Home / Business and Economy / Emerging paradigm shift in fuels market and the Nigerian economy By Professor Chijioke Nwaozuzu  

Emerging paradigm shift in fuels market and the Nigerian economy By Professor Chijioke Nwaozuzu  

President Buhari
Prof. Chijioke Nwaozuzu_

For more than a century, fossil fuels have accounted for a larger proportion of global energy supply sources. However, with increasing global environmental challenges, arising from increasing concentration of greenhouse gases (GHGs) associated with fossil fuels combustion, there has been a renewed emphasis on low- carbon intensive and environmentally- friendly energy sources, e.g. natural gas, renewable sources, nuclear, and now hydrogen.

Consequently, several technologies are being developed for production of renewable energy resources as well as natural gas, which are considered low- carbon emitting sources. New technology for extracting hydrogen from natural gas has been developed. These technologies are also becoming economically competitive with conventional energy sources (crude oil, coal, etc).

Major energy consuming economies, which constitute major markets for petroleum products (China, India, Europe, USA, etc) are realigning their energy policies and economies in favor of low- carbon intensive sources. These countries are also Nigeria’s key crude oil buyers.

These technologically-driven changes in the global energy landscape provide inherent opportunities and implications for developing economies like Nigeria. It is vital to realize that these global developments are going to impact countries, great and small. For most OPEC Member States, it is time for economic structural adjustment and diversification.

Diversification should aim at boosting their respective power sectors, and investment of upstream petroleum profits in downstream industries (e.g mega- refineries, petrochemicals, methanol, urea and fertilizer plants, Liquefied Natural Gas, LNG & Gas to Liquid, GTL plants, etc). Basically, the aim should be to domesticate their oil and gas resources to drive domestic industrialization and economic growth.

Examining Nigeria’s case, annual subsidy payments, running into trillions of Naira, are a huge drain on crude oil export revenue. Products’ importation equally represents a huge drain on scarce foreign reserves. Current import landing cost estimates for gasoline (PMS) is N180 per liter. According to PPPRA (Petroleum Products Pricing & Regulatory Agency, Nigeria), we import 56 million liters of PMS daily. Current pump price for PMS at the retail outlets is N145 per liter, which represents a price ceiling of N35 per liter (N180 – N145). Therefore, daily subsidy payment for importation of 56 million liters of PMS daily should be N1.96 billion (N35 X 56m). Annually, the size of this subsidy should be N23.52 trillion (N1.96bn x 12 months). Don’t cry for me, Argentina!

Another dilemma also presents itself, should the subsidy payment scheme be reversed. With such a policy change, the only way to ‘stop the bleeding’ would be to eliminate the price ceiling by increasing PMS pump price from N145 to N180 per liter, and the ripple effects of that action would be as follows.

High PMS Price = High Inflation Rate = High Bank Interest Rate = High Foreign Exchange Rate.

But GDP = Consumer Expenditure + Investment Expenditure + Government Expenditure.

With high bank interest rate, consumer and investment borrowing and expenditure will be drastically reduced. Therefore, fewer goods would be produced, consumer spending will be reduced and imports would increase. Consequently, GDP growth would be significantly dependent on government expenditure. To hold up the national economy, the Federal Government would have no choice but to go into deeper borrowing, as well as additional consideration of sale of government assets.

Should there be a delay or inadequate government spending, the economy will be thrown into a tailspin, and depression will occur (i.e. GDP growth rate slightly greater than zero). Further delay will throw the economy into recession (i.e. GDP growth rate below zero).

Depression or Recession = High Unemployment Rate + High Poverty Level + High Social Insecurity Level.

High Poverty Level + High Insecurity Level = High Corruption Level + High Crime Rate + High Social Restiveness + High Disease Rate + High Outmigration Rate. Grandma, please help!

However, there is an additional dilemma! Federal Government budgets are based on oil revenues. Nigeria’s major crude oil importers are the USA, China, and India.  USA is currently a net exporter of crude oil. China plans to electrify all vehicles by 2040. India plans to electrify vehicular fleet by 2030. In a couple of decades, the big buyers of Nigeria crude oil would have developed alternative energy sources for transport.

