Global oil prices have hit three digits for the first time in seven years since its collapse in 2014. Typically, the subsequent rise in oil prices should positively impact Nigeria’s revenue, external reserve position, the balance of payments, and exchange rate. It should help restore confidence in the offshore investment community, which has been severely shaken by recent fx liquidity issues and the country’s precarious macroeconomic condition.
However, Nigeria is struggling to benefit from the recent uptick in oil prices due to long-standing operational challenges that have stifled oil production and its failure to attract investment to the sector. Unfortunately, due to the malfunctioning nature of Nigeria’s four refineries in Port Harcourt, Warri, and Kaduna, much of the gains made during a higher oil price regime are squandered through refined fuel importation.
Nigeria still imports 100% of its petroleum products needs. More so, subsidies and subsidy costs may rise in tandem with refined petroleum product prices, and import bills on petroleum import will increase significantly.
According to the Nigerian National Petroleum Corporation, Nigeria uses around 19.535 billion gallons of gasoline each year, or 1.6 billion liters annually. With N241 paid as a subsidy on every liter today, the average daily subsidy payment is now N12.8 billion. The monthly subsidy payment is N385.6 billion, and the annual subsidy payment is N4.6 trillion.
Surprisingly, a 50% increase or drop in global oil prices consistently results in Nigeria spending at least four times more or less than the current fuel subsidy expenses. For example, while the average price of crude oil was $64.04 in 2019, the federal government spent N508 billion on fuel subsidy payments. When COVID-19 caused crude oil prices to plummet to as low as $41.47 in 2020, N102 billion was paid out as subsidy representing a fourfold decrease in previous subsidy payments.
In contrast, when oil prices soared by about 100% in 2021, the subsidy provided was at least eight times the previous subsidy payment, totaling approximately N816 billion. Due to global supply disruptions, crude oil prices are expected to hit $150 per barrel (roughly a 50% increase), implying that the NNPC may spend at least N18.4 trillion on subsidies if the country continues on its current trajectory. This figure is more than the 2022 budget of N16.39 trillion.
Since the Nigerian government continues to subsidize the price of gasoline (premium motor spirit) at retail pumps, higher crude oil prices have the potential to put further strain on the government’s budgetary position as long as the subsidy scenario remains unaltered. Fiscal deficits will result from the challenges, eventually leading to greater borrowing as the debt profile rises.
The N4.6 trillion fuel subsidy payment is unsustainable. If removed, the savings can fund the combined 2022 budgets for education, infrastructure, and health care, totaling N3.54 trillion.
Notwithstanding the advantages of increased global oil prices, the subsidies payment and underproduction in the oil industry, among other variables, remain the intense headache for the Nigerian government amidst rally in international oil price.