REAL COST OF PETROL
On 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 cost 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 445000
barrel 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. It is time to bring the Arab Spring south.
Izielen
Agbon Izielen Agbon writes from Dallas, Texas.