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.
izielenagbon@yahoo.com
He is former HOD ,
Petroleum Eng Dept, former ASUU chairman
University of Ibadan, trained many
operators in nation's energy industry
with pratical experience on our
practices and policy focus in the last
20yrs.
Published
December 15th, 2011
