OIL PRICE INCREASE IN NIGERIA

OIL PRICE INCREASE IN NIGERIA: A POLICY FOR THE MENDICANT?

(Ohio, United States of America)

In the past fifteen years in Nigeria, a lot of mendacity has been introduced into the socioeconomic policy of oil price increase at the pump in Nigeria. I continue to marvel how subsequent administrations in Nigeria continue to use the same "spin" in explaining their mendacious reason why they have to increase the oil price despite a drop in the wholesale price of barrel of oil.

This deceitful action of the government could only explain one of the major reasons why all previous and present governments of Nigeria prefer to govern unenlightened people, hence, the lack of interest in ensuring that every Nigeria are properly educated.

It is only in Nigeria that oil prices at the pumps continue to increase while the wholesale price is dropping like stone in the in the water. Currently the price of barrel of oil is below $15.00 and why should Nigerians pay more at the pump than when oil price for a barrel was around $32.00. The common answer from the government will be at the price of $32.00 they were subsidizing the price at the pump. Is this is a common mendacious answer of the government to a mendicant society or otherwise?

The purpose of this write up is to put the record straight as much as possible and to stimulate the government to be more open and direct when explaining why there is an increase in oil price at the pump.

The government reason now as described by the Special adviser of the government on petroleum is described below verbatim.

Presidential Adviser on Petroleum and Energy, Dr. Rilwanu Lukman, said at a news conference in Abuja to flag off the pre-qualification process for private refineries, that the upward review of fuel prices had spurred increase in private establishments of refineries as well as product importation.

"Prices of products before January 1, 2002 prices adjustment were unsuitable to attract participation by private individuals into refining, supply and distribution of products,"

"With the adjustment of product prices recently effected and the stability achieved there from, the full implementation of the policy of liberalization has commenced," he added.

Lukman said the need to get private investment in fuel supply and distribution followed the widening gap between products demand and supply to the domestic market due to the dwindling performance of the country's refineries.

He said average consumption of premium motor spirit (or petrol) was projected to hit 26 million liters per day in 2002; the local refineries would only able to produce 16 million liters on the average.

The establishment of private refineries would essentially relieve the pressure of imported products, Lukman said.

Prices had gone up by between 18 and 33 per cent with petrol selling at N26 per liter from N22, Kerosene N24 a liter up from N17 and diesel N26 per liter from N21.

Lukman, however, told THISDAY in an interview that he hoped the NLC agitation "will not scuttle the liberalization process."

"This (liberalization) is in the overall interest of the country and the economy. The increase is not a large one, it's been adjusted so as to create minimum disruption," Lukman said.

I congratulate Dr. Lukman for his educative reasons why the government had to increase oil price. Sir, is that "the absolute truth the whole truth and nothing but the truth"? I will like his government to answer the following questions:

1. When making this decision did you and your government consider the possible impact of this on the overburden Nigerian socioeconomic and political culture?

2. Did you realize that increase in oil price at the pump is an increase tax on the people with synergic effects on other sectors of the economy?

3. If you agree that this action is a direct or indirect tax on the people, were the consents of the people or their representatives in the congress sought as required in a democratically elected government?

I believe in the process of liberalization of every sector of Nigeria economy for the purpose of efficiency and stability of the country, but I am totally against deceit and exploitation of the masses in the name of liberalization. Hence my unbiased analyses of why the continual increase in the pump price of oil while the world wholesale prices decreases.

Since, there is no data and readily available from the government of Nigeria to educate the readers of this write up, I will be using information from the United States government and international organizations.

What is the cost of production of a barrel of oil?

1. Finding where oil might occur is a very tedious and expensive procedure. It requires all types of scientists including geologists, geophysicists, paleontologists, and others. Today's search for oil involves computers, explosives, magnetic studies, and even satellites in space. Only one out of twelve wells drilled actually discovers oil in amounts that are economically feasible (very costly odds).

2. Drilling a well on land costs about $75 per foot drilled, while drilling in the oceans costs about $300 per foot drilled. Oil-producing wells average about 5,000-10,000 feet in depth, but some wells are producing oil at depths of over 20,000 feet.

Once oil is found, it must be pumped out of the ground (more costs), and then, it must be transported to a refinery (more costs). The most common and cost-effective method of transportation is pipelines, but supertankers and tanker trucks are also used. This expenditure is covered by the past and current cost of the spot market for a barrel of crude oil [Education Technology Review Center (ETRC) 1997].

Refining, distribution and marketing

The refiner controls the next few steps of production: refining, storing, marketing and advertising, and the administration of thousands of franchise gas stations.

When you buy a gallon of gas, 18 percent of the price covers refining. The refiners' share has increased over the last two decades. Another 17 percent goes to distribution and marketing, the [Energy Information Administration (EIA) reports].

What are the components of the retail price of gasoline?

"The cost to produce and deliver gasoline to consumers includes the cost of crude oil to refiners, refinery processing costs, marketing and distribution costs, and, finally, the retail station costs and taxes. The prices paid by consumers at the pump reflect these costs, as well as the profits (and sometimes losses) of refiners, marketers, distributors, and retail station owners".

