On December 10, 2011, if you stopped at the Mobil filling station on
Old Aba Road in Port Harcourt, you would be able to buy a litre ofpetrol for 65 naira or $1.66 per gallon at an exchange rate of $1/N157
and 4 litres per gallon. This is the official price.
The government claims that this price would have been subsidized at N73/litre and that the true price of a litre of petrol in Port Harcourt is
N138/litre or $3.52 per gallon. They are therefore determined to
remove their subsidy and sell the gallon at $3.52.
But, On December 10, 2011, if you stopped at the Mobil Gas station on
E83rd St and Flatlands Avenue in Brooklyn, New York, USA, you would be
a able to buy a gallon of petrol for $3.52/gallon.
Both gallons of petrol would have been refined from Nigerian crude oil. The only difference would be that the gallon in New York was refined in a US
North East refinery from Nigerian crude exported from the Qua Iboe
Crude Terminal in Nigeria while the Port Harcourt gallon was either
refined in Port Harcourt or imported.
The idea that a gallon of petrol from Nigerian crude oil cost the same in New York as in Port Harcourt runs against basic economic logic. Hence, Nigerians suspect that there is something irrational and fishy about such pricing. What they would like to know is the exact cost of 1 litre of petrol in Nigeria.
We will answer this question in the simplest economic terms despite the
attempts of the Nigerian government to muddle up the issue.
What is the true cost of a litre of petrol in Nigeria?
The Nigerian government has earmarked 445000 barrel per day throughput for meeting domestic refinery products demands. These volumes are not for export. They are public goods reserved for internal consumption.
We will limit our analysis to this volume of crude oil. At the refinery gate in Port Harcourt, the cost of a barrel of Qua Iboe crude oil is made up of the
finding /development cost ($3.5/bbl) and a production/storage
/transportation cost of $1.50 per barrel.
Thus, at $5 per barrel, we can get Nigerian Qua Iboe crude to the refining gates at Port Harcourt and Warri. One barrel is 42 gallons or 168 litres.
The price of 1 barrel of petrol at the Depot gate is the sum of the
cost of crude oil, the refining cost and the pipeline transportation
cost.
Refining costs are at $12.6 per barrel and pipeline distribution
cost are $1.50 per barrel. The Distribution Margins (Retailers, Transporters, Dealers, Bridging Funds, Administrative charges etc) are N15.49/litre or $16.58 per barrel. The true cost of 1 litre of petrol at the Mobil filling station in Port Harcourt or anywhere else in Nigeria is therefore ($5+$12.6+$1.5+$16.6) or $35.7 per barrel . This is equal to N33.36 per litre compared to the official price of N65 per litre.
Prof. Tam David West is right. There is no petrol subsidy in Nigeria. Rather the current official prices are too high.
Let us continue with some basic energy economics. The government
claims we are currently operating our refineries at 38.2% efficiency.
When we refine a barrel of crude oil, we get more than just petrol. If
we refine 1 barrel (42 gallons) of crude oil, we will get 45 gallons
of petroleum products.
The 45 gallons of petroleum products consist of 4 gallons of LPG, 19.5 gallons of Gasoline, 10 gallons of Diesel, 4 gallons of Jet Fuel/Kerosene, 2.5 gallons of Fuel Oil and 5 gallons of Bottoms. Thus, at 38.2% of refining capacity, we have about 170000 barrels of throughput refined for about 13.26 million litres of petrol, 6.8 million litres of diesel and 2.72 million litres of kerosene/jet fuel.
This is not enough to meet internal local national demand. So, we send the remaining of our non-export crude oil volume (275000 barrels per day) to be refined abroad and import the petroleum product back into the country. We will just pay for shipping and refining.
The Nigerian government exchanges the 275000 barrels per day with
commodity traders (90000 barrels per day to Duke Oil, 60000 barrels
per day to Trafigura (Puma Energy), 60000 barrels per day to Societe
Ivoirienne de Raffinage (SIR) in Abidjan, Ivory Coast and 65000
barrels per days to unknown sources) in a swap deal.
