On December 10, 2011, if you stopped at the Mobil filling station on Old Aba Road in Port Harcourt , you would be able to buy a litre of petrol for 65 naira or $1.66 per gallon at an exchange rate of $1/N157 and 4 litres per gallon. This is the official price. The government claims that this price would have been subsidized at N73/litre and that the true price of a litre of petrol in Port Harcourt is N138/litre or $3.52 per gallon.

They are therefore determined to remove their subsidy and sell the gallon at $3.52. But, On December 10, 2011, if you stopped at the Mobil Gas station on E83rd St and Flatlands Avenue in Brooklyn, New York, USA, you would be a able to buy a gallon of petrol for $3.52/gallon. Both gallons of petrol would have been refined from Nigerian crude oil. The only difference would be that the gallon in New York was refined in a US North East refinery from Nigerian crude exported from the Qua Iboe Crude Terminal in Nigeria while the Port Harcourt gallon was either refined in Port Harcourt or imported. The idea that a gallon of petrol from Nigerian crude oil cost the same in New York as in Port Harcourt runs against basic economic logic. Hence, Nigerians suspect that there is something irrational and fishy about such pricing. What they would like to know is the exact cost of 1 litre of petrol in Nigeria .
 
We will answer this question in the simplest economic terms despite the attempts of the Nigerian government to muddle up the issue. What is the true cost of a litre of petrol in Nigeria ? The Nigerian government has earmarked 445000 barrel per day throughput for meeting domestic refinery products demands. These volumes are not for export. They are public goods reserved for internal consumption. We will limit our analysis to this volume of crude oil. At the refinery gate in Port Harcourt, the cost of a barrel of Qua Iboe crude oil is made up of the finding /development cost ($3.5/bbl) and a production/storage /transportation cost of $1.50 per barrel.
 
Thus, at $5 per barrel, we can get Nigerian Qua Iboe crude to the refining gates at Port Harcourt and Warri. One barrel is 42 gallons or 168 litres. The price of 1 barrel of petrol at the Depot gate is the sum of the cost of crude oil, the refining cost and the pipeline transportation cost. Refining costs are at $12.6 per barrel and pipeline distribution cost are $1.50 per barrel. The Distribution Margins (Retailers, Transporters, Dealers, Bridging Funds, Administrative charges etc) are N15.49/litre or $16.58 per barrel. The true cost of 1 litre of petrol at the Mobil filling station in Port Harcourt or anywhere else in Nigeria is therefore ($5 +$12.6+$1.5+$16.6) or $35.7 per barrel . This is equal to N33.36 per litre compared to the official price of N65 per litre. Prof. Tam David West is right. There is no petrol subsidy in Nigeria . Rather the current official prices are too high. Let us continue with some basic energy economics.
 
The government claims we are currently operating our refineries at 38.2% efficiency. When we refine a barrel of crude oil, we get more than just petrol. If we refine 1 barrel (42 gallons) of crude oil, we will get 45 gallons of petroleum products. The 45 gallons of petroleum products consist of 4 gallons of LPG, 19.5 gallons of Gasoline, 10 gallons of Diesel, 4 gallons of Jet Fuel/Kerosene, 2.5 gallons of Fuel Oil and 5 gallons of Bottoms. Thus, at 38.2% of refining capacity, we have about 170000 bbls of throughput refined for about 13.26 million litres of petrol, 6.8 million litres of diesel and 2.72 million litres of kerosene/jet fuel.

This is not enough to meet internal national demand. So, we send the remaining of our non-export crude oil volume (275000 barrels per day) to be refined abroad and import the petroleum product back into the country. We will just pay for shipping and refining. The Nigerian government exchanges the 275000 barrels per day with commodity traders (90000 barrels per day to Duke Oil, 60000 barrels per day to Trafigura (Puma Energy), 60000 barrels per day to Societe Ivoirienne de Raffinage (SIR) in Abidjan, Ivory Coast and 65000 barrels per days to unknown sources) in a swap deal. The landing cost of a litre of petrol is N123.32 and the distribution margins are N15.49 according to the government. The cost of a litre is therefore (N123.32+N15.49) or N138.81 . This is equivalent to $3.54 per gallon or $148.54 per barrel. In technical terms, one barrel of Nigerian crude oil has a volume yield of 6.6% of AGO, 20.7% of Gasoline, 9.5% of Kerosene/Jet fuel, 30.6% of Diesel, 32.6% of Fuel oil / Bottoms when it is refined.
 