In 2000, when the price of crude oil averaged $28.23 per barrel, crude oil accounted for about 46% of the cost of a gallon of regular grade gasoline

(Figure 1). In comparison, the average price for crude oil in 1999 was $17.51 per barrel, and it composed 37% of the cost of a gallon (4 liters) of regular gasoline.

Figure 1. What Do Americans Pay for in a Gallon of Regular Grade Gasoline?

Federal, State, and local taxes are a large component of the retail price of gasoline. Taxes (not including county and local taxes) account for approximately 28 percent of the cost of a gallon of gasoline. Within this national average, Federal excise taxes are 18.4 cents per gallon and State excise taxes average about 20 cents per gallon. Also, some States levy additional State sales taxes, some of which are applied to the Federal and State excise taxes. Additional local county and city taxes can have a significant impact on the price of gasoline.

Refining costs and profits comprise about 14% of the retail price of gasoline. This component varies from region to region due to the different formulations required in different parts of the country.

Distribution, marketing and retail station costs and profits combined make up 12% of the cost of a gallon of gasoline. From the refinery, most gasoline is shipped first by pipeline to terminals near consuming areas, and then loaded into trucks for delivery to individual stations. Some retail outlets are owned and operated by refiners, while others are independent businesses, which purchase gasoline for resale to the public. The price on the pump reflects both the retailer’s purchase cost for the product and the other costs of operating the service station. It also reflects local market conditions and factors, such as the desirability of the location and the marketing strategy of the owner [U. S. Department of Transportation, Federal Highway Administration, Monthly Motor Fuel Reported by States February 2000, Table MF-121T].

How much are Nigerians paying for gasoline?

At a price of $1.22/gallon or 30 cents per liter when crude oil price was $17.55 per barrel, the crude oil price and refinery cost and other cost excluding federal and states taxes was 60% of $1.22/gallon or 30 cents per liter, which is equal to 20 cents per liter.

20 cents converted to Naira, (please who know the current exchange rate of Naira) for the sake of stability let us use $1 =100 Naira (20 cents = $.2 = .2 x 100 = 20 Naira).

Hence, using American standard Nigerians are currently paying their fair share.

Considering the fact that cost of labor, and other cost of living, environmental impact taxes etc. needs to be factor into the above American costing. The minimum wage in America per hour with other benefits is about $10/hr which is about $1600 per month 160,000 Naira a month compare to Nigeria at 10,000 Naira per month.

If we factor this to the cost of production, refining and marketing in Nigeria should be less or about 10 cents per liter or 10 Naira per liter. Mr. Adviser at $21 per liter any investor in this business is in for a windfall. Hence the market as it is, is very lucrative.

Why are Nigerians paying arm and leg for gasoline?

The reasons why Nigerians will continue to be paying more than required for gasoline in the pump are the following:

1. Lack of understanding of strategic planning and accountability by the prior and current governments of Nigeria, in a proper democracy there is no way a government can just wake up without any debate or approval by the people/or their representatives in the congress and increase the price of a very important economic variable which the government knows that its reverberating effects will be felt by every sector of the Nigerian economy. The developed countries like United States know how strategically important this sector is to their economy, hence, the subsidization of this sector. "Beyond program subsidies, governments, subsidize a large portion of the protection services required by petroleum producers and users. Foremost among these is the cost of military protection for oil-rich regions of the world. US Defense Department spending allocated to safeguard the world's petroleum resources total some $55 to $96.3 billion per year. The Strategic Petroleum Reserve, a federal government entity designed to supplement regular oil supplies in the event of disruptions due to military conflict or natural disaster, costs taxpayers an additional $5.7 billion per year. The Coast Guard and the Department of Transportation's Maritime Administration provide other protection services totaling $566.3 million per year. Of course, local and state governments also provide protection services for oil industry companies and gasoline users. These externalized police, fire, and emergency response expenditures add up to $27.2 to $38.2 billion annually"[International Center for Technology Assessment]. For the government to tell Nigerians that they were persuaded or trying to make the environment conducive for businesspersons whose major interests are the pursuance of their self-interest over the national interest.

2. Poor Taxation System, the most effective and easiest way the government can collect tax is through increase gasoline price at the pump. Nigerian tax systems need to be reformed; only civil servants pay accurate tax in Nigeria. During the last presidential election some Nigerians were donating hundreds of millions of Naira towards the presidential campaign, no one ask how much these miscreants paid as tax in the past 10 years? The answer is pittance. So what the government cannot cowardly collect as tax, and the shortfall to the government treasury from the price of crude oil is passed to the masses as increased gasoline price at the pump.

Two third of revenue to the American treasury or Gross Domestic Product (GDP) is from taxation. How much of Nigerian GDP is from direct taxation excluding gasoline price at the pump.

Hence, Dr. Adviser and Mr. President be direct and straight forward with the public your current explanation and position inadvertently revealed you as apologist of "big business", and president and adviser to the president of a nation of beggars (a beggar has no choice).

January 2002