People & Money

More Trouble For Nigeria’s Economy, As Price of Diesel Increases In Europe

The nation’s economy may be in for more difficult situation soon as the price of Automotive Gas Oil  (AGO) otherwise called, Diesel, has increased on the international market on account of the continuous Russian -Ukraine War.

This is even as there is palpable fear that India, one of the largest importers of Nigeria’s crude oil may dump the commodity for a cheaper one from Russia.

With the increase in the price of diesel, it means that Nigeria’s inflation rate may go higher. So also the prices of commodities.

The price of the product which is currently put at between N600 to N780 per litre in the country may go far beyond that soon according to industry observers.

The price of the product has already led to declining in the business the freight industry.

The product is imported into the country as only a very few percentage of what is consumed in the country is refined in-country. The diesel produced by some of the modular refineries are used to serve the localities where they are located.

While the pump price of fuel or petrol remains at N165per litre, that of diesel continues to steadily rise, causing an increase in prices of consumer goods. Diesel is mostly used as fuel for trucks that transport an estimated 80% of consumer goods freighted across the country.

Diesel prices hit yet another new record on Wednesday at $5.43 per gallon in Europe, now some $1.2 more than a gallon of gasoline, according to AAA.  This is an indication that the price of the product must have increased per a metric ton.

Diesel is a deregulated product, unlike fuel whose price is regulated. Already the escalation of the war has increased the price of the product which is already affecting the prices of commodities locally. The price of such a thing as little as sachet water has moved from N5 to N20 and even more in most places because of the price of diesel.

Some logistics companies as well as those that operate trucks to lift fuel had to cut down the number of trucks they operate because of the price of diesel.

Also Read: Food Items and Diesel Drives February 2022 Inflation to 15.70%

According to Bloomberg, as Europe is considering its ban on Russia crude oil, India, which is the world’s third-largest oil importer and Nigeria’s largest crude buyer is negotiating discounts for the Russian oil asking for below $70 per barrel price to compensate for logistics, financing and sanctions troubles.

The European Commission proposed a full ban on Russian crude oil following the continued attack on Ukraine.

The proposed ban, which has sent oil prices rising by over four percent to about $108 per barrel, means higher cost petroleum products for Nigeria, and ultimately, an increase in subsidy spending.

Leading buyers of Nigerian crude, especially India and China, may dump Nigerian crude for much discounted Russian oil, reports have said.

If India and Russia agree on the discount, state-owned refiners in India could import as much as 15 million barrels of Russian oil in May, Bloomberg wrote.

At the same, China bought about $1.02 billion worth of crude oil from Nigeria in 2020, according to the United Nations trade database on international trade.

European Commission President, Ursula von der Leyen, said at the European Parliament that as part of the sixth package of sanctions against Russia over its invasion of Ukraine, the EC was proposing a complete ban on Russian oil imports, a move designed to come into force within the end of 2022, to give EU member states time to phase out purchases.

“Let us be clear: it will not be easy. Some member states are strongly dependent on Russian oil. But we simply have to work on it. We now propose a ban on Russian oil. This will be a complete import ban on all Russian oil, seaborne and pipeline, crude and refined,” von der Leyen said.

“We will make sure that we phase out Russian oil in an orderly fashion, in a way that allows us and our partners to secure alternative supply routes and minimise the impact on global markets. This is why we will phase out the Russian supply of crude oil within six months and refined products by the end of the year,” the Commission President said.

Although the development according to stakeholders may eventually become blessing in disguise to a country like Nigeria, which is already wooing European investors to gas infrastructure development in Nigeria, the immediate implication has been projected to worsen rising inflation in Nigeria due to the high cost of petroleum products that are mainly imported.

Already natural gas prices in the U.S. yesterday soared past $8 gaining 5 percent as inventory concerns mount ahead of a summer that promises high demand.

“Nigeria’s challenge is to meet up with her OPEC production quota. The market is tight enough that she will find ready buyers,” he said.

Analysts and members of the organised private sector (OPS) have expressed worry that rising diesel prices and expensive raw materials are notable concerns for local manufacturers this year, especially those in the fast-moving consumer goods segment (FMCG).

Beyond the need for diesel for logistics, the stakeholders noted that the current model of high dependence on the national grid has not worked well to serve the economy, considering that the country is too vast for the highly centralized regime of national grid.

They argued that the continued ownership and control of the transmission component of the power supply chain is also a challenge to grapple with, a move that has seen many generating their electricity to bridge supply gaps.

According to the Centre for the Promotion of Private Enterprise (CPPE), to tackle inflation, the key drivers need to be addressed.

The CPPE noted that escalating energy costs, alongside poor power supply from the national grid, have consequences for the economy as these are reflected in the high production and operating costs across all sectors, high haulage costs due to diesel prices as well as potential suspension of operations for businesses that are unable to pass the costs to the consumers.

Similarly, analysts at FBNQuest have equally warned in a new report that rising diesel costs and uncooked materials prices are becoming a growing strain on FMCG firms.

The report stated the Russian-Ukrainian battle would probably negatively influence the group in 2022.

“The battle has pushed up commodity costs as supply chains modify. We see two new sources of value strain for FMCG companies in 2022 that are unusually excessive uncooked materials prices and vitality prices,” the analysts stated.
In line with the report, the primary merchandise imported by FMCG firms which can be affected are wheat, crude palm oil, corn and barley.

“Moreover, diesel costs are up greater than 150% month-over-month as a result of international shortages and forex shortage,” he stated.

Diesel is a vital gas for producers not linked to gasoline distribution strains, in addition to being essential for logistics and distribution.

The key drivers of inflation include high and increasing energy cost; worsening currency depreciation, escalating transportation cost, high import duty on manufacturing inputs, illiquidity in the forex market, bottlenecks in the logistics chain, security concerns and low productivity resulting from structural challenges and weak application of technology.

Central bank financing of the fiscal deficit is also a major driver of inflation.

“To tackle inflation, all forms of taxes and levies on the importation of petroleum products should be suspended to give a respite on the spiking energy cost. There should also be deeper stakeholder engagements across sectors to develop an enduring strategy on the way forward.

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