Using a netback calculation method, we can easily calculate the true cost of a litre of imported petrol from swapped oil. The gross product revenue of a refined barrel of crude oil is the sum of the volume of each refined product multiplied by its price. Domestic prices are $174.48/barrel for AGO, $69.55/barrel for Gasoline (PMS or petrol), $172.22/barrel for Diesel Oil, $53.5/barrel for Kerosene and $129.68/barrel for Fuel Oil. Let us substitute the government imported PMS price of $148.54 per barrel for the domestic price of petrol/gasoline. Our gross product revenue per swapped barrel would be (174.48*0.066 +148.54*0.207+172.22*0.306+ 53.5*0.095+129.68*0.326) or $142.32 per barrel. We have to remove the international cost of a barrel of Nigerian crude oil ($107 per barrel) from this to get the net cost of imported swapped petroleum products to Nigerian consumers. The net cost of swapped petroleum products would therefore be $142.32 -$107 or $35.32 per barrel of swapped crude oil. This comes out to be a net of $36.86 per barrel of petrol or N34.45 per litre.
 
This is the true cost of a litre of imported swapped petrol and not the landing cost of N138 per litre claimed by the government. The pro-subsidy Nigerian government pretends the price of swapped crude oil is $0 per barrel (N0 per litre) while the resulting petroleum products is $148.54 per barrel (N138 per litre). The government therefore argues that the “subsidy” is N138.81-N65 or N73.81 per litre. But, if landing cost of the petroleum products is at international price ($148.54 per barrel), then the take-off price of the swapped crude oil should be at international price ($107 per barrel). This is basic economic logic outside the ideological prisms of the World Bank. The traders/petroleum products importers and the Nigerian government are charging Nigerians for the crude oil while they are getting it free.
 
So let us conclude this basic economic exercise. If the true price of 38.2% of our petrol supply from our local refinery is N33.36/litre and the remaining 61.8% has a true price of N34.45 per litre, then the average true price is (0.382*33.36+0.618*34.45) or N34.03 per litre. The official price is N65 per litre and the true price with government figures is about N34 per litre (even with our moribund refineries).
 
There is therefore no petrol subsidy. Rather, there is a high sales tax of 91.2% at current prices of N65 per litre. The labor leaders meeting the President should go with their economists. They should send economists and political scientists as representatives to the Senate Committee investigating the petroleum subsidy issue. There are many expert economists and political scientists in ASUU who will gladly represent the view of the majority. The labor leaders should not let anyone get away with the economic fallacy that the swapped oil is free while its refined products must be sold at international prices in the Nigerian domestic market.
 
The government should explain at what price the swapped crude oil was sold and where the money accruing from these sales have been kept. We have done this simple economic analysis of the Nigerian petroleum products market to show that there is no petrol subsidy what so ever. In the end, this debate on petrol subsidy and the attempt of the government to transfer wealth from the Nigerian masses to a petrol cabal will be decided in the streets. Nigerian workers, farmers, students, market women, youths, unemployed, NGO and civil society as a whole should prepare for a long harmattan season of protracted struggle. They should not just embark on 3 days strike/protests after which the government reduces the hiked petroleum prices by a few Nairas. They must embark upon in a sustainable struggle that will lead to fundamental changes. Let us remove our entire political subsidy from the government and end this petroleum products subsidy debate once and for all. It is time to bring the Arab Spring south.
 
Izielen Agbon Izielen Agbon writes from Dallas, Texas. izielenagbon@yahoo.com

 He is  former HOD , Petroleum Eng Dept, former ASUU chairman University of Ibadan, trained many operators in nation's energy industry with pratical experience on our practices and policy focus in the last 20yrs .

http://mobile.saharareporters.com/article/real-cost-nigeria-petrol-dr-izielen-agbon?page=1

I have just been briefed. Thank u sir.

i hv always said dis dat nigerians should not expect good thing to come out of this government. A thief can not purnish a thief because he does not see anytin wrong in stealing. our problem is corruption and jonathan cannot fight it because he is one of them. All nigerian policians are thieves!

Honestly,I want the pro-subsidy removal nairalanders to respond to this.

They have not even been able to get right the maths of the subsidy they claim to be removing.

Shouldn't there be a clear, line by line explanation or official position on a matter that's as important as this?

