Economics is most definitely not my area of strength. I'd therefore like some help from the much better economics minds out there on thinking through the downstream de-regulation process. With the proposed (but so far deferred) removal of the subsidy the Federal Government pays to downstream marketing companies, those companies will have to jack up the price to cover the costs of importing petrol - in a time of close to zero credit financing and a banking sector that needs to be brought back to life.
Saturday, October 17, 2009
First question: by how much approximately would the marketers raise the price and on what basis? Could this not be calculated simply by working out the naira cost of the current subsidy per litre and tacking it onto the current price?
Given the fact that it is much more profitable to sell high quality 'sweet' (low sulphur) Nigerian crude on the international market than locally in Nigeria, how would the government ensure that local crude is made available to the refineries? How can anyone ensure the refineries ramp up their capacity, given that they have never been able to do this previously? The refinery question is surely key to the fuel price eventually dropping - if refineries still do not produce close to national daily need, importing petrol will keep the price of fuel high indefinitely. In terms of a political economy context, for how long could high prices (some suggest fuel prices will have to double) be maintained, without widespread protest and industrial action?
The same issue applies to power, where the current subsidised cost of PHCN electricity is around N7 per kilowatt. Meanwhile, the cost for back-up power (which is produced and consumed in multiples of grid-electricity) is obviously conditioned by the combined factors of the cost of diesel, the generating set and maintenance. Lets say then that the cost of back-up power is around N50 per kilowatt. The reality is that the market forces determined price point for electricity may be some way between N7 and N50 - at random lets say N30 per kilowatt.
This represents the amount consumers are willing to pay (they are willing to pay much more for back-up power) balanced against the cost of production plus operating margin. This would mean that those who cannot afford to run a generator may not now be able to even afford what little grid-based power they get. However, it would have the huge advantage of creating a viable business model for private sector power generation that generates and distributes power to a far greater percentage of the populace in time.
The conundrum for policy makers is that the move towards a market forces arrangement for both the oil sector and for power is essential and close to unavoidable in terms of long-term government financial management. However, both moves are fraught with risks and requires careful modelling and scenario planning. They both involve a spike in prices for a yet-to-be estimated (as far as I know) amount of time. I have yet to read of much better-informed big picture thinking on either topic, although I'm sure Pat Utomi, Bode Agusto and others have tackled it. Can anyone provide links or more/better thoughts on all the above?