Fuel Subsidy: The real PRICE of petrol

I woke up this morning to an article on the “real cost of Nigerian petrol“.  The article goes through a series of calculations, mostly on various costs, on the refining and transporting of crude oil. The article comes to the conclusion that because, based on their calculations, the cost of refining PMS is N34.45 there really is no subsidy. They rather argue that the government is already taxing the public up to 91.2% and wants to increase the “tax”  A travesty.

They however forget the simple truth about prices. Prices are not really determined by the cost of producing things. The cost matters in the sense that the price will probably never go below whatever it costs to produce. Volatile costs would probably also lead to volatile prices. Beyond that the cost really has no say. The price is determined by demand and supply. The amount people who want to buy the product and how much they are willing to pay for it and quantity of the product available for sale.

It is common knowledge that we do not refine enough petroleum products locally to meet local demand. The bulk of our petrol, kerosene and so on is imported from international markets. The same markets we sell our crude oil. The price of a gallon of refined gasoline (what we call PMS) as at the time of writing this is $2.70 per gallon. This equates to about N100 per litre. Over the past six months it has fluctuated between $2.45 and $2.90 per gallon. This is the price of refined gasoline. This price does not include the cost of transportation from the actual refineries to Nigeria. It does not include the famous demurrage charges. These will probably push the landing price of petrol in Nigeria higher.

Is the landing cost of petrol N138 per litre? Probably close to it. Is there already a subsidy? definitely.

The positive side to the calculations by Prof. Agbon, if they are correct, is that we should definitely be able to refine PMS for much cheaper than the price at international markets. If we can refine PMS at close to N35 per litre and the rest of the world is willing to pay up to N100 per litre then there is a lot of potential growth in domestic refining. Of course we need to swallow the bitter pill of deregulation first.

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