Nigeria has long grappled with one of its most persistent economic challenges: fuel prices. For decades, the country has faced fuel queues, petrol shortages, smuggling, partial subsidy removals, and frequent price hikes, leading to significant economic disruptions for both individuals and the nation. But could Nigeria finally be on the path to relief?
While I am not typically aligned with the current administration, it is impossible to ignore the progress they have made in addressing this complex issue. Recent developments, particularly the removal of the fuel subsidy and the floating of the Naira, have sparked hope for a potential fuel price transformation—though not without some initial pain.
Historically, Nigeria maintained a fixed exchange rate policy, injecting foreign currency (FX) into the economy to stabilize the dollar-to-naira exchange rate. This kept the USD relatively affordable but placed immense pressure on the Naira, given Nigeria’s reliance on imports, especially petroleum products like petrol, diesel, and kerosene. This FX pressure worsened the nation’s economic imbalances, especially with the global volatility in oil prices.
In 2023, two pivotal changes reshaped the landscape: the removal of fuel subsidies and the decision to float the Nigerian Naira. Both policies led to an immediate surge in fuel prices, from an average of N238.11 per litre in May 2023 to around N545.83 per litre in June 2023, to an average of N897 per litre by September 2024. For many Nigerians, this felt like yet another hardship, but beneath the surface, these changes may lay the groundwork for long-term stability.
One bright spot in this evolving scenario is the commissioning of the Dangote Refinery (DanRef), a local refinery poised to significantly reduce Nigeria’s dependency on imported fuel. Even more promising is the shift from conducting transactions in USD to Naira for crude oil and petroleum products. This decision has the potential to reduce demand for foreign currency, offering long-term benefits for the Nigerian economy.
September 2024 saw tensions between NNPC Limited (NNPC) and DanRef over issues related to crude oil importation, pricing, and the currency of transactions. However, by October, a breakthrough had been reached: DanRef would purchase crude oil from NNPC in Naira and sell petrol and diesel domestically, also in Naira. This deal is monumental, as it sets a precedent for local transactions in the energy sector.
As part of the agreement, DanRef will sell petrol to NNPC and other marketers at a lower price than N898 per litre previously charged in September 2024. This new pricing structure is expected to push down pump prices, with predictions suggesting a decrease from N950.22 per litre (Lagos price) to around N850 per litre. While this reduction is modest, it signals the potential for further decreases as the sector stabilizes.
A key factor driving optimism is the expected decrease in demand for USD in the energy sector. By no longer needing to purchase crude oil or fuel in foreign currency, the pressure on the exchange rate will diminish, likely leading to an appreciation of the Naira. As the Naira strengthens, the cost of crude oil and petroleum products will decrease, as they are priced in USD on global markets. This could lead to even lower fuel prices domestically.
In the short term, reduced fuel prices will translate to lower transportation costs, potentially easing inflationary pressures on food and essential goods. Assuming the government addresses insecurity in key agricultural regions, this could help stabilize prices for consumers across the country.
Looking ahead, the entry of more local refineries into the market will heighten competition, further driving down prices. Aliko Dangote’s refinery may currently dominate the landscape, but competition from other players, such as Abdul Samad Rabiu, who is developing a competing refinery, will foster market competitiveness.
In the medium term, as more refineries come online, local competition and potential global oversupply of crude oil could lead to even greater reductions in fuel prices. Since crude prices for local refineries are tied to global markets, even a slight decrease in global oil prices would directly benefit Nigeria’s domestic fuel costs.
The road ahead is still filled with challenges, and as the economist John Maynard Keynes famously noted, “In the long run (term), we are all dead.” However, if these policies and market developments continue their current trajectory, Nigeria may finally be on the verge of an energy transformation, with more affordable fuel prices becoming a reality rather than another empty promise.
All other things being equal, it seems Nigeria is on the right path. While the journey is far from over, and there will be hurdles along the way, the signs point toward a brighter future for Nigeria’s fuel market.
Emmanuel Afimia is an Energy Economist and the Managing Consultant of Enermics Consulting Limited