Correct pricing of petroleum products
By
The urgent need for the de-regulation of the petroleum industry is no longer debatable. Nigerians must accept the compulsory need for change. Can we imagine what would have happened to local air transportation if it was not deregulated in the late 80s? All air travel passengers would have had to scramble for seats on the dying Nigeria Airways' remnant of one or two planes to service all the local airports. What an absurdity it would have been! Now, even on the same routes, passengers pay different fares as charged by the different airlines in addition to the greater convenience of the availability of planes on different time schedules. Similar benefits are expected vis-à-vis NITEL when the GSM begins operation, in spite of NITEL's own GSM licence. Why then should we deny ourselves similar or even better benefits in the industry?
Rabid sentimentality and political sophistry have always been allowed to override purely rational, commonsensical fact-and-figure solutions to the economic angle to the problem, and the most abused, and emotive word "subsidy" has been the usual culprit. Neither labour nor the government has ever understood that it is not the consumer who has been subsidised by incorrect pricing. Rather, government, labour and all consumers have been subsidising the smugglers and the black marketeers to cheat the government, investors in the oil industry and the populace. The major beneficiaries have been our parasitic neighbours who steal our vehicles and steal our oil to drive the stolen vehicles in their countries, through the black marketeers and our incorrect pricing. It is important to note that no de-regulation of the downstream operations can occur without the correct pricing of oil and allied products because pricing is a fundamental instrument for resource allocation and management.
"Correct", cost-based pricing must be distinguished from the nebulous and concession-evoking term of "appropriate" pricing. This writer believes that incorrect pricing has been Nigeria's sole problem in the oil industry. Incorrect pricing is uniform, political pricing which is based on a national average of costs. The same price for a litre of refined oil in Warri or Port Harcourt as in Ibadan as in Enugu is incorrect, just as the same price for a litre of refined oil in Kaduna as in Katsina, Jos and Kano is incorrect. In this 21st century, we should now accept the principle of correct pricing for products and services. The civil unrest, which NLC organised last year after the price increase from N20 through N25 to N22, exposed the shallowness and inappropriateness of a uniform national average-cost-based pricing policy for petroleum products across the country in a most glaring manner.
Although NLC's mayhem got good fellowship in Lagos and Ibadan axis, it only got a feeble support in the East where consumers were already paying the N35 N40 per litre and even higher than this in the North, because the Kaduna refinery was not working. The rest of the country "watched" with great amusement the civil unrest in Lagos and Ibadan where the privileged people who had access to petrol at N20 per litre were on rampage. Government eventually bowed to the political pressure and reduced the price to N22. Nine months later, the black marketeers in Lagos/Ibadan sell a litre at N80 while their cousins at Ilesha sell at N120, what the government offers for sale at N22. So, who is fooling who? Many states in the North have voluntarily agreed to pay a much higher price officially as a guarantee for a sustained availability of the product.
The decision makers now need to walk away from the traditional rhetoric of ad hoc, reactionary recipes to the problems because it has now assumed a much higher dimension than hitherto. They need to formulate a coherent, consistent and comprehensive policy for the pricing of petroleum products. This policy needs to be thoroughly prepared and pre-tested before it is set for implementation as it must take into consideration the interests of consumers and suppliers of services to the industry. The policy must include all relevant variables with clearly authenticated facts and figures which will stand the test of time and the vagaries of operations in the industry.
The local cost of refining a composite barrel of Crude Oil as ascribed to NLC is the basis of solution to this serious problem of uniform pricing. The N22 pump price version of the costing is the base for reference to justify the need for zonal pricing of petroleum products. The N0.30 cost of transporting crude oil cannot be the same for Kaduna, as for Port Harcourt to Owerri cannot be the same from Port Harcourt to Enugu, nor can it be the same from Warri to Ondo, as from Warri to Ibadan and in the North it cannot be the same between Kaduna and Kano and between Kaduna and Katsina. For the same reason, the uniform charge of N1.20/litre for transporters is wrong, and the "bridging" charge of N0.80 per litre should be removed. Thus in the costing sheet, perhaps the only justifiably constant elements are Crude Oil cost, Refining cost, Marketers, Dealers, and Government/NNPC margins per litre. All other costs should vary in the different parts of Nigeria as a function of distance per 100-kilometre average from each of the three refineries.
If this approach is followed, it is possible that some parts of the country can have petrol as low as N15 per litre while some can have it as much as N25, or even N30 per litre. The benefits will be correct pricing based on a really correct cost of delivery of petrol to each area of the country. Nobody will "subsidise" anybody anymore and government's legendary waste of huge sums of money involved through fat economic wrong policy of uniform pricing will stop.
Furthermore, to extent that this will end the economic rents which have become financial incentives for the racketeers and smugglers to vandalise oil pipelines to cause acute scarcity of supply and hold the whole nation to ransom, there will be a guarantee of sustained supply or availability of petroleum products all year round in every part of the country.
This writer is of the firm view what we should define a new pricing paradigm which:
To those who may be hyper-critical of this pricing model, they should also know that the idea of different income levels between the federal, state and local governments on the one hand and oil producing and non oil-producing states on the other hand was unthinkable two years ago. Now it is a fact of life. The prices of other commodities like meat, fish, yam and vegetables have never been uniform; indeed they have always varied with distance from supply points, and the seasons. There is no logical and objective reason why it should be different in the case of petroleum products. With a de-regulated or differentiated income of in the public service, it is necessary to accept the reality of a differentiated cost structure in the different parts of the country for the oil industry in order to deregulate the downstream operations through correctly differentiated pricing.
The political unity of Nigeria does not depend on the uniformity of price of petroleum products any more than it depends on a uniform naira exchange rate for the US Dollar, the pound sterling, etc or other commodities. Nigerians source their forex in different parts of the country, even in different parts of the same cities, use such rates to determine the cost and price of their products and services without any problem. Even when petroleum price has been officially uniform (despite the current reality of quintupled increase at Ilesha) the prices of the basic commodities have never been uniform, nor have passenger or other freight rates been uniform.