Deregulation: Why Labour’s resistance could backfire – Oil Experts

February 26, 2021 Mary

It is a well known fact that deregulation of petroleum sector and rise in fuel pump rice have remained a combustible policy mix, threatening the peace and stability of the oil industry.

There is therefore little surprise that the organized labour is already kicking against latest hints of possible rise in fuel pump price soon.

Recall that last week, the price of crude oil rallied to $61 per barrel, the highest in thirteen months. This was after oil price sank to sub-zero level in the wake of the Covid-19 pandemic in 2020.

Insiders believe that for a country like Nigeria that is heavily dependent on revenues from oil, the price rally should be good news as it portends more money for the government to provide social amenities for the welfare of the citizens. But the upbeat feeling following report on likelihood of oil price rally is dampened by the prospect of a rise in the pump price of Premium Motor Spirit (petrol).

Recall further that during the launch of the Nigerian Upstream Cost Optimization Programme (NUCOP) last week, both the Minister of State for Petroleum Resources, Chief Timipre Sylva, and the Group Managing Director of NNPC, Mallam Mele Kyari, hinted at the prospect of a rise in the pump price of petrol in the country in line with the deregulation regime in operation in the downstream, following the rise in the price of crude oil.

Labour’s drums of war

Since then, the leadership of organized labour has been beating drums of war, contending that a pump price increase would impose more hardship on Nigerians who are already battling the effect of a sluggish economy.

As noted earlier, deregulation of the downstream and pump price increase have been very contentious issues that have generated a lot of conflict between the government and labour for close to two decades. Since 2004 when the Federal Government started the policy of selling the crude oil earmarked for local refining/consumption at international price, it created a situation where the landing price of petroleum products was higher than the regulated pump price of petroleum products in the country. The old system where crude oil earmarked for local refining/consumption was sold to the NNPC at a subsidized rate was able to take care of price differential between landing cost and regulated pump price. With the new policy, a system of subsidy payment was introduced to take care of the price differential. But over time, the subsidy system became cumbersome and the Federal Government began to find it unwieldy and unsustainable. The various attempts to end the subsidy regime by deregulating the downstream became a constant subject of bitter conflicts between the government and labour sometimes resulting in debilitating strikes.

In March 2020, the Federal Government finally took the bull by the horns and deregulated the downstream by taking advantage of the low oil prices induced by the Covid-19 pandemic. The Minister of State for Petroleum Resources and the Petroleum Products Pricing Regulatory Agency (PPPRA) stated repeatedly that going forward, the price of PMS would be determined by prevailing market forces. One of those forces is the price of crude oil.

Insisers have maintained that wth the current rise in the price of crude oil, it is inevitable that the price of petrol would go up in the local market. More so when there is no provision in the 2021 Appropriation Act for subsidy payment.

They further argue that the deregulation of the downstream is supposed to bring about some sort of liberalization of the sector which would make it possible for all petroleum products marketers to source their products from anywhere and sell at any price dictated by prevailing market forces. The competition arising from that would have helped to force pump prices down to the benefit of the citizens. But the scarcity of foreign exchange has made it difficult for the marketers to import products, thereby making NNPC the sole importer in keeping with its statutory role as marketer of last resort.

Why labour’s moves may roll back recent gains

Oil industry watchers have argued that with the agitation of labour aimed at rolling back the deregulation, NNPC is inadvertently being made the fall guy to absorb the cost of the price differential between landing cost and pump price. This, they argued, would put NNPC in a very bad spot financially and eventually lead to a situation where it would be difficult to further import products. The obvious implication of that is fuel scarcity and the return of fuel queues.

One obsercer argued, “The same people who are resisting the deregulation would be the same people who would turn around to castigate NNPC for not supplying enough fuel to guarantee zero fuel queues and for not making a profit at the end of its financial year.

“Labour must learn to be objective in its resistance to the downstream sector reforms meant to eradicate the distortions in the market which have been responsible for bouts of scarcity and lack of investments in the sector.

Another observer said “If the labour leaders spearheading the resistance to deregulation are fair to themselves, they would recognize that the deregulation has largely stabilized petroleum products supply over this past year. Once the foreign exchange issue that has made it difficult for major and independent marketers to engage in importation of petroleum products is resolved, the other gains of deregulation will kick in and Nigerians will be better for it.”

It could be recalled that one of the key arguments of labour is that if the refineries were in operation, it would help reduce the prices of products and mitigate the hardship that deregulation would impose. But the reality on ground does not support that. The revamping of the refineries will only result in marginal decrease in the pump price of petroleum products since the only cost element it would affect is the freight cost. Since the refineries would pay international price for crude oil, the benefit from local refining in terms of products pricing would be marginal, insiders argued.

“The earlier the labour leaders understand this and allow the deregulation process to go on unhindered, the better for Nigeria and Nigerians.

“If they are in doubt, they should go and ask the former Comrade Governor, Adams Oshiomhole, who made a career out of his opposition to deregulation for over 10 years only to turn around to become an apostle of deregulation as a governor,” one industry watcher said

A key player in the industry noted that “The market stabilization that has been brought about by the past one year of deregulation should be enough to assure labour that full deregulation is the way to go if Nigerians are to enjoy the full benefits of their hydrocarbon wealth. Resisting deregulation under the guise of fighting for the welfare of Nigerians is only an attempt hoodwinking Nigerians into believing that they can eat their cake and still have it.”