If you missed Part I of this article, read it here
By Izielen Agbon
ON January 1, 2017, the Mexican government imposed a 20% increase in fuel price. The price of PMS increased to 15.99 pesos/litre ($0.75/litre). Civil societies and workers unions mobilized over social media. The grassroots demonstrated in the streets and shut down petrol stations across the whole country. The labour unions blocked major highways. The attempt of the government to crack down was met with rioting and looting. Hundreds were arrested.
The protesters demanded lower fuel prices, an increase in domestic refining of crude oil and the resignation of President Enrique Pena Nieto. Mexico has a population of 129 million and more than 46% live under the poverty line. Although Mexico is an oil producing nation, it imported 44% of its refined products from the United States because of limited refining capacity. Current PMS prices are MXN 19.06/ litre ($0.906/litre).
In March 2018, Venezuela ended its PetroCaribe program which enabled Caribbean nations to buy petroleum products at a reduced rate. The Haiti government obtained an IMF loan that came with conditionalities. The conditionalities included the removal of fuel subsidies. The price of petroleum products was increased by 50%. Food prices went up. The Haitian population is 11 million and 60% live below the poverty line. Unemployment is 40% and an additional 40% of the labour force is underemployed.
Production subsidies were given to Nigerian refineries prior to 2002 when President Obasanjo was convinced to impose an IMF import parity pricing model on the downstream sector. The Nigerian downstream should operate on a production pricing model. The refineries should be repaired and put under a private-manage-and-maintain modified LNG operational model. Government participation should be reduced to a minimum. Production subsidies should be introduced into the production sphere of the 445,000 bpd of crude oil devoted to domestic consumption. More refineries should be built. Cheap energy is a necessary condition for the survival of small-scale businesses and the accelerated industrial development of the nation.
The reaction of the Haitian grassroots to the fuel price hike was immediate. Demonstrators blocked the streets, fought the police, attacked government officials and put businesses and government buildings on fire. They demanded an end to corruption and the reversal of the fuel price hike policy. Hundreds were arrested and 17 citizens killed. The government backed down and reversed the fuel price increase after months of protests. The protests have continued as the government’s committee on corruption under the PetroCaribe programme reveals more information. Currently, PMS sell at HTG 59.18/litre ($0.548/litre) in Haiti.
In Zimbabwe, protests broke out after the government increased fuel prices by 150% in January 2019. Zimbabwe has a population of 14.5 million and a poverty rate of 72.3%. All the petroleum products consumed in Zimbabwe are imported. The fuel price increase led to massive demonstrations. Demonstrators looted shops, blocked major roads and burnt tyres. Clashes between demonstrators and security forces led to 5 killed. Soldiers patrolled the streets of the nation and crushed the mass revolts.
In May 2019, another fresh round of fuel price hike was introduced. This time, the price of PMS per litre was increased by 46% to $1.42/litre. Protests and demonstrations broke out again leading to more crack down. Currently, PMS prices are at ZWD 97.93/litre ($1.175/litre).
In 2019, Ecuador took a $4.2 billion IMF loan to help grow its economy. The loan came with conditionality which included the removal of fuel subsidies to help stop the suspected smuggling of petroleum products to neighbouring nations. Ecuador has a population of 17 million and a poverty rate of 21.5%. In October 2019, the price of PMS was increased by 25% from $0.64/litre to $0.80/litre under presidential decree 883.
The protests began on October 3, 2019 and lasted 11 days. The Ecuadorian grassroots, consisting of the poor, indigenous people, women, youths, students, farmers and workers, occupied the streets, government buildings and the oil fields. The unrest damaged 101 wells across 20 oil fields and forced 24 rigs to stop work leading to a loss of more than $130 million. Faced with a direct threat to the next round of Ecuador’s oil bids, Lenin Moreno, the President of Ecuador, backed down after 11 days of nationwide protests and reversed the ill-fated IMF-inspired policy. Currently, PMS sell for $0.462/litre in Ecuador.
