stated that the current foreign exchange rate is the harbinger of the gale of retrenchments that would sweep workers out of the manufacturing sector.

“For instance, I am a manufacturer of medicine; I received a notice from my bank two weeks ago that the Federal Government had placed an embargo on all letters of credit. The implication of this is that immediately we run out of the raw materials we have now, the hope of getting more will be slim, or it won’t come on time.

“In the pharmaceutical industry, where I belong, close to 98 per cent of our raw materials are imported. A lot of companies are already cutting salaries,” Agboade added.

The NASME Deputy President further said the scale of retrenchment could be as high as 25 per cent. He warned that if things were not sorted out quickly, it could reach 50 per cent.

Similarly, the Chairman, National Association of Small Scale Industrialists, Lagos State chapter, Mr. Segun Kuti-George, said the fact that the foreign exchange rate was not in equilibrium with the naira was a sign that mass retrenchment might be closer than expected.

“We have more naira chasing fewer dollars now. Also, the monetary policy is moving from 12 per cent to 13 per cent higher interest rate. We now have a higher rate of exchange, which inherently means inflation.

“It means that prices of imported and locally-made goods will go up, which would mean lower demand and, therefore, lesser profits for companies. This may then lead to layoffs,” he explained.

The Director-General, Lagos Chamber of Commerce and Industry, Muda Yusuf, predicted that the year would be challenging for businesses, as the cost of production would increase, while purchasing power would decline.

He explained that businesses would have to look at all possible options for survival, including cost reduction in other areas. The process of reducing costs, according to him, may result in cutting the number of employees.

At the presentation of the 2015 budget to the National Assembly, the Minister of Finance and Coordinating Minister of the Economy, Dr. Ngozi Okonjo-Iweala, had announced more austerity measures. She had explained that the measures were aimed at cushioning the economic impact of the drop in oil prices.

She added that the measures would be implemented from the beginning of the second quarter of 2015 to boost the ratio of non-oil revenues to oil revenues. The Federal Government’s 2015 budget estimates of about N4.3trillion was planned with a $65 oil price benchmark.

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