A Review of the Nigerian Energy Industry

Mobil Oil chairman blames fuel tanker explosions on price regulation

25 August 2015, Lagos – The Chairman and Managing Director of Mobil Oil Nigeria Plc, Mr. Tunji Oyebanji has attributed the increasing spate of fuel tanker explosions across the country with the attendant fire outbreak to the inability of oil marketing companies to make new investment as a result of the regulation of prices petroleum products by the government.

fuel-tanker-on-fire-in-001Speaking in Lagos at the recent 2015 conference of the National Association of Energy Correspondents (NAEC), Oyebanji stated that the inability of the marketers to make reasonable margins from their business has hindered their capacity to invest in new trucks for lifting petroleum products.

In his presentation on “Deregulation of the Petroleum Products Sector: A Key to Sustainable Development,” the Chairman and Managing Director of Mobil Oil Nigeria Plc, Mr. Tunji Oyebanji  noted that the margins of the marketers have remained fixed for the past eight years.

He said apart from having a negative impact on the downstream business, regulation and payment of subsidies also have serious impact on the Nigerian economy.

Oyebanji listed the opportunity cost of subsidies to include lack of investments in infrastructure, health, education and investment in local refining, which he said was private sector driven.

Budgetary constraints, leakages/smuggling, wrong beneficiaries and inadequate investment in pipelines, storage facilities, and jetties were also listed as some of the negative effects of subsidy payment.

Oyebanji also identified rent seeking/corruption, administrative cost of enforcement, low taxes, safety issues, adulteration of product and market distortion as some of the ills of price regulation.

According to him, price regulation encourages what is known in the industry parlance as “Rice and Beans” where the marketers adulterate high cost product with low cost product to sell it as high cost product.

Quoting the 2003 report of the IMF and others on Indonesian experience, Oyebanji noted that  “given that higher income groups consume the lion’s share of petroleum products, it is tempting to conclude a priori, that these groups would bear the brunt of any additional reduction in the subsidy. Such a conclusion would be premature, however, in light of the ripple effects of higher petroleum prices on production costs and incomes throughout the entire economy.”

According to him, these results suggest that in the short run, a reduction in petroleum subsidies will result in an increase in the price level and a reduction in household consumption.

“Even though higher-income groups lose the most from subsidy reduction, the poor are also affected; the latter could be protected by well-targeted social safety nets, using some of the fiscal savings generated by subsidy reform.  Given the contribution of subsidy reduction to fiscal sustainability, higher petroleum prices are unlikely to adversely affect the poor in the long run,” he added.

He noted that marketers margin has remained unchanged in almost eight years as a result of deregulation, thus  discouraging investment, with the country experiencing frequent supply shocks due to lack of refining capacity, logistics infrastructure and delays in subsidy reimbursement by government

Oyebanji said the supply shocks have created pricing arbitrage opportunities along the supply chain, while opaque allocation of imports quotas has given opportunities to importers with no retail outlets

According to him, delays in subsidy reimbursements to oil marketers have seen government incur avoidable costs in overdue interest payments and forex differentials.


– This Day

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