Topic: The Real Cost of Nigeria Petroleum Oil by Dr Agbon  (Read 2178 times)

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The Real Cost of Nigeria Petroleum Oil by Dr Agbon
« on: January 14, 2012, 09:02:39 AM »
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 N65 or $1.66 per gallon at an exchange rate of $1 to N157 and four litres per gallon. This was the official price.

The Federal Government claims that this price was subsidised at N73 per litre and that the true price of one litre in Port Harcourt was N138 or $3.52 per gallon. It means that the government was determined to remove the subsidy on petrol and sell at $3.52 per gallon.

But if you had stopped at the Mobil Gas station on E83rd St and Flatlands Avenue in Brooklyn, New York, USA, you would be able to buy a gallon of petrol for $3.52. Both gallons of petrol would have been refined from Nigerian crude oil. The only difference would be that the gallon sold in New York was refined in a US North East refinery from crude oil exported from the Qua Iboe Crude Terminal in Nigeria, while the Port Harcourt fuel was either refined in that city 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 a litre of petrol in Nigeria.

We will answer this question in four the simplest economic terms, despite the government’s attempts to muddle up the issue. What is the true cost of a litre of petrol in Nigeria?

The Federal Government has earmarked 445,000 barrels per day for meeting domestic refinery products demands. This is not for export. It is public goods reserved for internal consumption. We will limit our analysis to this volume of crude oil. At the gate of the Port Harcourt refinery, the cost of a barrel of Qua Iboe crude oil is made up of the finding cum development cost ($3.5) and a production/storage transportation cost of $1.50 per barrel.

Thus, at $5 per barrel, we can get Qua Iboe crude oil to the refineries in Port Harcourt and Warri. One barrel is 42 gallons or 168 litres. The price of a barrel of petrol at the depot is the total sum of the cost of crude oil, the refining cost, and the pipeline transportation cost. Refining costs are fixed at $12.6 per barrel and pipeline distribution costs at $1.50 per barrel.

The Distribution Margins (Retailers, Transporters, Dealers, Bridging Funds, Administrative charges etc) are N15.49 per litre or $16.58 per barrel. The true cost of one litre of petrol at the Mobil petrol 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 per cent efficiency. When we refine a barrel of crude oil, we get more than just petrol. If we refine one barrel (42 gallons) of crude oil, we will get 45 gallons of petroleum products. The 45 gallons of petroleum products consist of four gallons of LPG, 19.5 gallons of gasoline, 10 gallons of diesel fuel, four gallons of aviation fuel, two-and-half gallons of fuel oil and five gallons of bottoms. Thus, at 38.2 per cent of refining capacity, we have about 170,000 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/aviation fuel.

This is not enough to meet internal national demand. So, we send the remaining of our non-export crude oil volume, which is 275,000 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 government exchanges the 275,000 barrels per day with commodity traders, about 90,000 barrels per day, to Duke Oil; 60000 barrels per day to Trafigura, 60,000 barrels per day to Societe Ivoirienne de Raffinage in Abidjan, Ivory Coast and 65,000 barrels per day 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 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 seven per cent of AGO, 20.7 per cent of petrol, 10 per cent of aviation fuel, 30.6 per cent of diesel, 32.6 per cent of per cent 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 per barrel for AGO, $69.5 per barrel for petrol, $172.22 per barrel for diesel oil, $53.5 per barrel for kerosene and $129.68 per barrel for petrol. Let us substitute the government imported PMS price of $148.54 per barrel for the domestic price of petrol. Our gross product revenue per swapped barrel would be summed up as $142.32 per barrel. We have to remove the international cost of a barrel of crude oil, which is $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 minus $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 anti-subsidy Nigerian government pretends the price of swapped crude oil is $0 per barrel, while the resulting petroleum product is $148.54 per barrel or N138 per litre.

The government therefore argues that the ‘subsidy’ is N138.81 minus N65 or N73.81 per litre. But if the landing cost of the petroleum products is at the international price of $148.54 per barrel, then the take-off price of the swapped crude oil should be at $107 per barrel. This is basic economic logic outside the ideological prisms of the World Bank. The petroleum products importers and the government are charging Nigerians for the crude oil, while they are getting it free.

If the true price of 38.2 per cent of our petrol supply from our local refinery is N33.36 per litre and the remaining 61.8 per cent has a true price of N34.45 per litre, then the average true price is 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 per cent at current prices of N65 per litre.

There are many expert economists and political scientists in the Academic Staff Union of Universities 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.

They should not just embark on three days strike, after which the government reduces the hiked petroleum prices by a margin. They must embark upon in a sustainable struggle that will lead to fundamental changes.

« Last Edit: January 14, 2012, 09:07:49 AM by flukky01 »

 

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