In Iran, the Government raised fuel prices in September 2018. The price of PMS was increased by 300% from IRR 3,333/litre ($0.08/litre) to IRR 10,000/litre ($0.24/litre) in response to the government’s desire to raise additional revenue, tackle fuel smuggling and give cash payments to the poorest members of Iran’s 85 million population.
Drivers were allowed to purchase up to 250 litres a month at $0.24/litre. Iran’s poverty rate was 18.7%. It produced 96.5% of its daily petroleum products demand of 1.8 million barrels per day domestically and based its petroleum product prices on a production pricing model. It therefore sold PMS at $0.08/litre before the fuel price hike. The Iranian grassroots protested the fuel price increase.
Iranian truck drivers went on strike in 240 towns and abandoned their trucks on the highways. In the towns, protesters blocked streets and burnt some banks and stores. The Iranian government shut down the internet and put security forces on the streets. Thousands of arrests were made and many protesters killed.
On November 14, 2019, the Iranian government raised PMS prices by another 50%. Drivers were now allowed to purchase up to 60 litres a month at IRR15,000/litre ($0.36/litre). Any additional litre would cost IRR30,000/litre ($0.72/litre). The Iranian masses reacted immediately. People abandoned their cars and buses on highways. Streets were blocked, gas stations set on fire, banks attacked and stores looted. The government shut down the internet and security forces employed maximum force to stop the protests.
The demonstrations and street battles raged for 3 weeks. Fifty military bases were attacked by the protesters. Nine Islamic religious centres and 731 banks, including the Iranian central bank, were destroyed. More than 1,500 Iranians were killed and many thousands were arrested. The mass resistance was crushed.
In April 2019, during the Joint Annual Spring meeting of the World Bank, the IMF Managing Director, Christine Lagarde, asked the federal government to remove fuel subsidy. She said: “We believe that removing fossil fuel subsidies is the right way to go.” Later in the year, an IMF staff team visited Lagos and Abuja to discuss economic/financial development and review reform implementation with Nigerian government officials. At the end of the meeting, the IMF team said: “Fuel subsidies tend to be poorly targeted, foster over-consumption, curtail investment and maintenance in related sectors, and crowd out more productive government spending.” The team insisted that fuel subsidy reform should be pursued vigorously. The Nigerian government explained that while they agreed in principle with the need to increase fuel prices, the timing was not right.
Current PMS prices are IRR15,000/litre ($0.36/litre). A lot of peaceful protests occurred in many other countries where fuel prices were increased as a result of IMF conditionality and pressures. We have presented some of the grassroots struggles against fuel price hike because we have to tell our own stories as we fight for lower fuel prices, more disposable income and better lives for our children.
What exactly is a fuel subsidy?
The Nigerian masses and labour have always argued that a fuel subsidy does not exist. What exists is a subsidy on corruption and the mismanagement of our refineries. President Muhammadu Buhari knows that a fuel subsidy does not exist. He has said this publicly on many occasions. If this is the case, how did the IMF come about the idea of a fuel subsidy that must be eliminated with fuel price hikes? What exactly is a fuel subsidy?
In the early 2000, after the failure of its structural adjustment programme (SAP) model, the IMF developed an import parity pricing model for fuel consumption in developing nations. This model gave an import parity fuel price which consisted of three components.
The first component was the opportunity cost of getting the fuel to the consumers. This is the cost of importing the fuel into the country and transporting it to the consumers. This cost was viewed as revenue foregone by consuming the fuel domestically rather than exporting it. It did not matter if the crude oil was produced at a cost far below its export price and refined in the country.
The second component was the environmental cost associated with the fuel consumption. The third component was a consumption tax aimed at raising revenue. The fuel subsidy was the difference between the import parity price and the actual price of the fuel. The import parity model was only applied to developing nations who were asked to impose them as part of the conditionality of IMF loans. It does not apply to developed nations or to labour power as a commodity. It does not recognize local wages as the price or cost of imported labour power in an international labour market.
