The first part of this article was published in this column last week with the title “THE MOTHER AND FATHER OF FUEL PRICES (1)”.  In that piece, we observed that both the federal government and the NLC appreciated the benefits of competitive pricing and improved services, and the more efficient resource allocation that deregulation would bring about.  Nonetheless, inspite of government’s declaration of deregulation of the downstream sector, evidence suggests that the NNPC continues to subsidize fuel imports by about N300m a day and yet petrol prices continue to be on the upbeat with rising price of crude oil on the international market.  There is little doubt therefore, that something is out of tune in the petroleum pricing matrix.  In this event, we identified poor and inadequate refinery capacity, the freight component of cost of imported fuel, corruption and smuggling as factors that may be affecting the increasing domestic price of fuel.  However, our examination of these factors showed that their impacts were at best marginal if prices were allowed to fluctuate with crude oil pricing as required in a deregulated framework.  We concluded therefore that the major factor responsible for the failure of deregulation so far is the awkward relationship between international crude oil pricing and the price of the naira vis-à-vis the dollar.

In view of the impact of crude oil prices on local fuel prices, some Nigerians have maintained that crude oil is our local heritage and we should therefore not be expected to pay the same price as countries which are not naturally endowed with this resource.  At worst, they argue that the impact of rising crude oil prices on domestic fuel prices should be cushioned by direct price subsidies notwithstanding the distortions this would cause to the otherwise acclaimed benefits of deregulation of the downstream sector.  However, this welfarist argument may jeopardize the free market mechanism and all the benefits of attracting foreign investments into refineries, competitive product pricing and improved customer services.  Besides, "the cost effects of an open ended subsidy to stabilize petrol prices in a climate of steadily and readily depreciating" naira will have a catastrophic effect on the survival of existing refineries as they would most certainly go under if, for example, the NNPC continues to absorb daily subsidy values in excess of N300 million (over N150 billion annually) as reported by the NNPC Group Managing Director recently (2005).  This in turn would sound a death knell on the prospect of private investment in our refineries.  (In 2008, subsidy values exceeded N800bn according to the Oil Minister).

However, a simple problem solver may reason that even if international crude oil prices are rising, the expected upward push in domestic fuel prices will be cushioned by a stronger valued naira vis-à-vis the dollar (the crude oil value denominator), since the additional dollar revenue which accrue to us automatically from rising crude oil prices would increase our foreign exchange reserves positively and translate to a stronger naira; so that, ultimately, the domestic fuel prices will either stabilize or even fall in response to the stronger naira.  Thus, Nigerians will be able to buy fuel more cheaply despite rising crude oil prices, but smugglers of petrol will be put out of business, as the stronger naira will reduce smuggler’s margins and make the business unprofitable!  For example, if the naira gained 50 percent of its value against the dollar today (2009), the local fuel prices will also fall by almost 50 percent of its current price to about N26 per litre; but if the naira gained 90 percent of its current value against the dollar, then the local price of PMS (petrol) will fall to less than N7 per litre "without subsidy".  Even the prevalence of corruption, excessive port charges, distribution expenses and inappropriate pricing template cannot increase the price from N7 to more than N14/litre.   A petrol tax element of anything from N5 – 10 per litre can be added to the resultant price while the revenue therefrom is dedicated to critical areas of need such as education, health, transportation and provision of infrastructure.  "So it is clear that the single most important factor in the determination of local fuel prices is the value of the naira."   In a deregulated market, local fuel prices have no choice but to move in sympathy with international crude prices, "but the appropriate management of the foreign exchange inflow from the increased dollar revenue determines the price of the naira and consequently the price of local fuel products! "

In such a scenario, the downstream sector of our oil industry would have been successfully deregulated as the local price of fuel can then be determined by market forces; that is, when the price of crude oil increases, Nigeria would earn more revenue, and the naira will improve in value, this increased value of the naira would mean automatically cheaper petrol prices locally, without a kobo of subsidy.  Paradoxically, investors who have shied away from establishing refineries in Nigeria would be quick to bring their projects to fruition because inspite of the lower nominal naira value of the pump price, they would be free to align their prices with international market price of crude oil, and would you believe, even earn more dollar revenue as the lower nominal value of the naira pump price would in fact command more dollar value if the value of the naira appreciates as it should with rapidly increasing crude oil prices!  The impact of a cheaper naira pump price of fuel will have a trickle down multiplier effect on the economy, as transportation costs fall and food stuffs arrive at the market place from the farms at cheaper prices.  Industries and Nigerians in general will enjoy cheaper naira cost for running their generators and fueling their sales, distribution and personal vehicles, and inflation rate will drop with a salutary effect on all income earners, especially the poor!

If the South African currency, the Rand could appreciate by over 50% from 14-6 Rands to the dollar in less than two years, we should witness a similar development in the naira value with increasing reserves and rising crude oil prices and see fuel prices falling to less than N26/litre.

Indeed, if the Central Bank refrains from unilaterally converting our dollar revenue into naira and creating the unending scourge of excess liquidity with the attendant negative and adverse effects of its framework from mopping up in the economy, the naira can quickly consolidate its dollar value by over 60% within three months.  Our paper, "“A LIBERALIZED FOREIGN EXCHANGE MARKET: A proposal for a Liberalized foreign exchange market in Nigeria and its economic benefits”" – Boyo/Ojomaikre (www.geocities.com/lesleba),  contains a detailed proposal on how the foreign exchange market can be deregulated.  This proposal has been presented to various stakeholders in the Nigeria polity, but surprisingly, our proposal openly canvassed in all media over the last two years has been met with a curious silence!  However, the message is clear if we want to save Nigeria, we must save the naira!  (The full text of this article was first published in 2005).

SAVE THE NAIRA, SAVE NIGERIA!