TRADITIONAL REASONS FOR HIGH DIESEL PRICE
Traditionally, upward swing in diesel price is usually due in part to the rising price of crude oil in the international market, age-long failure of local refineries to meet production target and lack of clear cut policy by the Federal Government on the deregulation of the downstream sector. Chief among these reasons has always been the international price of crude that account for a significant portion of diesel price. However, under the present condition where crude price is falling yet diesel price remains predominantly sticky downwards, the listed reasons above may not suffice.
Most operators generally agree that the diesel stock bought when oil prices were relatively high, are fully exhausted, leaving marketers with little excuse for selling diesel at a price that does not reflect the cheaper stock now being either directly imported, or bought off other suppliers.
RATIONALIZING PERPETUALLY HIGH DIESEL PRICE IN NIGERIA
Shylocks playing god OR Systemic bottlenecks OR Both?
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 (LCs) 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-depot price 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.
Regulated Deregulation
The control of the market by a few has created a support level for the stubbornly high price of diesel, bestowing on the marketers a huge premium above actual landing costs. Deregulation will be meaningless if some dominant players sitting over champagne glasses can agree a minimum price with no correlation to global or even local market realities and trends. The prospects of innovation, customer appeal and expanded options that are the drivers of the deregulation advocacy have become stillborn, with the resultant effect that Nigerians are left the worse for wear. The operators also lose in the present dispensation with the market becoming an open sesame for all comers bereft of skills, expertise and uniqueness. Obviously, successful deregulation needs effective regulation.
In the first place, there is no regulatory framework for competition, or in this case, anti-competitive practices. The truth is that retailers and marketers who have struck price agreements are not breaking any law in Nigeria. 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 Umaru Yar’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 cartelization. Unfortunately, this provision on its own confers no powers on the PPPRA to rein in anti-competitive practices since no precise price or 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? Our humble opinion is that the Honourable Minister of petroleum resources should use the strong suasion powers of her office and prevail on retailers to temper their greed.
The good news however is that the House of Assembly will in a couple of days commence a clause-by-clause consideration of the PIB!
