PMS Pump Price Reduction and The Economy – My Take Away

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By BABATUNDE FASHOLA

It is no longer news that the federal government has announced a reduction in the pump price of premium motor spirit (PMS), popularly called petrol. While I have made my position known on my Twitter handle that ‘a little over 10% reduction in cost of the final (crude oil) product (PMS) in response to an over 50% drop in the cost of the raw material is a good try and that Nigerians can get a better deal’, I am constrained to make this further intervention for a few reasons.

1. There is a sense in the public space that this reduction is politically motivated, given the reactions that have followed it. To the extent therefore that there is a political nexus, it deserves further interrogation because it is an ECONOMIC issue and this is a major issue in the elections as canvassed by both parties, especially at the presidential candidacy level.

General Muhammadu Buhari had seized the moment and the importance of the economic issue earlier this month. Through his campaign council he said: “Stop stealing from Nigerians and allow them enjoy the relief that has come to consumers of petroleum products globally.

“For the Nigerian consumers, unfortunately the collapse of crude oil price since October 2014 has not translated into any change in diesel, kerosene and PMS prices across the country.”

2. The second reason for my intervention is also economic, and it goes to interrogate POLICY, particularly this PRICING POLICY, and the consistency of the party in government vis-a-vis their credibility before the Nigerian public.

The Economics of Oil
It must be obvious to any discerning mind that you cannot have a viable democracy without debating the management of the economy. This is because the real issue in elections is the way people’s lives have fared during the tenure of the incumbent. The question, sometimes spoken, sometimes not, but never forgotten, is this: – Has my life been better in the last few years or not? This question always involves an examination of the record of service of the incumbent and many have lost their seats in a bad economy. So, the present government must defend its record on the economy and this involves its management of prices and consumer indices.

The cost of energy, fuel, gas, electricity for transport, cooking, heating and manufacturing is a direct determinant of the cost of living and how far people’s wages can take them before the next pay day.  It is not therefore surprising that in the last decade and a half, many western countries have gone to war “in order to make peace”, especially in the Middle East, so that there is no scarcity of petroleum (crude oil) supply. The reason is simple.
Scarce crude means high prices of crude oil, translating to high fuel, gas and production costs, leading to restive domestic population, which can translate to electoral defeat.

If one remembers Iraq, Libya and Egypt; in spite of the democratic masks that those military interventions wore, it is difficult to dismiss a domestic, political (electoral) self interest in them.  In the aftermath of these interventions and investment in shale oil as an alternative, leading to the crash of crude oil prices, what have these western countries done at home for their people in terms of oil price management?

Let us look at a few examples:
i. United Kingdom
Drop in price (dollar per litre): 0.52
Percentage of price drop: 23.75%

ii. United States of America
Drop in price (dollar per litre): 0.39
Percentage of price drop: 36.57%

iii. SINGAPORE
Drop in price (dollar per litre): 1.79
Percentage of price drop: 21%

v. NIGERIA
Drop in price (dollar per litre): 0.03
Percentage of price drop: 10.3%

My Take Aways
a) It is poor economic management to import the final product of a commodity whose raw material (crude oil) we produce in abundance.

b) A refinery in Nigeria, such as the 400,000-barrel refinery we are supporting by providing land for the Dangote Group in the Lekki Free Zone will keep jobs at home (instead of in foreign refineries), create income for the Nigerian government by way of companies income tax, and give us better control of pricing by eliminating subsidies and demurrage charges by port delays paid to ship owners in dollars against a weak naira; and it will eliminate many other charges that are passed on to ordinary Nigerians.

c) Clearly, an inefficient port management that escalates shipping costs, a devalued currency, and an exorbitant interest rate on borrowing, which are economic failures of the current government, are part of the reasons why Nigeria cannot get a better deal from an over 50% drop in crude oil price.

