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 of petrol 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 bbls 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 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 price
of swapped crude oil is $0 per barrel (N0 per litre) while 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 at international
price ($148.54 per barrel), then the take-off price of the swapped crude
oil should be 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 are
charging Nigerians for the crude oil while they are getting it free.
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 Izielen Agbon writes from Dallas, Texas. izielenagbon@yahoo.com
He is former HOD , Petroleum Eng Dept, former ASUU chairman University of Ibadan, trained many operators in nation's energy industry with pratical experience on our practices and policy focus in the last 20yrs
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