The import parity model under-develops Nigeria. It negates our comparative advantage as a crude oil producer. It makes our refineries uncompetitive and unattractive to foreign investors. From the viewpoint of a foreign investor, it makes no sense to buy the crude oil at international prices and refine it in Nigeria. It is better to refine the crude oil in their home countries where there are all kind of tax incentives as fuel subsidies and then sell it in Nigeria. From a sustainable development point of view, Nigeria adds more value by exporting refined petroleum products (processed goods) rather than crude oil (raw materials).
In April, 2020, the Executive Board of the IMF approved Nigeria’s request for emergency financial assistance of $3.4 billion, (100% of quota) under the RFI to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic. Nigeria is expected to pay back the loan within 3¼ to 5 years. The commitment fee is between 0.15% and 0.6%. The service charge is 0.5% for each withdrawal and the lending interest rate is 1.05%. IMF loans always come with conditionality; official and unofficial. The IMF unofficial conditionality of the SAP loans under the Ibrahim Babangida regime in the late 1980s had shown this fact to Nigerians.
In 1978, at the opening ceremony of the FESTAC games, General Olusegun Obasanjo said: “When we made our first contact with the merchant adventurers from Western Europe, most of our shores became trading posts where primary products were exchanged for processed goods… We continue to be trading post, which supply primary products in exchange for processed goods… The trading posts are run and maintained by our citizens. These can be grouped into four (a) intellectual (b) commercial (c) bureaucratic (d) Technical. The activities of these agents constitute impediment to Black African development.”
These trading post agents constitute the fuel cabal in Nigeria that ensures the continuation of a corruption subsidy under the refined petroleum product importation scheme. The cabal encourages the elimination of our capacity for domestic refining and ensures that all our refineries are non-functional.
The import parity pricing model governs the pricing of Nigerian fuel prices and forms the basis of the PPPRA PMS price template. The import parity PMS price is the Expected Open Market Price (EOMP). The EOMP is the sum of the benchmark landing cost, the distribution margins and the Taxes.
The opportunity cost is the sum of the benchmark landing cost and the distribution margins. The Benchmark Landing Cost is made up of the cost + freight, trader’s margin, lightering expenses, NPA, Financing, Jetty Depot Thru’put Charge, Storage Charge, Bridging Fund, Marine Transport Average and the Admin Charge.
The Cost + Freight is made up of the Free-on-Board Price (FOB) as quoted in Arab Gulf Market and reported by Platt and Argus, the Premium/discount as published in Platt and Argus, the Ocean freight from mid port in the Arab Gulf to Indian Ports, Insurance, Exchange rate, Custom Duty, Ocean Loss, Wharfage and Port charges.
The Distribution Margins is made up of the Retailers Margins, the Transporters Margins and the Dealers Margins. There are not environmental costs or consumption taxes imposed on PMS prices in Nigeria. The so-called fuel subsidy is therefore the difference between the EOMP and the actual PMS price. The logical conclusion of this model is the importation of all refined petroleum products because it allows and presents many opportunities for mismanagement and corruption. The bureaucratic PMS price of N162/litre was decided on the basis of the import parity pricing model.
In May 2020, the Minister of Finance, Budget and National Planning, Zainab Ahmed, and the CBN governor, Godwin Emefiele, assured the new IMF Managing Director, Kristalina Georgieva, that fuel subsidy has been permanently eliminated and will never return. These kind of promises and assurances have been made by government officials in the past. So, the IMF wanted a plan that would be implemented in the third quarter of 2020.
The alternative model for determining fuel price is the production pricing model. In this model, the fuel price is the cost of crude oil at the refinery gate, the refining cost, the distribution and marketing cost and the taxes. Oil producing nations used the production pricing model for fuel prices in their domestic market before IMF neoliberal technocrats invented the import parity pricing model.
