How Did we get into the Economic Conundrum
I regret to be the bearer of somber news, but the Dangote refinery is not the panacea we require to address the persistent fuel shortage, and I doubt we’ll see fuel prices dip below 900 naira per liter anytime soon.
Before I delve deeper, let me share a personal experience. Yesterday, my driver spent an exhausting 12 hours searching for fuel—an ordeal I haven’t encountered since becoming an adult.
Like many others, I find myself questioning the root causes of this ongoing fuel scarcity and pondering what our way forward might be.
So, join me as I explore the problem and potential solutions.
Nigeria, as most of us know, is an oil-producing nation. We proudly hold the title of Africa’s largest oil producer, extracting between 1.5 million and 1.7 million barrels daily. However, it’s crucial to note that not all of this oil remains within Nigeria or is managed by the Nigerian National Petroleum Corporation (NNPC).
The NNPC typically receives between 400,000 and 800,000 barrels from our total production. The bulk of the oil, however, is allocated to international oil companies (IOCs) like Shell and Chevron, which have invested significantly in our oil fields. Smaller companies, such as Oando, Aradel, and Seplat, also secure a fraction of these daily outputs.
Now, what does the NNPC do with its share? The answer is straightforward: they sell it to oil traders in exchange for dollars on behalf of the Nigerian populace.
A decade ago, NNPC was remitting at least $3 billion to the Central Bank of Nigeria (CBN) every month. This significant inflow helped stabilize the naira when it was valued below 200 naira to a dollar.
Unfortunately, that is no longer the case due to the burden of fuel subsidies.
Let me break it down further. Nigeria operates four refineries that have fallen into disrepair and are currently nonfunctional. Combined, these refineries have the capacity to process 445,000 metric tons of crude oil daily. Since they are inoperative, some businessmen have profited from their stagnation. Rather than utilizing the local refineries, the NNPC must sell its allocated crude oil—around 445,000 barrels—to international traders like Vitol.
As of today, Nigeria is utilizing its entire allocation just to purchase refined fuel. This is why NNPC can no longer remit dollar revenues to the government’s coffers.
To continue this cycle, these traders supply NNPC with refined fuel, which is then distributed to local retailers and other oil marketers. This system worked adequately five years ago when we were producing approximately 2.3 million barrels daily, resulting in a relatively stable fuel supply.
However, after the COVID-19 pandemic, Nigeria’s oil production plummeted from 2.3 million barrels to around 1.1 million. Consequently, NNPC’s allocation shrank from 600,000 to less than 250,000 barrels, significantly limiting its ability to provide the contracted 445,000 barrels of crude oil to Vitol. In fact, NNPC may now only supply 100,000 to 150,000 barrels—far from sufficient for our daily needs.
This deficit inevitably leads NNPC to owe these traders substantial amounts. To complicate matters further, the government’s poorly managed economic policy exacerbated the situation.
On May 29 last year, the president announced the removal of the fuel subsidy, which thrust countless households into severe poverty. As if that wasn’t enough, the government also opted to float the naira without any foundational support. This devaluation spelled disaster, causing the cost of petrol to soar after NNPC exchanged crude oil for refined products with international traders.
As a result, petrol’s landing cost skyrocketed to approximately 1,200 naira per liter. Without devaluation, we could have maintained a landing cost of roughly 650 to 750 naira per liter, a difference that would have bolstered our economy.
So while the landing cost of petrol is now 1,200 naira, NNPC has been selling it to marketers at only 545 naira per liter. This translates to a subsidy of over 700 naira per liter, which is unsustainable. NNPC is now in a dire financial predicament.
Rather than confronting this reality, NNPC has sought to obscure the truth, continuing to deny any subsidies, which has led to ballooning debts—over $6 billion—owed to international traders that they can’t repay. Consequently, these traders now demand cash payments, halting the previous credit arrangements. This crippling financial situation means that NNPC can only offer crude oil in exchange for refined fuel, yet even that is insufficient, leading to immediate and disastrous consequences.
This explains why desperate Nigerians are queuing at fuel stations and why my driver faced a grueling 12-hour search just to find fuel.
Returning to the issue of the Dangote refinery, it is important to emphasize that it is not the quick fix we are yearning for. Even if NNPC channels the 445,000 barrels of crude oil intended for our now-defunct refineries to Dangote’s facility, we won’t see a significant decrease in fuel prices anytime soon.
While Dangote will purchase crude oil in naira, the final price for refined fuel will still be calculated based on international crude oil prices. This morning alone, crude oil is priced at $69 per barrel, which, when paired with a conversion rate of 1,600 naira to the dollar, would mean NNPC could only expect to set fuel prices between 950 to 1,000 naira per liter from Dangote. Should he sell directly to oil marketers, the price could soar to 1,200 naira per liter.
In summary, the twin issues of subsidy removal and naira devaluation are at the heart of this crisis. We find ourselves nearly paying more for petrol due to subsidy impacts from devaluation, with no immediate solution in sight.
The long road ahead feels daunting and disheartening.
