The Cost of Current Fuel Arrangements to Nigeria

The cost of the current fuel arrangements to Nigeria cannot be accurately determined by sitting behind a desk to put numbers together. The Nigerian Bureau of Statistics would be in a better position to provide a better idea of what the cost would be; however, I will make some attempts to quantify what this cost is.

The costs can be broken down into two:

  1. The drain on foreign currency savings as a result of subsidized dollars. Oil marketers can get dollars to buy petroleum products from CBN at N197 while the value on the streets is around N325
  2. The total man-hours wasted on fuel queues weekly

The two costs above can be linked. What Nigerians save from buying petrol at subsidized dollars should offset the productivity they lose by waiting on the streets to buy fuel. But from the perspective of the Nigerian economy, both of them are losses.

We will start by first analyzing how much Nigerians save by buying fuel at current price (N86.50) — these savings also happen to be a burden borne by the foreign reserves. The Petroleum Products Pricing Regulatory Agency (PPPRA) template shows that the landing cost of one litre of petrol is N64.40 per litre while the retail price is N86.50. The Government, indirectly, collects a sales tax of N7.80 per litre. Fuel marketers purchase this product, using the Central Bank of Nigeria (CBN) exchange rate of N197/US dollar. Assuming that fuel marketers import fuel, using the parallel market rate, the landing cost of petrol would be between N91.53 and N117.68 per litre. This is based on the assumption that black market price could be anything between N280 — N360 per US dollar. By the time we add distribution margins of N14.30 and raise sales tax to N10, we should see fuel sell between N116 and N142 per litre, with an average of N130 per liter. Average black market price is between N120 and N200, depending on where you get it. Once again, the black market has shown an uncanny ability to determine the true value of a controlled good.

Using Monte Carlo simulation with all the variables above, one can arrive at a value of $1.87 billion savings made for Nigerians by providing subsidized dollars to petroleum marketers. Let me reiterate once again that these savings is actually a burden borne by the foreign reserves. To put it in perspective, the total Eurobonds issued by the Federal Government of Nigeria is only $1.5 billion. Nigeria blows more than this amount annually just to provide “cheap fuel” for its citizens. Is it worth it?

Is the stress of queuing up for 2–6 hours to buy fuel worth N43.50 per litre, the savings made from buying fuel at N86.50 worth it?

The Nigerian GDP as at 2015 stood at $568 billion. With an estimated population of between 160 million and 180 million, the GDP per capita stands at around $3,341. Assuming that Nigerians work for an average of 7–9 hours per day and between 225 and 275 days per year, it means that the average earning for a Nigerian is about $1.54 per hour. If Nigerians queue between 2 to 6 hours per week to buy fuel, it means each Nigerian loses an average of $402 per year on fuel queues.

From my analysis, Nigeria loses about $50.43 billion every year on fuel queues. This is only the quantifiable costs. One cannot put the associated costs of stress, reduced productivity, etc that follows many hours of staying on fuel queues in the Nigerian hot sun.

The total cost of the current fuel arrangements in Nigeria stands at $52.30 billion. For a $568 billion economy, this is a huge burden.

Now, let us address that pesky little issue that many Nigerians keep raising about how raising fuel prices will make things very difficult for everyone. From the analysis above, we can conclude that each Nigerian saves only $11.00 (N2,167) from buying fuel at N86.50 per liter and then sacrifices $296.65 ((N58,439.47) every year.

It is very certain that Nigeria cannot sustain the current fuel arrangements for too long. If crude oil prices stay at current levels for the next few years, Nigeria will be forced to review these arrangements. Hopefully, things would not have deteriorated beyond current levels.