The production pricing model is still used in USA for the determination of fuel prices. In Texas, USA, crude oil cost makes up 51% of the PMS prices, refining cost make up 21%, Distribution and Marketing make up 11% and Taxes make up the remaining 17%.
Fuel subsidies are given by government in the production stage as tax allowances such as the Percentage Depletion Allowance, Domestic Manufacturing Tax Deduction, the Foreign Tax Credit and Expensing Intangible Drilling Costs.
Production subsidies were given to Nigerian refineries prior to 2002 when President Obasanjo was convinced to impose an IMF import parity pricing model on the downstream sector. The Nigerian downstream should operate on a production pricing model. The refineries should be repaired and put under a private-manage-and-maintain modified LNG operational model. Government participation should be reduced to a minimum.
Production subsidies should be introduced into the production sphere of the 445,000 bpd of crude oil devoted to domestic consumption. More refineries should be built. Cheap energy is a necessary condition for the survival of small-scale businesses and the accelerated industrial development of the nation.
The present fuel price hike to N162/litre is a product of IMF pressures on the federal government. The IMF had advised the Nigerian government that, “lower oil prices provide an opportunity to phase out fuel subsidies. The recent drop in crude oil prices (and lower petrol and kerosene prices) could facilitate the completion of the subsidy reform, which started in 2012. Staff recommends introducing an independent price-setting mechanism to smoothly pass through international price changes to domestic prices and gradually eliminate fuel subsidies….”
In June 2020, with WTI prices at $38.31/bbl, the government reduced the fuel price further to a band of N121.5/litre–N123.5/litre. In July 2020, with WTI prices at $40.41/bbl, the PPPRA announced a fuel price hike to a band of N140.8/litre–N143.8/litre. In August 2020, with WTI prices at $42.34/bbl, the PPPRA announced a fuel price hike to a band of N148/litre–N150/litre. Finally, in September 2020, with WTI prices at $40.28/bbl, the PPPRA announced a fuel price hike to a band of N158/litre–N162/litre. The fuel price hikes had very little to do with the changes in the spot market for crude oil.
The IMF fuel price hike strategy was to (i) Develop a comprehensive reform plan with clear objectives (ii) Develop an effective communication strategy (iii) Appropriately phase and sequence price increases (iv) Improve the efficiency of energy state-owned enterprises (SOEs) (v) Implement targeted mitigating measures and (vi) Depoliticize energy pricing by establishing an automatic pricing formula for fuel products that links domestic energy prices to international energy prices and distance the government from the pricing of energy.
The IMF in its 2019 Article IV Consultation on Nigeria “noted that phasing out implicit fuel subsidies while strengthening social safety nets to mitigate the impact on the most vulnerable would help reduce the poverty gap and free up additional fiscal space in the country.”
In April 2019, during the Joint Annual Spring meeting of the World Bank, the IMF Managing Director, Christine Lagarde, asked the federal government to remove fuel subsidy. She said: “We believe that removing fossil fuel subsidies is the right way to go.” Later in the year, an IMF staff team visited Lagos and Abuja to discuss economic/financial development and review reform implementation with Nigerian government officials. At the end of the meeting, the IMF team said: “Fuel subsidies tend to be poorly targeted, foster over-consumption, curtail investment and maintenance in related sectors, and crowd out more productive government spending.” The team insisted that fuel subsidy reform should be pursued vigorously. The Nigerian government explained that while they agreed in principle with the need to increase fuel prices, the timing was not right.
In 2020, an IMF staff team visited Lagos and Abuja (from January 29, 2020 to February 12, 2020) to conduct its annual Article IV consultation discussion with Nigerian government officials. The IMF staff team recommended fuel subsidy reform and the unification of the exchange rates. The following month the federal government requested financial assistance under the IMF Rapid Financing Instrument (RFI) to help with balance of payment needs and covid-19 health expenditures.
