THE REAL COST OF NIGERIAN PETROL VS THE FRAUD CALLED SUBSIDY

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 costs 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 445,000 barrels 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.

Our guest author Dr. Izielen Agbon Izielen Agbon writes from Dallas, Texas.

Culled from Leadership Magazine: http://www.leadership.ng/nga/columns/12081/2012/01/01/real_cost_nigeria_petrol_vs_fraud_called_subsidy.html#.TwNGLfSzKeA.facebook

MY VIEW ON THE FUEL SUBSIDY REMOVAL

This fuel-subsidy issue is a double-edged sword;

The Governments stance:
1. "We want to use the money to build infrastructure."

The People's stance:
1. One Nigerian senator earns 3times what the President of the USA earns and we have 109 of them! not to talk of ministers, governors, advisers and the presidency itself!! Apart from this we have 1 billion in our budget this year alone for the feeding of the presidency (that is unheard of also in other countries), not to talk of the massive corruption as evidence by the massive depletion of our foreign reserves and excess crude oil accounts!!! So: "If you are serious about not having enough money for improvements/infrastructure prove your loyalty by slashing your salaries and using that money to improve our economy." That is where a huge chunk of our budget is going.

2. Before you remove the subsidy, don't you think you should reduce the burden this will cause the people? at least this is what every other country has done. There should be constant electricity and the roads/rail and transport services should be sorted.

3. The most important point is however; WHY ARE OUR REFINERIES NOT WORKING? If our refineries were functioning at full capacity and we went ahead to build some more; we would not have this problem. Not only will we be able to sell to the foreign market at a more competitive price to earn more income? The cost of selling it to Nigerians themselves would drop drastically.

So now, let's be honest with ourselves, who has a better argument? Is the government not meant to serve the people? If the government is to be a government of the people, then it should humble itself and fix up. The government is not expected to provide subsidy forever, but for now; it has to cut the salaries of its overpaid yet under-worked workers and fix the refinery/electricity issues at least. The burden should also be place lightly; not all at once. It is just common-sense.


God Bless Nigeria.

“The separation of the races is not a disease of colored people, but a disease of white people…I do not intend to be quiet about it.” - Albert Einstein

History

I sincerely believe that if we had not lost time to slavery (400 years) and colonization (another 100 years). We would have been like Japan and China.

But there is still hope. God dey.

BOKO-HARAM

What a stupid menace.

This all started when we allowed sharia law in the north. We have to abolish sharia law; it is not fair that any law should favor any religious group. Turkey has 97% of its population as Muslims, yet it doesn't have a sharia law.

There is no way sharia law will not cause tension among other religious groups (and how do you stop the fanatics?)

Nigerians of all religions have lived to together for years without any religious strife whatsoever. Some fanatical elements however decided to use their positions of power to cause strife and use religion to separate us and achieve their selfish goals. The constitution already allows for everyone to practice whatever religion they choose FREELY. We do not need a special law for anybody or any state.

Imagine what would happen if a governor in the south east or west wakes up and declares a special law in his/her state for any specific religion or ethnic group. How would the rest of the people who do not belong to that group feel? 

Religion has to be separated from government. This is the mood and swing of things that we are witnessing in the "Arab Spring". People are trying to embrace democracy and a transparent government not someone who asks you to do something or dictates to you based on religion or his or her concept of God. That is not the primary job of the government. The primary job of the government is to look out for the interests of the people.

Why so much focus on religion? There is no electricity, no running water, no jobs, bad roads, a messed up economy, run down schools and hospitals and a completely messed up infrastructure; yet they are concerned about religion and having laws for religious groups. And the worst thing is that those laws are not properly taught to the people and are only used to promote the interests of the super rich and influential.

How many rich men have had their hands cut off for stealing or been stoned for fornication? It's just the poor folks who are suffering. If we are to be totally honest with ourselves we know the right thing; but we are blinded by our perceived loyalty to our religious beliefs and groups. 

Finally, if we do not do away with Sharia law, the north will always be marginalized and prone to religious violence. Miscreants in the society and government will always use their so-called "Sharia laws"(because that is not how its even practiced in Saudi) for their selfish interest. Let us go back to how it was, everyone should be free to practice whatever religion they choose without any interference from the government in any region and without any special laws.

God Bless Nigeria and U.