Crude Oil Price Hits 14 Year High At $123.7, May Put Fuel Subsidy Payment In Jeopardy

Crude oil price rose to its highest level in 14 years hitting $123.7 per barrel on Thursday, following higher demand for the black liquid as a result of the energy crisis caused by the Russian-Ukraine war.

This is the highest amount which the product would be sold since 2008. The last time the price of crude oil was as high as this was in 2008 when it sold for $145.31 per barrel.

In 2009, crude oil sold for $81.03, while in 2010, 2011 and 2012, it sold for $91.48, $113.39 and $109.39 per barrel respectively.

In 2013 the highest price of crude oil per barrel was $110.62, in 2014 $107.95 while in 2015, 2016, 2017, 2018, 2019, 2020 and 2021, it was sold for $61.36, $54.01, $60.46, $77.41, $66.24, $63.27, and $84.65 per barrel respectively.

The rise in oil prices was underpinned by robust demand in the world’s top consumers as the war between Russia and Ukraine intensifies.

Last week, OPEC agreed to accelerate production increase to tame runaway fuel prices and slow inflation.

But experts said that the move will leave producers with very little spare capacity, and almost no room to compensate for a major supply outage.

Nigeria’s crude oil production averaged 1.42 million barrel per day in May. The figure is 70,000 bpd higher than the average crude oil production in April.

While there had been an increase in production, Nigeria is still struggling to meet up with its OPEC quota of 1.66 million barrels per day.

In the 2022 budget, the federal government pegged the crude oil benchmark at $73 per barrel with the projected oil production put at 1.88 million barrels per day.

According to the government, an oil revenue forecast of N3.362trn to fund the 2022 budget would be higher by N1.35trn or 67.18 per cent above the previous year’s target of N 2.011trn.

With higher crude oil price which is above the budget benchmark of $73 per barrel, experts are of the view that Nigeria may not be able to maximize the benefits because of rising fuel subsidy burden.

As of 2021 when crude oil price averaged $62 per barrel, the federal government spent a whopping sum of N1.2trn subsidizing petrol.

But with oil price hitting its highest level of $123.7 per barrel in 14 years, there are fears in government circles that the country may surpass its monthly fuel subsidy budget.

In January, February, March and April of this year, the Nigerian National Petroleum Company Ltd incurred N210.38bn, N219.78bn, N245.77bn and N271.58bn for payment of fuel subsidy respectively, giving a total of N947.51bn during the four-month period.

President Muhammadu Buhari had recently approved an increase in the estimated provision for Premium Motor Spirit subsidy for 2022 by N442.72bn from N3.557trn to N4trn.

A top government official told THE WHISTLER that when the fuel subsidy budget was being prepared few months ago, it was hinged on crude oil price of about $85 per barrel.

The official said, “The 2022 budget was prepared based on the assumption of crude oil price of $62 per barrel. What this means was that the government revenue to find the budget was based on that parameter.

“Now we had envisaged that the signing of the Petroleum Industry Act will abolish the era of fuel subsidy but the regime of subsidy was pushed forward by 18 months which means we will continue to subsidize the product.

“Since we rely solely on importation of petrol for domestic consumption, the fear now is that with the tension caused by the Russia-Ukraine conflict, we are heading for energy crisis and this might push up demand and price of crude oil.

“What this means is that we have to spend more on petrol import which will keep going higher and the fear is that the N4trn budget may not be able to finance import of petrol.”

Speaking on the impact of higher crude oil prices on fuel subsidy payment, the President, Association of Capital Market Academics of Nigeria, Prof Uche Uwaleke, said the plummeting government revenue and the pressure on government finances had made it difficult for the federal government to continue to subsidize petroleum products

He urged the government to fully deregulate the downstream sector, noting that this would pave way for private investments.

Uwaleke, who is Nigeria’s first Professor of Capital Market Studies also said deregulation of the downstream sector would help to provide a competitive environment that would ultimately drive down the prices of petroleum products prices.