The government had obtained a $2.5 billion loan from the World Bank and a $1.0 billion loan from the African Development Bank to deal with the effects of the pandemic. It wanted another $3.4 billion loan from the IMF. The government was faced with falling oil prices, lower revenues, BOP balance problems and the covid-19 pandemic.
In April, 2020, the Executive Board of the IMF approved Nigeria’s request for emergency financial assistance of $3.4 billion, (100% of quota) under the RFI to meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic. Nigeria is expected to pay back the loan within 3¼ to 5 years. The commitment fee is between 0.15% and 0.6%. The service charge is 0.5% for each withdrawal and the lending interest rate is 1.05%. IMF loans always come with conditionality; official and unofficial. The IMF unofficial conditionality of the SAP loans under the Ibrahim Babangida regime in the late 1980s had shown this fact to Nigerians.
Once they got the IMF approval for the loan, the federal government introduced a downstream deregulation policy. Seizing on the WTI oil price of $16.55/bbl, the federal government reduced PMS prices from N145/litre to a band of N123.5/litre – N125/litre. The masses did not benefit from this because the nation was on a pandemic lockdown.
In May 2020, the Minister of Finance, Budget and National Planning, Zainab Ahmed, and the CBN governor, Godwin Emefiele, assured the new IMF Managing Director, Kristalina Georgieva, that fuel subsidy has been permanently eliminated and will never return. These kind of promises and assurances have been made by government officials in the past. So, the IMF wanted a plan that would be implemented in the third quarter of 2020.
In June 2020, with WTI prices at $38.31/bbl, the government reduced the fuel price further to a band of N121.5/litre–N123.5/litre. In July 2020, with WTI prices at $40.41/bbl, the PPPRA announced a fuel price hike to a band of N140.8/litre–N143.8/litre. In August 2020, with WTI prices at $42.34/bbl, the PPPRA announced a fuel price hike to a band of N148/litre–N150/litre. Finally, in September 2020, with WTI prices at $40.28/bbl, the PPPRA announced a fuel price hike to a band of N158/litre–N162/litre. The fuel price hikes had very little to do with the changes in the spot market for crude oil.
The federal government assumed that by increasing the fuel prices gradually, it would be able to avoid a response from the Nigerian masses. Unfortunately, this will not be the case. The federal government had increased electricity tariff by about 100% the week before. VAT and Stamp Duties charges had been increased earlier. Exchange rates have gone up forcing the naira value of imported commodities to increase. Unemployment and underemployment rates have doubled due to the covid-19 pandemic and the poverty rate has increased.
There is high insecurity in the nation and the cost of living has gone up. Inflationary trends in the economy are increasing. But disposable income has reduced due to the lockdown and business closures. All the refineries in the nation are shut down and undergoing repairs. At least $396.33 million was spent on Turn-Around Maintenance (TAM) and the repair of the refineries from 2013 to 2017 with nothing to show for it.
The federal government has informed the nation that the petroleum products from the 650,000 bpd Dangote Refinery will be sold at international prices. There is no political will to solve the corruption subsidy problem. The fuel price hike thus reduces to an IMF insensitive revenue generation policy designed to transfer income from the ranks of the poor Nigerian masses into the coffers of the federal government. A mass-based grassroots resistance is imperative. Our survival and the sustainable development of our nation are at stake. The final fuel price will be determined by the balance of power between the federal government and the masses of Nigerian people. (Concluded)
Dr. Agbon, former HOD, Department of Petroleum Engineering, University of Ibadan (UI), former ASUU Chairman, UI, presented this paper, originally titled; “Fuel Price Hike: The Fact of the Matter” at the Nigeria Labour Congress Round Table on Deregulation of the Oil and Gas Downstream Petroleum sub-sector in 2016. In the wake of the recent increment in the price of petrol, he reviewed it to further reflect current trends in the industry.
Dr Agbon, now a consultant, lives in the United States of America, and can be reached via: [email protected]o.com, or Twitter: @izielenagbon
