The Federal Government of Nigeria is set to grapple with increasing subsidy costs on Premium Motor Spirit (PMS), commonly known as petrol, as crude oil prices surged to a staggering $97 per barrel. This remarkable rise in oil prices could have far-reaching implications for manufacturers and business owners, potentially leading to a significant surge in production costs, including diesel and aviation fuel, which may reach nearly $1500 per liter.
The relentless ascent of oil prices continued, with a notable four percent increase, propelling Brent crude to the vicinity of $97 per barrel. This surge aligns with the predictions of analysts who anticipate that oil prices could soon breach the $100 per barrel mark.
While this surge in oil prices appears to be a windfall for Nigeria on the international market, it is a matter of concern due to the country’s challenges in crude oil production and its heavy reliance on petroleum product imports. Often, these market fluctuations erode any gains made from crude oil sales.
The Federal Government has seemingly reinstated the subsidy payment on PMS after an initial announcement by President Bola Tinubu regarding its removal. In response to the sustained increase in PMS prices, the government has reverted to this subsidy scheme, utilizing the Nigerian National Petroleum Company Limited, which has been commercialized, to manage market shocks and maintain a monopoly over the downstream segment of the nation’s oil and gas industry.
It’s worth noting that Nigeria’s petroleum product consumption predominantly comprises approximately 19.5 billion liters per year, with Premium Motor Spirit (PMS) accounting for about 99 percent of this consumption, while diesel and aviation fuel constitute only around one percent.
Last month alone, the federal government disbursed N169.4 billion as subsidy to maintain the pump price at N620 per liter.
A document from the Federal Account Allocation Committee (FAAC) revealed that in August 2023, the Nigerian Liquefied Natural Gas (NLNG) paid $275 million in dividends to Nigeria through NNPC Limited. Out of this amount, NNPC Limited used $220 million (equivalent to N169.4 billion at an exchange rate of N770/$) to cover the PMS subsidy, while retaining $55 million, which has raised questions about its utilization.
As the global supply of diesel is constrained, with Russia closing its borders against diesel exports, and oil traders stockpiling crude, the oil market dynamics continue to evolve. Saudi Arabia and Russia’s announcement of an extension of their combined 1.3-million-bpd supply cut has contributed to this shift, diverting trader attention from concerns about demand in China.
While JP Morgan projects that oil prices could reach $150 per barrel, traders have aggressively purchased 183 million barrels of crude and fuel futures over the past four weeks, reflecting the market’s bullish sentiment.