Why deregulation of downstream is most appropriate now

The recent step taken by the Federal Government towards total deregulation of the downstream sector of the petroleum industry by increasing the price of Premium Motor Spirit or petrol from N86.50 to N145 per litre has elicited a lot of hues and cries from the public. Olusola Bello examines the circumstances surrounding this and says this is however expected given the fact that the product impacts on every aspect of our socio-economic lives, either positively or negatively.

The government foray into what is purely business matter is what has caused Nigerians these pains. If the government has not meddled into the business of supply and distribution of the product and fix the price in such a way that a consumer of petrol in Lagos pays the same price with another consumers in Maiduguri, in spite of the distance and the logistics involved, there may perhaps not be an issue.

Does these arrangements make any economic sense?

It was because of government interference in the business that brought about long queues that almost crippled the economy. When government could no longer finance the importation of the product the country ran into crisis and Nigerians started sleeping at the filling stations.

Lack of deregulation of the downstream sector of the oil and gas sector is a major factor to the slow growth of the economy, as the sector has not witnessed any serious investment because of the regulation of the price of petrol.

Investors that intended to invest in refineries had to back out because the government was fully in control of the price of the product. Oil marketing companies could not invest in infrastructure to support their business because they had limited space to operate due to the little margins they are left with.

The situation became more severe in recent time with lack of foreign exchange, which became absolutely impossible for marketers to import even when they had the naira component.

The unavailability of foreign exchange (forex) coupled with the inability to open letter of credit have forced marketers to stop product importation, and imposed over 90 percent supply on Nigerian National Petroleum Corporation (NNPC) since October 2015 in contrast to the past where NNPC supplies 48 percent of the national requirement.

NNPC does not have the resources for and is not designed to meet this increase in supply; this has resulted in the current fuel situation across the country.

NNPC has continued to utilise crude oil volumes outside the 445,000 barrels/day thereby creating major funding and remittance gaps into the Federation account.

There is no provision for subsidy in 2016 Appropriation. Until when the price was changed last week from N86.50 to N145 there an estimated subsidy claim of N13.7 per litres, which translates to N16.4 billion monthly. There is no funding or appropriation to cover this.

In the absence of available forex lines or crude volumes to continue massive importation of PMS, it is clear that unless immediately action is taken to liberalise the petroleum supply and distribution, the queues will persist, diversion will worsen and the current prices will spiral out of control.

With deregulation however there would be high level of competition, smuggling of petroleum products, monopolistic and sharp practices, existence of petroleum subsidy, poor maintenance of infrastructural facilities, distortions in products supply and distribution, inappropriate pricing of products supply and high level of fraud and corruption.

The money realised from the exercise would be used to develop projects that will be beneficial to the majority of the people. With the current move market equilibrium price is better attained through the interaction of supply and demand forces.

More specifically, the deregulation of downstream petroleum industry would take account of all actions that would loosen all constraints and factors that affect both the supply and demand of petroleum products as well as recognize the need to provide a ‘social safety net’ for citizens.

Furthermore, it would stabilise economic fundamentals and allows access to development loan, creates labour market stability, which may have the potential create additional 200,000 jobs through new investments and prevent potential loss of nearly 400,000 jobs in existing investments.

Lack of deregulation has not only caused dislocation, but if not checked once for all, it has the potential of collapsing the entire economy as People are already losing their jobs. If this situation continues to re occur, then many companies will close shop and the workers will stay at home.

The Federal Government because it was bedevilled with fiscal deficit, high external debt, unfavourable balance of payment and inability to sustain the huge subsidy for fuels announced a price modulation mechanism which would relief her of the burden of paying subsidy on the imported products.

The country has lost count on how many times organised labour went on strike over attempted deregulation of the downstream of the oil and gas, yet they have no alternatives to government policy.

Another dangerous dimension that was added to this saga was the renewed insurgency and pipeline vandalism in the Niger Delta, which drastically reduced national crude oil production to 1.65 million barrels per day as of today against 2.2 million barrels per day planned in the 2016 budget, further reducing income to the federation account and also affecting crude volumes for PMS conversion and impacting government forex earnings.

Resultant fuel scarcity has created an abnormal increase in price, resulting in Nigerians paying average of N150-N300 per litres as prevalent hoarding, smuggling and diversion of products reduced volumes made available to citizens.

It is therefore better that we allow the sector be opened up for those that can add value to the economy and deploy infrastructure that would put the sector on the path of growth.

Olusola Bello