Interrogation of Policy
In announcing the reduction of fuel pump price, the Minister of Petroleum Resources, Mrs Diezani Alison-Madueke, stated the reasons for the government’s decision in her own words as follows: “As you may be aware, there has been a lot of volatility in the price of petroleum products, particularly crude oil, over the last few months. Invariably, this has meant that the price of the product in Nigeria has also been greatly impacted.”
When addressing journalists, she added: “After watching the price per barrel drop over the last few months, we have finally achieved parity… therefore this would be the best time to actually reduce the price. We have been watching very carefully over the last two weeks to ensure that the volatility did not destabilise this reduction in price and we think it’s safe to implement it at this time.”

Please note she used the words (1) “price per barrel drop” and (2) the “achieved parity” in the oil price regime to justify the reduction.

i) Price Per Barrel Drop
As I have pointed out, I doubt that a 10% reduction is the best that we can get in response to a 50% drop in oil price, and this is simple common sense. If a product is manufactured at X price and the price of the raw material drops by Y%, I think it is simple economics to reflect that Y% drop in the price of the final product without doing any damage to the cost of packaging or transporting the product. And this should happen vice versa if the price of the raw material heads in the opposite direction.

But let me be quick to acknowledge that these price changes may not necessarily be effected overnight in a period of volatility; and this is the relevance of the minister’s point about “parity”, which I will come to later.

But the quick additional point to make is that diesel has not enjoyed any subsidy for a long time and there is a loud silence on this product, as far as pricing policy is concerned; and nothing is said about kerosene. So, if this was really meant to bring relief to the people, I think diesel, which impacts on production costs, power costs in homes through generators, and kerosene, which ordinary Nigerians use to cook, would have been the place for government to demonstrate that it understands the plight of the people. This would have afforded some cushion against the austerity measures indicated by the Minister of Finance.

MY TAKE AWAY
This price reduction is not far reaching enough. It demonstrates a knee-jerk reaction to a serious economic issue where the majority of ordinary Nigerians are concerned. When we factor the fact that the majority of Nigerians generate their own power at four times the cost of public power, and they mostly use diesel, a reduction there would have reduced the pressure on their disposable income.

(ii) Achieved Parity
My understanding of the minister’s use of these words is that government now believes that oil prices will hover around the current prices of $50 per barrel, so that, according to her, “the entire country will benefit immensely from this reduction.”  If this is correct, then who are we to believe?  If we go back to the statement of the Minister of Finance, Dr. Ngozi Okonjo-Iweala, on December 17, 2014 when, while defending the oil budget benchmark of $65 for the 2015 budget which some observers felt was too ambitious, she said: “This is what we have done by proposing a benchmark of $65pb. We recognise that prices might still fall further but we do not intend to revise the price further down as price intelligence indicates that prices might average between $65 and $70pb in 2015.” If the Finance Minister expects oil prices to get to $70 and the Petroleum Minister says we have “achieved parity,” there seems to be inherent contradictions within the same government.

MY TAKE AWAYS
a. Are government departments talking to themselves?
b. Who is co-ordinating the economy?
c. Why was the Minister for Finance not part of this major pricing policy briefing?
d. Was this price reduction provided for in the 2015 budget?

P.S.
As I concluded this intervention, my attention was brought to a response by former Anambra State Governor Peter Obi to a contribution I had made, in which he said in THISDAY Newspaper that: “The president showed that the sound economic policies of his government have brought about macro-economic stability. This has been acknowledged by the renowned economist and former Chairman of the Asset Management Division of Goldman Sachs Group, Dr. Jim O’Neill, who coined the term BRIC (Brazil, Russia, India and China) and MINT (Mexico, Indonesia, Nigeria and Turkey), recognising these countries as the world’s fastest growing economies.”

I have no issue with Governor Obi, because his role in government and policy making is still unclear to me. If he speaks as a party man, it is a measure of credit to him that he knows more about the programmes of a party he joined a few weeks ago, than those he met there. But for the record, the same O’Neill, whom he quotes in support of this government’s policy and the leadership of President Goodluck Jonathan, said: “If he (Jonathan) doesn’t get re-elected, and it’s because of Nigerian people wanting something different and something better, I think the markets would be happy with that. Foreign investors are pretty negative about Nigeria, so I don’t dismiss the possibility that if he lost, people actually might react positively.”

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