Price modulation pays off as average household spend on PMS dips 7.7%
by BALA AUGIE AND LOLADE AKINMURELE
June 15, 2016 | 12:00 am| | | Start Conversation
The decision by policy makers in oil producing Nigeria to deregulate the downstream petroleum sector is beginning to yield dividends, as the average monthly price paid by households fell 7.70 percent in May.
According to the Premium Motor Spirit (PMS) report published Tuesday, Nigerians spent less on petrol in the month of May (Month on Month), paying an average of N150 in May, compared with N162 in April.
Recall that the scarcity in April intensified and saw petrol price soar, as supply was well below demand.
“The MoM dip was because in April, marketers outside Lagos, Abuja and Port Harcourt sold PMS between the N150-200/ litre range,” said Temi Aduroja, an energy analyst at Renaissance Capital, an investment bank, in response to questions.
“But after the deregulation, most marketers in the country now sell PMS at N145/litre, which explains the 8 percent decline.”
Bismarck Rewane, CEO, Financial Derivative Company, was in the affirmative that May’s price modulation had indeed helped drive down the average petrol spend by households.
“With the deregulation of the downstream sector and price liberalisation, there was availability of products, which eliminated the need to pay a premium higher than the market price,” Rewane said.
Ibe Kachikwu, minister of state for petroleum resources, had announced on May 11, that fuel price would spike by 67 percent to N145 from N87 previously held, saying the price modulation would help bolster supply of products and attract investment in refineries.
Industry experts are of the opinion that government was forced to liberalise the sector since there were shortages of foreign exchange to meet demand of fuel importers.
Africa’s largest economy has been battered by falling oil price, a source of two thirds of its revenue and 90 percent of earnings, a systematic risk that culminated in evaporating reserves.
This led to the Central Bank imposing capital controls by rationing dollars to manufacturers in order to curb inflation.
The dollar scarcity prevented government from meeting the requirements of fuel importers, which therefore resulted in the intense scarcity witnessed in the months of March and April.
The apex bank pegged the currency at N197-N199 while it sells at about N350 at the black market.
Industry experts are of the view that the apex bank delays in announcing details of a more flexible foreign-exchange system are holding back business decisions in the downstream because of confusion over future price.
“Until we get clarity from CBN on the FX policy for marketers (secondary sources for FX) it is hard to determine where prices will go,” said Aduroja of Renaissance Capital.
“I do not see a further dip in prices, and if this happens it will affect top line and share price of marketers,” she said.
Analysts added that the price regime has reduced the immense corruption in the downstream oil sector, where some marketers buy at the N87 and smuggle the product across borders for sale at a higher price.
“With a free market system, supply will improve and overtime economic rent that some people were enjoying will be removed as consumer will be driven by turnover not margins. Profits will be determined by the number of outlets and not how you hoard profit to make margins,” summed Rewane.
On a year on year basis, household petrol spend declined 27 percent due to the price modulation by the Federal Government, the statistics agency noted.
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