Recent increases in the price of petroleum products, particularly petrol or Premium Motor Spirit (PMS), are not merely price adjustments; they constitute a fresh assault on the productive capacity of the country’s economy. Already, the economy is struggling with a cost-of-living crisis, manifesting as a sharp drop in household incomes, along with a drastic hike in transport costs and food prices.
Clearly, Nigeria is once again confronting the crucial paradox of its petroleum economy. Rising crude prices, which should ordinarily be a blessing to the country, have turned out to be a major financial burden on citizens. With the subsidy now fully removed, every additional dollar per barrel translates into higher pump prices at local filling stations.
The economics is not difficult to explain. Crude oil is traded on the global market, with the dollar serving as the currency of exchange. But an average motorist on the streets of Lagos or in a coastal community in Bayelsa would find it difficult to understand why a resident of a community sitting on oil reserves, or a city hosting Africa’s biggest refinery, must pay the full global market cost of petrol.
Petrol prices have breached the N1,400-a-litre threshold in parts of the country after Dangote Petroleum Refinery raised its gantry price to N1,350 a litre. The refinery has increased its price four times since August 21, adding N185 or 15.9 per cent, according to reports. The latest adjustments suggest that domestic petrol prices will continue to mirror movements in the international crude market.
It is no longer sufficient to ask why petrol prices are high. Three years after subsidy removal and more than a year into the operation of the Dangote Refinery, the more important question is why the government has failed to create a system that can minimise Nigeria’s exposure to the vagaries of the international market.
The naira-for-crude arrangement was expected to reduce the country’s vulnerability to external oil price shocks. Yet the government has disappointingly pulled the plug on the initiative without providing a credible alternative. If the arrangement is considered impracticable, what is its substitute? The answer to this question underpins the unfinished business of downstream petroleum reform.
EFN Non Oil Export
The global community understands that energy prices are too important to economic growth to be left entirely at the mercy of market forces. Countries that cannot afford direct product subsidies often deploy other fiscal incentives, including tax waivers and targeted relief measures, to moderate energy costs and protect economic activity.
Nigeria should confront this reality. A market-driven petroleum sector does not absolve the government of its responsibility to protect citizens from extreme price volatility, particularly when energy costs have far-reaching consequences for production, transportation and household welfare.
Nigeria produces crude oil, but it does not control the international price of crude. The emergence of local refineries does not alter that fundamental reality, contrary to the optimism that accompanied the removal of the subsidy. The inability of the Dangote Refinery to significantly stabilise petrol prices is an obvious demonstration of this limitation.
A refinery can eliminate the inefficiencies associated with importing refined petroleum products, reduce foreign exchange exposure linked to product imports and improve domestic supply security. It cannot, however, manufacture cheap crude to power its operations. When international crude prices rise, the major input cost of a refinery also rises. Crude is estimated to account for about 65 per cent of total refining costs. This is precisely where Nigeria finds itself today.
The geopolitical crisis involving Iran has further complicated the outlook. Attacks, disruptions around the Strait of Hormuz and threats to the Middle Eastern energy economy have heightened fears of supply shortages, pushing Brent crude above $100 a barrel. If the escalation continues, crude prices could rise to $120 or more in the coming weeks.
Petrol prices are already too high for millions of Nigerians. A further increase in crude prices could push pump prices higher, potentially towards N2,000 a litre if international prices climb to $120, $130, $140 or beyond. Such a scenario would expose the fragility of an economy that has not sufficiently insulated its citizens from external energy shocks.
A return to the old blanket subsidy regime would be fiscally dangerous. It would reintroduce the distortions, leakages and rent-seeking practices that successive governments have struggled to eliminate. At the same time, the government cannot reasonably expect citizens to absorb petrol prices of between N1,400 and N2,000 a litre without severe economic and social consequences.
Beyond the inability of many households to pay, such a price would deepen inflationary pressures, weaken consumer demand and intensify social tensions. Higher petrol prices operate as a form of regressive taxation, taking a larger proportion of the income of poorer households than that of wealthier citizens.
The contradiction of high petroleum product prices must therefore be confronted with a greater sense of responsibility and commitment. The government should not pretend to be helpless. There are multiple options it can explore to make petroleum products available and affordable without returning to an indiscriminate subsidy regime.
As a matter of urgency, the naira-for-crude arrangement should be reviewed, with a genuine intention to determine whether it can be redesigned to stabilise the domestic market. An efficient arrangement could help Dangote and other refiners reduce freight and foreign exchange-related costs, provided it is transparent, commercially viable and devoid of abuse.
The government should also examine targeted fiscal measures that protect consumers and productive sectors from extreme price shocks. Such interventions should be transparent, time-bound and subject to independent scrutiny, rather than becoming another channel for opaque regulation.
The downstream sector has historically thrived on rent-seeking, a problem that can be tackled through a more competitive and genuinely liberalised market. Import licensing should not be restricted to a privileged few. New licences could be granted to applicants with credible business plans, adequate financing and demonstrable capacity. Energy security is too critical to Nigeria’s economic survival to be left in the hands of a few cartels. Competition must be encouraged, while regulators ensure that market liberalisation does not become a cover for predatory pricing, collusion or the capture of public resources.
Beyond international oil price shocks, Nigeria must address its internal structural and logistical constraints. The country’s poor and predominantly road-based transport system, inadequate fuel distribution infrastructure, pipeline limitations and high logistics costs all contribute to expensive petroleum products. These are domestic problems that cannot be blamed on the global crude market. There is no better time to begin finding lasting solutions to these challenges than now. The relevant agencies responsible for downstream regulation, infrastructure and logistics must recognise that this is not a time to sit idle.
The removal of subsidy was presented as a difficult but necessary reform that would free resources for development and establish a more efficient petroleum market. The government now owes Nigerians evidence that the reform is delivering beyond fiscal savings. It must demonstrate that the new system can withstand global shocks, protect poor households and support productive activities.
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