Much Ado About Petrol Price Reduction
Crude oil demand powering the global economy is surely on a steep decline. This is also very evident in the price point for the commodity. Every year one Economics student heard that in their first few classes. The lower the demand, the lower the price.
For a lot of people, crashing prices is good news. Sadly, crude oil offers differently for countries whose Government revenue source is largely from the black gold. It is distraught and anguish that is experienced by these countries. As this offers the largest source of Government revenue, this also has a direct relationship with the flow of foreign exchange, especially the United States Dollar to the economy. This is a clearly case of double assault as Government revenue diminishes, so also the ability to protect the currency from imminent devaluation.
I write from Nigeria, and the above situation describes Nigeria’s current state, like many other States majorly reliant on the earnings from Crude Oil to provide security and welfare for the people. The crash in Crude oil also means that the price of crude oil derivatives like petrol, diesel, kerosene, aviation fuel, lubes, etc would see a downward move. Nigeria imports a significant sum of her petrol from other markets, thus affected by exchange rate. So, the benefit of a price crash would have been more exciting to the local users if not that a portion of that gain would have been eroded by exchange rate losses.
According to globalpetrolprices.com, Nigeria pays the 6th cheapest price of petrol in the world, despite importing almost all her consumption. The government maintained this price through a sort of subsidy by Crude Swap, other writers have described that in the past. On the other hand, even before the crash in the crude oil prices, Nigeria operates a large deficit financed budget. Over 40% of the funding sources of the budget is borrowed using different instruments and agreements. So, the easy question to be asked is should the crash in crude oil price lead to a crash in local price? The answers can be varied, but context is important. My thought about the question is a definite capital NO. I will explain briefly below.
Nigeria has an interesting policy of placing a high tariff on products that can be produced locally, but are imported. Petrol naturally falls in this category, but not the tariff. Now is a good time to introduce tariff on the imported petrol that will probably still keep the approved retail price at 145naira. This approach reduces the deficit the government would have to bother about.
Another view is Petrol tax that has since disappeared from the components of petrol taxes. When the former President Obasanjo abolished the toll gates, he replaced same with petrol Tax on petrol. This tax would have been an ideal source of generating funds for road reconstruction and rehabilitation that has suffered over the past years. This would also further reduce the Government deficit that is spent on road infrastructures.
I am not convinced as to why Nigeria should be paying the 6th cheapest petrol price in the world when she imports almost all her refined petrol requirements from other countries. The top uses of petrol in Nigeria are for Vehicles and Power Generators. Neither of these is owned and used by the vast majority of Nigerians who are poor, leading to majority of the pseudo-elite proudly referring to the country as the Poverty Capital of the World. Also, Nigeria has the lowest crude oil production per capita amongst all the major oil producers, which indicates that Nigeria is not an oil rich country, contrary to previous rhetoric.
I am sure there would be other views different from what I have shared. I would love to read them. Keep Safe from COVID-19
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Olamide Eyinla can be reached on olamide.eyinla@gmail.com