With reduced or insignificant revenues from crude oil exports, how will the Federal Government of Nigeria fund the Federal Ministries, Agencies, Departments, Universities, Polytechnics, Medical Centers, Embassies, State Governments, Local Governments, etc.

Currently, we are told that more than 23 State Governments in Nigeria are deemed to be unsustainable without Federal Government Revenue Allocations. The implication is that those State Governments cannot generate enough internal revenues (IGRs) to sustain the economies of their respective States. Therefore, should oil revenues plummet, there will likely be a gross reduction in allocation to State Governments and Local Governments and most of them will face colossal and imminent collapse.

Should crude oil revenue plummet, how will the Federal Government perform these three tasks all at once: allocate revenues to Ministries, Agencies, Parastatals, State and Local Governments; fund PMS imports to the tune of 56 million liters daily or more; and still pay subsidies to the tune of N23 tn annually or more? The least we can do NOW is to cut off petroleum products importation.

NNPC has 3 refineries with name-plate capacity of 445,000 barrels per day, but current combined capacity utilization is roughly 10% (i.e. 44,500 barrels per day). To achieve self-sufficiency in petroleum products supply and account for smuggling to neighboring countries, Nigeria requires at least a refining capacity of 1 million barrels per day.

Therefore, current shortfall in refining capacity = 1,000,000 – 44,500 = 955,500 barrels per day. Current refineries are too old and have been poorly maintained over the decades. Newest refinery (the second PH refinery) is roughly 30 years old! It is imperative and imminent that new refineries and petrochemical plants are constructed as a MATTER OF URGENCY, to replace the old and ailing existing ones.

Reliance on ‘Dangote & partners’ refinery project may prove to be elusive, as it is sited in an export processing zone, and facing the Atlantic Ocean. The Dangote & partners refinery project is positioned as a ‘world export refinery’, and patterned after the Jamnagar refinery in India (1.2 million barrels per day refining capacity). Jamnagar refinery was sponsored by Reliance Industries, whose Chairman (Makesh Ambani) is the richest man in India. Therefore, it is imperative that the refining capacity gap is closed within a timeframe of five (5) years without consideration of the Dangote & Co project.

Should Nigeria’s oil export reduce drastically, the country should be able to domesticate the utilization of oil and gas resources through the refineries and petrochemical complexes. The consequences of inaction could be that, in a few decades to come, the country may not be able to fund imports of PMS, and at the same time would not be able to refine its crude oil for domestic use.

Therefore, the crude reserves would be ‘stuck in the ground’ and with little resources available to fund fuels imports – THE DOUBLE WAMMY! Whatever is left of the economy could be further crushed by continued subsidy payments on imported fuels- THE TREBBLE WAMMY.

The Federal Government and her citizens face a future Tsunami if we continue to be in denial of this global shift in transport fuels. The ‘ostrich game’ will not cut it! These are not times for the ‘business as usual’ approach. The ‘right industry experts with considerable international clout’ as well as financial resources have to be marshaled in time to douse this clear and present danger. Appointments to key petroleum industry positions have to be severely and critically reviewed. As we keep ruminating over the security challenges in Nigeria, let us not forget that we have ‘another big fish to fry’!! It was not raining yet, when Noah built his Ark!!!

Professor Chijioke Nwaozuzu, the Director, Emerald Energy Institute for Energy & Petroleum Economics, Policy, & Strategic Studies, University of Port Harcourt, is an Ex-British Chevening Scholar and Ex- PTDF PhD Scholar. Email: cnwaozuzu@gmail.com. Tel: 070 6874 3617 (SMS Only)

About Global Patriot Staff

Check Also

At UNGA77: Humanitarian Affairs ministry showcases social investment programmes

By Cecilia Ologunagba New York, Sept. 23, 2022 The Federal Ministry of Humanitarian Affairs, Disaster …

Leave a Reply

Your email address will not be published. Required fields are marked *