Why price of diesel remains high

My home generator is no guzzler, yet my heart always skips a beat at the sight of my monthly diesel bill. In my side of town on the Lekki-Epe Expressway, the price of diesel is between N145.00 and N160 depending on the station. Interestingly, it often costs me less to buy at the stations that sell for N155.00/litre than at those that sell for N145.00/litre. That however, is the subject for another day. The truly befuddling question is why the more than 50% crash in crude oil prices has left the price of diesel unaffected. The bigger concern is that diesel is a deregulated product, and I have been one of the fiercest advocates for deregulation of petroleum prices in the last few years. Is there now cause to question the argument for deregulation?

 

The Facts

In January 2015, the international price of gasoil (as diesel is technically referred to by oil traders) averaged$445 per metric tonne. A metric tonne of diesel could yield an average of 1,120 litres of diesel, depending on the density of the particular specification. Converted to naira, the international price of diesel per litre has been about N74.00in the period under review. Factoring collateral costs including foreign exchange, freight, port and storage, the landing cost of diesel in Nigeria per litre is between N85.00 and N90.00. Actual ex depot price in January has averaged N95.50k. Diesel is therefore being sold at a minimum premium of N50.00 in Nigerian stations for every litre.

 

Perception and Reality

Marketers of petroleum products are often seen as a cartel of rampaging shylocks that will stop at nothing to make profit. They are however faced with significant operational and business challenges that seem to (but do not necessarily) justify the prices that we pay. First off, with the naira in limbo against the dollar, banks have been extremely circumspect about opening Letters of Credit in favour of oil marketers. The forgettable and tragic experiences of 2008 are still very fresh for many, and have encouraged an abundance of caution. More directly, banks have been seeing the short end of the stick in the RDAS market, regularly getting only a slim percentage of what they bid for. Diesel not being as much of a priority as PMS for LCs, has to contend with fewer opportunities for opening of LCs, and necessarily, importation. There is also a nagging suspicion by many that the naira is going to fall further, and many do not want to be caught in-between a transaction when that happens. As a result, fewer LCs are opened for diesel and there are fewer persons able to import the product.

 

Yet the ex depotprice of diesel (for January 2015) averaged N95.50. For the very fear of foreign exchange risk, many importers are ready to quickly sell-off stock from the jetty tanks. With no such risk attaching to retail distributors, coupled with the slow turn-around for supply from the few importers, retailers look to padding profit from the pumps. The result is the N50 premium per litre of diesel. Competition seems meaningless in this context as obvious pricing agreements amongst retailers ensure that consumers are robbed of the benefit of a deregulated and potentially competitive market. Profiteering is the name of the game, and consumers seem helplessly at the mercy of its hard-nosed players.

 

 

Deregulating PMS

This diesel scenario does not bode well for the deregulated PMS regime that I have severally advocated. I know as a fact that many market operators are also keen on having that market deregulated. Such deregulation will be meaningless if some dominant players sitting over champagne glasses canagree a minimum price with no correlation to global or even local market realities and trends. The prospects of innovativeness, customer appeal and expanded options that are the drivers of the deregulation advocacy could be stillborn, with the real fear that Nigerians will be left the worse for wear. Even the operators would lose in such a scenario, as the market will not be one of skills or expertise or uniqueness but an open sesame for all comers and a sure road to oblivion. Obviously, successful deregulation needs effective regulation.

 

Regulatory Oversight?

The truth is that retailers and marketers who have struck price agreements are not breaking any law in Nigeria. In the first place, there is no regulatory framework for competition, or in this case, anti-competitive practices. Though the Minister of Petroleum has the power to fix the price at which any particular class of petroleum products may be sold (section 6(1) of the Petroleum Act), President UmaruYar’adua had by executive order in 2009, removed diesel from the class of price-regulated petroleum products. However the Petroleum Products Pricing Regulatory Agency (Establishment) Act of 2003 states one of the agency’s functions to include prevention of “collusion and restrictive trade practices harmful in the sector”. This is the nearest provision there is to prevent abuse of market positions through cartelisation. Unfortunately, this provision on its own confers no powers on the PPPRA to rein in anti-competitive practices since no precise price nor price range has been fixed which retailers could be alleged to have colluded to breach. This is expected to be one of the areas where a strengthened legal regime for the agency under the Petroleum Industry Bill will ensure more precise powers of regulatory intervention.

 

But pending the PIB what should be done? I think the Honourable Minister of Petroleum Resources should use the strong suasion powers of her office and prevail on retailers totemper their greed. Simple.

 

Emeka Akabogu is the Chairman, OTL Africa Downstream



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