Article summary
- Globally, high inflation is reducing demand for diesel fuels as manufacturers curtail production and consumers curb consumption.
- Markets around the world are showing early signs of weaker industrial activity and flashing recession signs.
- In Nigeria, government policy could lead to reduced industrial activity across the board.
Increased global inflation poses a risk to diesel demand, according to an industry executive at United States-based Marathon Petroleum. According to a Reuters report, high inflation is reducing demand for diesel fuels as manufacturers curtail production and consumers curb consumption. The Reuters report stated that in Q1/2023, diesel demand fell by 1.7%.
Meanwhile, in April 2023, Bloomberg reported that diesel demand is dropping in the global markets and flashing recession signs, which is an early signal of weaker industrial activity and reduced consumer spending, and the pullback has recession watchers on high alert.
When demand for diesel drops, it could mean that industries are slowing down, which can in turn lead to reduced employment, weaker consumer spending, and other negative economic effects.
However, it is important to note that many factors can influence diesel demand, including shifts in technology, changes in government policy, and fluctuations in global energy markets.
The Nigerian context
Ada Abel, the manager at FQ Loaf Bakery in Abuja, told Nairametrics that the 22.04% inflation rate in Nigeria is affecting everything, including diesel prices, which have risen by 55.90% between March 2022 and March 2023, from N539.52 per liter to N840.81 per liter, a whopping 55.90% increase.
According to Ada Abel, the cost-push inflation might become worse when the fuel subsidy is finally removed, leading to reduced demand for products because of higher prices.
Nigerian manufacturers may also reduce production activities following a new tax policy recently introduced by the federal government. On April 30, Nairametrics reported that the FG introduced a new set of taxes on alcoholic beverages, imported vehicles, and single-use plastics in its new tax regime. Under the newly introduced taxes, the FG will charge N75 per liter of beer, stout, or wine imported into Nigeria.
In response to the new tax policy, the Manufacturers Association of Nigeria (MAN) has said that the proposed tax has the potential to trigger unprecedented distortions in the affected industries as well as in the entire manufacturing sector.
MAN also said the policy can produce a negative effect on investments with a huge consequence on job retention in the affected industries.
What you should know: Diesel demand can be an important indicator of economic activity because it is used in a wide range of industries, including transportation, construction, and manufacturing.
- The Russia-Ukraine war has disrupted diesel trade flows and the International Monetary Fund (IMF) has warned that countries in sub-Saharan Africa are at risk of losing $10 billion in foreign direct investments (FDIs) and could lose access to markets if geopolitical tensions continue.
- The IMF advises countries in the SSA region to promote integration and cooperation under the African Continental Free Trade Area (AfCFTA). The AfCFTA will reduce tariff and non-tariff trade barriers, strengthen efficiency in customs, leverage digitalization, and close infrastructure gaps.
