As the fuel queues return, the question of “why” is back on the front burner. Historically, the presence of fuel queues has been associated with fuel subsidies and the struggles marketers faced with getting their money from the federal government. This time around things are a bit different. Or are they?
We know that, given the evolution of crude oil prices and the exchange rate over the last 18 months, it is highly unlikely that the pump price could have remained fixed at N145 per litre without any kind of intervention. We know that almost all major importers no longer directly import fuel but instead buy from the NNPC at government approved prices for onward distribution. We know that in all likelihood there is a fuel subsidy but it is hidden in theNNPCs books, and difficult to measure given that they use a trade by barter system to import fuel, trading crude oil directly for PMS. So how large is the fuel subsidy? I took a look at some numbers to try and figure it out using two methods.
First from NNPC’s books. The NNPC publishes a monthly performance and operations report in which it reports some key numbers; the amount of PMS it produces via its refineries, the amount of PMS it imports, the amount of PMS supply, the amount it sells to distributors and its retail outlets via PPMC, and its revenue from those sales. With these numbers we can get a “wholesale” price per litre for PMS. What does this price mean? Not sure but perhaps we can compare it to prices in markets where we know there is no interference to get a sense of relative prices. In this instance I compare it to Refiner Petroleum Product Prices in the US for motor gasoline (https://www.eia.gov/dnav/pet/pet_pri_refoth_dcu_nus_m.htm). You can probably already guess the first problem in trying to compare the NNPC price per litre with US refiner prices. What exchange rate to use?
Using either the official exchange rate of around N305 or a fixed black market rate of N360 gives very different numbers, but the trend is the same. Officially there was almost no subsidy in August of 2016, which kind of corroborates the stories we heard about the logic behind the rate of N305. As time has gone on, and as the price of crude oil has gone up, the spread has gotten larger. The same story is obvious if you use the parallel market rate, which implies that even back in mid 2016 there was already a subsidy, and that has also increased as the crude oil price has gone up.
The implication is that as at August this year the implied subsidy per litre had risen, from zero to above N20 per litre if you believe that N305 is the official exchange rate, and maybe as high as N50 per litre if you believe that N360 is the exchange rate. I stop at August because that is the last time the NNPC has published its “monthly” report. Given that between August and December the price of crude oil has gone up from $51 to $63 ( roughly a 23 percent increase) then you can only guess what is happening with the implied subsidy.
An alternative way to calculate the subsidy is to compare the actual pump price in Nigeria with that in a country without market interference. Again I use average pre-tax retail prices from the US. The story is similar and again depends on what you believe the exchange rate is.
Either way, the divergence between official non-fixed US prices and domestic prices in Nigeria is apparent. The implication is that the fuel subsidy has crept back in and had already grown to between N25 and N60 per litre depending on which exchange rate you believe. Also keep in mind that crude oil prices have increased some 23 percent since August when this data stops, and given that the pump price is still N145, the implied subsidy should have increased as well.
The implications for the economy are of course very important. As international prices diverge from domestic prices, something has to pick up the tab if domestic prices don’t adjust. In the past it was very easy to figure out who was picking up that tab as an official subsidy was being paid. This time around it is a lot more difficult as the subsidy is internalized by the NNPC. The consequences are still the same though. As the spread gets larger, all sorts of supply problems start to manifest, which the public experiences as fuel queues.
The fuel queues are bad but they are not the real problem. The real problem is that we are recreating a scenario where a big future adjustment will be required. As we should have learned over the last five years, its not the little adjustments that damage economies, but the big ones. Everyone can quickly adjust to an increase from N145 to N150 even if it happens every few months. An increase from N145 to N200 though, that is what causes problems. Smart policy therefore tries to avoid big adjustments by consistently making little adjustments. Will we be smart this time, or will we continue to dance to the same old politically motivated tune?
On a related note, I tried to calculate some actual monetary value for the subsidy over the last year but it proved problematic. There have been no official fuel demand or consumption numbers since September 2016. If you assume that NNPC sales are close to fuel demand then the subsidy for the year between September 2016 and August 2017 was somewhere between N150bn and N442bn depending on which exchange rate you believe. By my estimations, if the oil price holds firm, and the domestic pump price does not change then the subsidy in 2018 will be close to N1tn (depending on which exchange rate you use of course). That would be hilarious wouldn’t it, given that those were the types of subsidy numbers we saw with the previous regime. You can peruse the data I use here.
Also I assumed the parallel market rate was N360 through out the period. That actual rate, which touched N450 at some point, makes the subsidy numbers look worse but tell a somewhat misleading story.