On May 11 2016, the Minister of State for Petroleum Dr Ibe Kachikwu announced an increase in the price of fuel that confirmed the removal of fuel subsidy. For the first time in Nigeria’s history, the price of fuel was no longer fixed but will now be allowed to trade within a price band that is more or less market driven.
The result was swift as fuel queues which had littered hundreds of streets across Nigeria basically disappeared. Fuel importers and marketers were now free to import fuel at prices that was thought to be cost reflective. Nigerians were ironically happy considering the impact this will have on their disposable income and the devastating protest that followed a similar move by the government in 2011. With fuel subsidy seemingly out of the way, the belief is that the markets are now in control and with time fuel will follow the price of diesel which was already deregulated. As at the time fuel price was increased to around N145 per liter, the price of diesel was N140. Today, the price of fuel range from N143 to N140 but the price of diesel is now N210 per liter. So what could be the reason for this?
Renowned economist Bismark Rewane in an article in The Nation explained why the price of diesel has nearly doubled since March when it was around N207.
[alert-note]One outlier product is the price of diesel which has increased by almost 100 per cent from 107 per litre in March to N210 per litre presently. This is mainly because of the abysmally low power output from the national grid, which has pushed demand to record levels. The impact of this high diesel price is pushing distribution and transportation cost to stratospheric levels. We have also seen a sharp spike in the prices of kerosene and cooking gas. “These are all scarcity propelled because importers switched from kerosene and diesel to PMS (premium motor spirit). We are now seeing a swing to the end of the product pendulum again. Rewane[/alert-note]
According to Mr Rewane, the rise in the cost of diesel is mostly due to an increase in demand for the product amidst a worsening power situation.
Other people we spoke to who are familiar with the working of the industry had different reasons for the hike in diesel prices. An analyst informed Nairametrics that oil marketers have now prioritized fuel (PMS) over diesel (AGO). They cite the fact that the demand for fuel was typically higher thus the reliance on volumes to make the most of thin margins.
Another reason put forward was the fact the access to forex for import of diesel is getting limited by the day with the CBN preferring to sell dollars for import of fuel. Unlike diesel, they claim fuel caters more to a lot more Nigerians. We were also informed that Marketers also prefered to use dollars to import fuel rather than diesel.
The impact of the rising cost of diesel continues to be significant considering how critical it is to powering the industrial and commercial sectors of the economy. Businesses, rely on diesel run generators to power their operations as power from the grid remain at all time lows. The Federal Government is yet to make any formal statement about the rising cost of diesel.