Dangote Refinery: A Game Changer or Another False Hope? by Zekeri Idakwo
The news of Dangote Refinery’s commencement of full operation has sparked hope in Nigeria’s oil industry, with many expecting a significant drop in the price of Premium Motor Spirit (PMS), popularly called fuel, a reduction in inflation and a more stable foreign exchange market. The Refinery is seen as a much-needed solution to the country’s long-standing fuel scarcity, high inflation and ridiculous price regime. There are a number of other factors that will affect the final cost of petrol at the pump.
According to the CEO of the Major Oil Marketers Association of Nigeria, Clement Isong, the Refinery may not have immediate impact on the pump price.
The Refinery’s impact on fuel prices will likely be limited.
“I have heard some people say there will be savings in freight, that might be true. But that is a very small part of the cost. The major part of the cost is the raw material, which is the crude oil; even the refining cost is quite small. I don’t expect a significant drop in price, definitely not N400, that’s very unlikely in my opinion,” he said.
A barrel of crude oil for example can be refined into different products, such as petrol (PMS), Automotive Gas Oil (AGO) also known as diesel, Dual Purpose Kerosene (DPK) simply called Kerosene and Liquefied Petroleum Gas (LPG). On average, one barrel of crude oil yields about 170 liters of refined products. This means that for every barrel of crude oil, there are about 170 liters of petrol, diesel, kerosene, and LPG. So, when we talk about the cost of crude oil, we’re really talking about the cost of the products it yields.
Refining crude oil into petrol requires significant energy and resources. These costs can vary depending on factors such as the type of crude oil, the efficiency of the refinery, transportation and the cost of labour and materials. On average, it costs around NGN N150 to refine a liter of petrol, these are determinant factors.
Nonetheless, government interventions like subsidies, taxes and levies can also have a big impact on the cost of petrol. These interventions can either increase or decrease the price of petrol, depending on the specific policies in place. For example, if President Tinubu continues to provide “secret subsidies” for petrol, and tax/levies reduction for Dangote Refinery, it will lower the cost for consumers. On the other hand, if the government discontinues the payment as publicly announced, and with an unfriendly fiscal policy, it would increase the cost for consumers.
It’s important to note that the current pump price of PMS, which is about N620-N670 per liter, is allegedly being subsidised by the Nigerian National Petroleum Company Ltd (NNPCL). The actual cost of producing and distributing PMS is higher than the current pump price, and the NNPC is obviously absorbing this difference.
There are several factors that can lead to a reduction in the price of PMS as the Dangote Refinery begins operation. First, there will be less demand for imported PMS, which will reduce the cost of importing fuel. Second, the Dangote Refinery will produce PMS at a lower cost than imported fuel, which will allow for a reduction in the retail price. Third, the Refinery will be able to produce more PMS than is currently needed, which will increase competition and drive prices down. Fourth, a local refinery will lead to a more stable supply of PMS, reducing the risk of disruptions that can cause price spikes.
Hence, one way the government, NNPC, and Dangote Refinery can work together to reduce fuel prices is by creating a coordinated pricing strategy. This would involve setting prices based on the cost of production, rather than the market price, and which can be implemented through a price cap scheme. The government can also help to ensure that the Refinery has access to the necessary raw materials, such as crude oil, at a fair price. In addition, the government can support the Refinery by improving infrastructure such as roads and ports. This would help to reduce the costs of transporting fuel and ensure that it reaches consumers at a lower price.
Nevertheless, the benefits of the Dangote Refinery will extend beyond just the price of PMS. One major benefit is job creation. Not only will the Refinery itself create thousands of jobs, but the increased availability of affordable PMS will also lead to job creation in other sectors. For example, lower fuel prices can help spur growth in agriculture, manufacturing and other industries that rely on PMS.
Another benefit is the savings on foreign exchange. Currently, Nigeria spends billions of dollars every year importing refined petroleum products. By eliminating the need to import refined petroleum products, Nigeria can save those billions of dollars that can then be spent on other priorities such as infrastructure, healthcare, and education.
Similarly, another benefit of the Dangote Refinery is its potential to reduce inflation. As the exchange rate stabilises and more dollars become available, prices of goods and services will likely come down. The Refinery is also like a rising tide that lifts all boats, as it will benefit other industries that are reliant on petroleum products. This includes transportation, manufacturing, and agriculture.
In addition, the Refinery is expected to put an end to the perennial fuel shortages that have plagued Nigeria for years. With a steady supply of refined products from the refinery, Nigeria can finally put those days behind it and enter a new era of self-sufficiency.
The Dangote Refinery has the potential to ease the fuel crunch in Nigeria and reduce prices but it is not a silver bullet. The Refinery will need to be supported by the government and NNPCL in order to be successful.
However, if it is implemented effectively, the Refinery would be a major boom for the Nigerian economy and have a positive impact on the exchange rate. In the final analysis, the best gift Nigerians will appreciate from the Refinery is reduced pump price of PMS.
