As Crude Oil Price Rise, Nigeria’s Subsidy Burden May Rise Along with it

The price of crude oil as of 7th February stood at $93.27, its highest point in seven years.

Heightened tension over Russia’s possible invasion of Ukraine leading to speculations of supply disruptions as well as strong global demand despite the new variant of Covid 19 are some of the reasons for the surge in crude prices. Analysts believe that if Russia, one of the world’s leading exporters of crude oil, invades Ukraine crude oil prices could reach as high as $110.

While the increase in oil prices may be great news for oil-producing countries this may not entirely be the case for Nigeria.

Although Nigeria is Africa’s largest crude oil producer, over the years, the country’s strength as an oil producing country is continually threatened by its inability to locally refine crude oil for domestic consumption.

Globally, fluctuations in crude prices directly impact fuel prices so that the higher crude oil prices are the higher gas prices are likely to be. In other climes, gas prices are not stable, often rising and falling to the ebb and flow of the global oil economy. In Nigeria however, where fuel prices are benchmarked and controlled by the government, consumers don’t directly feel these fluctuations.

With Nigeria importing refined petroleum, the landing price of the commodity (price before subsidy inclusion) is subject to prices of Crude oil at the international market.

Simply put, Nigeria exports crude oil and benefits from high crude prices, but since the country does not refine its own crude oil for local consumption, it has to import refined crude oil and it has to import petroleum at international market price inclusive of other costs of refining, costs which collectively become the landing price.

The biggest obstacle to enjoying gains from crude price increases is the country’s subsidy regime, which augments the landing cost of petroleum by fixing the cost of fuel below international market prices and paying the difference. 

Nigeria’s leading imported product according to the Observatory of Economic Complexity still remains refined petroleum. This means that the country is still subject to forces of importation and the international market for the landing cost of its refined petroleum. These landing costs determine how much is spent on subsidy per time.

There have been talks at different times of ending the subsidy regime because of its unsustainability. The most recent attempt to end the subsidy hit the rocks as soon as the year started, when Nigeria’s National Petroleum Corporation (NNPC) put forward a N3 trillion naira subsidy Bill.

The country’s minister of finance, Zainab Ahmed while speaking about the N3 trillion bill for subsidy in 2022, blamed the increase in the amount to be spent on fuel subsidy on the surge in the price of crude oil to $80, signalling that, if there is more increase, more amounts will be spent on subsidy payments. 

For instance, Nigeria’s National Petroleum Corporation (now company)  posted zero revenue in October 2021, and was quoted as stating that subsidy payments gulped all revenue made from exports for the month. 

In 2020, with the impacts of COVID-19 on local  consumption of petroleum amid lockdowns and a crash in the price of crude oil to a low of $41.47, the country spent N102 billion on subsidies. 

In 2019, the sum of N508 billion was recorded as spent on subsidy in NNPC’s  books when the crude oil average price then was put at $64.04.

Rising crude prices will likely mean higher refined petroleum landing prices which will mean ballooning subsidy payments for the country. Eventually, an increase in Crude Oil price, may not necessarily mean more revenue for the country 

Already, crude oil prices have been projected to reach $100 per barrel, meaning, if the country’s practice of higher crude prices, the higher subsidy is anything to go by, and the consumption rate figures remain or increase, NNPC may spend even more for subsidy than the N3 trillion bill it put forward.

An energy expert, Akintunde Babatunde, while weighing on the impact of removing fuel subsidy, had earlier told Dataphyte that ‘the higher the price of Crude Oil at the international market, the more effect it would have on prices at the local market’.

Sustaining subsidies amid rising Oil prices may lead to increased financial burdens for the country’s loan-sustained budget.

A Dataphyte report earlier warned the impact of the N3 trillion may have on the revenue potentials for 2022, should spend more for subsidy than its already stipulated N3 trillion, the country may be heading for wider budget deficits.

Although the country has turned its Oil corporation into a company, stating its intention to revive critical infrastructures, the immediate effect of the current crude oil prices and the future projections may impact on  fiscal  policies and oil-sector contribution to revenue generation.