The landing cost of a litre of petrol is N123.32 and the distribution margins are N15.49 according to the government. The cost of a litre is therefore
(N123.32+N15.49) or N138.81 . This is equivalent to $3.54 per gallon
or $148.54 per barrel.
In technical terms, one barrel of Nigerian crude oil has a volume
yield of 6.6% of AGO, 20.7% of Gasoline, 9.5% of Kerosene/Jet fuel,
30.6% of Diesel, 32.6% of Fuel oil / Bottoms when it is refined.
Using a netback calculation method, we can easily calculate the true cost of
a litre of imported petrol from swapped oil. The gross product revenue
of a refined barrel of crude oil is the sum of the volume of each
refined product multiplied by its price.
Domestic prices are $174.48/barrel for AGO, $69.55/barrel for Gasoline (PMS or petrol), $172.22/barrel for Diesel Oil, $53.5/barrel for Kerosene and
$129.68/barrel for Fuel Oil.
Let us substitute the government imported PMS price of $148.54 per
barrel for the domestic price of petrol/gasoline. Our gross product
revenue per swapped barrel would be (174.48*0.066
+148.54*0.207+172.22*0.306+ 53.5*0.095+129.68*0.326) or $142.32 per
barrel.
We have to remove the international cost of a barrel of Nigerian crude oil ($107 per barrel) from this to get the net cost of imported swapped petroleum products to Nigerian consumers. The net cost of swapped petroleum products would therefore be $142.32 -$107 or $35.32 per barrel of swapped crude oil.
This comes out to be a net of $36.86 per barrel of petrol or N34.45 per litre. This is the true cost of a litre of imported swapped petrol and not the landing cost of N138 per litre claimed by the government.
The pro-subsidy Nigerian government pretends the proceeds from swapped
crude oil is $0 per barrel (N0 per litre) while the cost of the resulting petroleum products is $148.54 per barrel (N138 per litre).
The government therefore argues that the “subsidy” is N138.81-N65 or
N73.81 per litre. But, if landing cost of the petroleum products is calculated at international price ($148.54 per barrel), then the proceeds from the swapped crude oil should be calculated at International price ($107 per barrel). This is basic economic logic outside the ideological prisms of the World Bank.
The traders/petroleum products importers and the Nigerian government want
to charge Nigerians for the crude oil while they are getting it free.
They want us to pay international prices for our nation’s crude oil
while Nigeria sells crude oil to neighboring ECOWAS nations at a
discount.
So let us conclude this basic economic exercise. If the true price of
38.2% of our petrol supply from our local refinery is N33.36/litre and
the remaining 61.8% has a true price of N34.45 per litre, then the
average true price is (0.382*33.36+0.618*34.45) or N34.03 per litre.
The official price is N65 per litre and the true price with government
figures is about N34 per litre (even with our moribund refineries).
There is therefore no petrol subsidy. Rather, there is a high sales
tax of 91.2% at current prices of N65 per litre.
The labor leaders meeting the President should go with their
economists. They should send economists and political scientists as
representatives to the Senate Committee investigating the petroleum
subsidy issue. There are many expert economists and political
scientists in ASUU who will gladly represent the view of the majority.
The labor leaders should not let anyone get away with the economic
fallacy that the swapped oil is free while its refined products must
be sold at international prices in the Nigerian domestic market. The
government should explain at what price the swapped crude oil was sold
and where the money accruing from these sales have been kept.
We have done this simple economic analysis of the Nigerian petroleum
products market to show that there is no petrol subsidy what so ever.
In the end, this debate on petrol subsidy and the attempt of the
government to transfer wealth from the Nigerian masses to a petrol
cabal will be decided in the streets.
Nigerian workers, farmers, students, market women, youths, unemployed, NGO and civil society as a whole should prepare for a long harmattan season of protracted struggle. They should not just embark on 3 days strike/protests after which the government reduces the hiked petroleum prices by a few
Nairas. They must embark upon in a sustainable struggle that will lead
to fundamental changes.
Let us remove our entire political subsidy from the government and end this petroleum products subsidy debate once and for all. It is time to bring the Arab Spring south.
Izielen Agbon, Dallas, Texas.
c/o
*Adaku Onwuzurike
ThreeSearch Nigeria Ltd*
