Tuesday, 01 October 2024 04:50

NewsScroll analysis: From N187/litre when Tinubu took over, it’s now N1,000/litre. Here’s why petrol prices aren’t likely to come down anytime soon

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The surge in petrol prices in Nigeria, rising from N187 per litre when President Bola Tinubu took office last year to N1,000 per litre, reflects a complex blend of both domestic and international economic factors. The reasons why petrol prices are unlikely to decline soon, as outlined in the analysis below, offer a significant understanding of the issue.

Key Reasons Why Petrol Prices Will Remain High:

1. Dollar Denominated Crude Sales and Depreciating Naira

The sale of crude oil, the primary feedstock for refineries, is priced in U.S. dollars. While the federal government has proposed selling crude to local refineries in the local currency, Naira, starting from October 2024, the pricing benchmark will still remain in U.S. dollars. This implies that even when sold in Naira, the exchange rate between the Naira and the dollar will determine the actual cost.

With the Naira's rapid depreciation—now at around N1,700 to $1—and no clear signs of recovery, the cost of crude oil in local currency terms will continue to rise. The weakening currency effectively means higher costs for refined petrol. This exchange rate pressure, driven by a lack of robust foreign reserves, weak investor confidence, and structural imbalances in Nigeria’s economy, ensures that petrol prices will remain high, or potentially rise further.

2. Global Oil Price Dynamics

International crude oil prices are sensitive to geopolitical tensions, such as the current conflicts in the Middle East, and changes in global demand. Historically, tensions in oil-producing regions drive prices upward, and the Middle East remains a major player in global oil supply. With no immediate resolution to these conflicts in sight, oil prices are expected to continue climbing. The combination of high international oil prices and a depreciating Naira will exacerbate the situation, making it difficult for Nigeria to reduce petrol prices.

3. Government's Economic Policy and Subsidy Removal

The Tinubu administration has taken a clear stance against subsidies on petrol, aligning with the IMF and World Bank’s advocacy for market-based pricing mechanisms. The government’s removal of subsidies has led to a significant price increase. As the government remains committed to the Bretton Woods Institutions’ policies, the chances of reintroducing subsidies are slim, further cementing the reality of sustained high petrol prices.

4. High Electricity Costs and Alternative Energy Challenges

The high cost of electricity in Nigeria forces many households, small businesses, and even industries to rely on petrol-powered generators. With no affordable and reliable alternatives, demand for petrol remains robust. The slow adoption of Compressed Natural Gas (CNG) as an alternative for vehicles, coupled with the prohibitive cost of electric vehicles (EVs), ensures that petrol remains the primary energy source for both mobility and power generation. Until there is significant investment in and adoption of alternative energy sources, demand for petrol will remain high, further pushing prices up.

5. Refinery Challenges and Import Dependency

Nigeria’s refineries have been largely non-operational, and despite ongoing efforts to rehabilitate them, the timeline for local refining to meet domestic demand remains uncertain. Until local refining capacity is significantly expanded, Nigeria will remain dependent on imported refined products, which are subject to the volatility of international oil markets and exchange rates. Even the much-hyped Dangote Refinery may take time to stabilize its output to meet domestic demand. This heavy reliance on imports leaves Nigeria vulnerable to global price fluctuations, ensuring that petrol prices will remain high.

6. Inflationary Pressures

The general inflation rate in Nigeria, currently at historic highs, also feeds into higher petrol prices. Rising costs across sectors, from logistics to labour, affect the entire supply chain of petrol distribution. Inflation erodes purchasing power and adds to the cost of production, making it more expensive for importers and distributors to bring fuel to the market.

7. Limited Policy Interventions

There is a clear lack of effective policy interventions to manage the growing energy crisis. While the government has made promises to boost local refining capacity and encourage alternative energy sources, the implementation of these policies is slow. Without significant regulatory or infrastructural changes, the systemic issues driving petrol price increases will persist. Moreover, the financial constraints faced by the government limit its ability to intervene meaningfully in the short term.

Implications for the Nigerian Economy and Living Standards

1. Increased Cost of Living

Rising petrol prices have direct and far-reaching impacts on the cost of living. Transportation costs, which are a significant component of everyday expenses for many Nigerians, are closely tied to fuel prices. With the rise in petrol prices, transportation fares have surged, affecting not only individuals but also the cost of goods and services. The increase in logistics costs means higher prices for food, consumer goods, and essential services, contributing to overall inflation and reducing disposable incomes.

2. Stagflation Concerns

The combination of high inflation and stagnating economic growth—referred to as stagflation—is a serious concern. As petrol prices rise, so too does inflation, while economic growth remains tepid due to structural issues such as poor infrastructure, high unemployment, and weak industrial output. This could lead to a scenario where economic activity slows while prices continue to rise, creating a difficult environment for businesses and households.

3. Strain on Small Businesses

Small businesses, which often rely on petrol-powered generators due to unreliable electricity supply, are hit hard by rising fuel costs. Many small and medium-sized enterprises (SMEs) already operate on thin margins, and the added burden of higher fuel prices may lead more to closures or reduced operations. This could result in higher unemployment and reduced economic output, further exacerbating poverty levels in the country.

4. Worsening Poverty and Social Unrest

Nigeria's poverty levels are already among the highest in the world, and rising petrol prices are likely to push more people into poverty. As living costs increase and real incomes stagnate, more Nigerians will struggle to afford basic necessities. This economic pressure could also heighten social unrest, as people become increasingly frustrated with their deteriorating standard of living. The government will need to address this issue with social safety nets and targeted interventions to avoid widespread discontent.

5. Pressure on Government Revenues

While the removal of subsidies has freed up some government resources, rising petrol prices can also place additional pressure on public finances. If inflation and economic stagnation continue, tax revenues may fall, and the government may face pressure to increase social spending to mitigate the impact on vulnerable populations. This creates a difficult balancing act for policymakers, as they must find ways to stimulate growth while managing rising costs and social discontent.

Conclusion

The likelihood of petrol prices falling in the near future is slim due to a combination of domestic economic challenges and global oil market dynamics. The implications of persistently high petrol prices are profound for the Nigerian economy and its citizens. Rising costs of living, inflationary pressures, and a lack of viable alternatives to petrol create a grim outlook for economic recovery and poverty alleviation in the short term.

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