The university don and former Finance Commissioner in Imo State said, “Until we develop the capability to refine enough crude oil for domestic consumption, the pump price of PMS will continue to be exogenously determined. This is the sad reality; we cannot afford any round of fuel scarcity and the attendant costs to the economy.

“With the PIA, I expect the government to fully deregulate the downstream sector, paving way for private investments and generating a competitive environment that will drive down petroleum products prices ultimately. Only then, will the hand of the regulators in the oil sector become less visible.”

In his comment on the fuel subsidy payments, a Fellow of the Institute of Chartered Accountants of Nigeria, Mr. Afeez Balogun expressed regret that ten years after a massive protest against the removal of fuel subsidy was staged in Nigeria, the country has continued to crumble under the weight of the ballooning subsidy payments over the years.

In an interview with THE WHISTLER, he said, “While the introduction of the subsidy programme is aimed to cushion the macro-economic impacts of oil price shock as with many other resource-rich countries, the cost of these subsidy payments is simply not sustainable.

“The cost of fuel subsidy is not measured merely in the amount which have now risen to astronomical levels but by the opportunities lost if these funds were otherwise channeled.

“As of 2020, according to a report by Dataphyte, Nigeria has committed over N10trn towards subsidy payments over a ten-year period. To put the outrageousness of these monstrous payment in perspective, this amount is 250 per cent more than amount committed to infrastructure spending. It is 290 per cent more than health spending.

“Clearly, the opportunity cost of the subsidy spending far outweighs the direct benefits. It is only not sustainable to continue to subsidize fuel consumption at the expense of critical spending that offers potential to improve our economy, it offends every economic principle to promote consumption at the expense of improving productive capacity.”

Balogun said the Ukraine/Russia war has contributed greatly to the rising crude oil price which stands the highest in over 12 years.

“Unfortunately, despite increasing international prices of crude oil, Nigeria has failed to take advantage as it imports petroluem products from abroad, on which it will expend N4trn this year, almost a quarter of its N17.1trn budget for the year.

“Now we have a revenue problem. Fuel Subsidy payment which consumes 25 per cent of our national budget at current levels is simply not sustainable.”

Analysts at Anchoria Asset Management Limited which is part of VFD Group also said the ongoing war between Russia and Ukraine would drive up the cost of fuel subsidy payment in Nigeria.

They said in their Report which was obtained by THE WHISTLER, that the since energy costs account for 35 per cent of production costs, the increase in energy prices will result in higher cost of production and ultimately push inflationary pressures up.

The Report said, “Gas prices are also projected to climb due to supply concerns, even though prices have grown by 84 per cent year on year. A spillover effect from this will be a further increase in electricity tariffs.

“Higher energy prices mean increased subsidy payments, and consequently an increase in planned government borrowings. This places further pressure on Nigeria’s debt servicing ability.”

The Minister of Finance, Budget and National Planning, Mrs. Zainab Ahmed, had last month described the current subsidy on Premium Motor Spirit as a huge problem for the government.

Ahmed explained that the subsidy on petrol had pushed government’s deficit far higher than what was initially planned when the 2022 budget was conceived.

She lamented that the current high price of crude oil had further increased petrol subsidy burden on the federal government.

She said, “We are cleaning up our subsidies. We had a setback; we were to remove fuel subsidy by July this year but there was a lot of push back from the polity.

“We have elections coming and also because of the hardship that companies and citizens went through during the COVID-19 pandemic, we just felt that the time was not right, so we pulled back on that.

“But we have been able to quietly implement subsidy removal in the electricity sector and as it is, as we speak, we don’t have subsidies in the electricity sector. We did that overtime by carefully adjusting the prices at some levels while holding the lower levels down.

“Fuel subsidy is a huge problem for us. It has thrown up our deficits too much higher than we planned. What is happening now with the global oil prices is also going to worsen matters but the current review that we are doing is to hold the subsidy at the level in which we planned.

“Hopefully, the parliament will agree with us and we are able to continue with our plan for subsidy (removal) otherwise the way things are going we will not be able to predict where we will be.”

ENDS