Pukkah:

Thus, at $5 per barrel, we can get Nigerian Qua Iboe crude to the refining gates at Port Harcourt and Warri.

Where on earth is one able to buy oil for $5/barrel from?

The international price is ~$100.

Where is this other $95 coming from? Who is paying for it?

(Answer, the Nigerian government is paying for it, if you force it to sell the crude for $5 when it can get $100 for it.)

If anyone here thinks that selling something for $5/barrel when it is worth $100/barrel doesn't represent a subsidy, then we can discuss privately via email or Skype me purchasing a N1000 bill from them for N50

ekt_bear:

If anyone here thinks that selling something for $5/barrel when it is worth $100/barrel doesn't represent a subsidy, then we can discuss privately via email or Skype me purchasing a N1000 bill from them for N50

@ekt_bear,

I tire for their own economics, how do you buy a $100/barrel and expect to sell at N34 per liter?

Pukkah:

They have not even been able to get right the maths of the subsidy they claim to be removing.

Shouldn't there be a clear, line by line explanation or official position on a matter that's as important as this?

I think people trying to prove this subsidy thing got it all wrong IMO. Again, like ekt_bear asked, where do they get this $5/barrel oil from? Like seriously, the math isn't that hard to do, so this is the first question, Who buys @$100+ and then sell at 34N/liter. Me too I'm tired of all these so-called propaganda, false information have wings, flying in different shapes and fashion over the internet.

The prof that wrote that write up is scaringly ignorant! How can he say crude oil produced in Nigeria and sent to our local refineries should cost $5 per barrel? Oil is produced in Nigeria via joint ventures with a 55 - 60% stake for the government and the balance for the IOCs. At 2.35 million barrels per day production, the government's daily take is about 1.4 million bpd.

If the government then sells 445000 bpd to the local refineries at $5 per barrel and exports the balance, how will the national budget be implemented? Can the nation meet its capital and recurrent expenditure with 965000 bpd oil receipts? Will the NASS/States/LGs/rational nigerians ignore the opportunity cost of selling the 445000 bpd at international market price?

Either way we look at it, there is still going to be subsidy i.e

445000 bpd * $5 * 365 days = $ 812 million at subsidized prices
OR
445000 bpd * $100 * 365 days = $16.25 billion at market prices

Who will bear the over $15 billion dollar national budget/income deficit? And yet the prof ignorantly says there will be no subsidy

the fact is u can't compare d price u would sell crude oil 2 indigenous refineries ($5) 2 d price u would sell same 2 foreign buyers ($100). for starters d price of crude oil on d international mkt is set by a combination of the forces of demand and supply and OPEC production quotas. on the other hand, d price at which d local refineries buy oil is not subject 2 d int'l price but d conditions prevalent within our own environment. As at 2003 NNPC was selling crude 2 d refineries at greatly subsidised rates but i dn't know of now.

my main problem wiv d prof's submission is ds. he himself admits dt if u go 2 a mobil filling station in the United states d price of petrol is about $3.52 which is about d price we would eventually be buying pms if d president sticks 2 his guns.

the US is a country which largely imports crude oil 2 satisfy most of its oil needs which is then refined in its own refineries. Nigeria on the other hand is a country dt imports refined crude oil 2 meet its own needs given d fact dt its refineries aren't efficiently utilised. i find it very hard to believe dt because we refine our crude oil abroad d value of d crude oil itself will just automatically disappear simply b'cos 'we own d crude oil'. as if it is our right 2 buy pms 4 cheap.

if he says dt all we pay at those int'l refineries is just d transportation cost and refining cost then waht about d value of the raw crude itself? Simply because u make beef nd swap with the mai-suya next door doesn't mean d value of the beef itself disappears thus making d suya cheaper. in dt case dr is no exchange nd no value added which goes against economic principle.

in fact the NNPC MD recently stated dt NNPC actually buys d crude oil at d prevailing int'l price nd distributes it to d refineries.(http://www.thisdaylive.com/articles/nnpc-65-000-barrels-of-crude-oil-not-missing/105038/)

Even if the price of pms is in fact N34.03 per litre compare this 2 d price prevalent in some of the countries surrounding us:

Chad- N210
Benin- N167
Ghana- N175
Niger- 185 (these figures were displayed on the news reel bar during the NTA news broadcast abt 3 days ago. confirm d figures)

Now pls tell mi, if u are a businessman in the nigerian downstream oil sector where would u sell ur petroleum products? would u sell here in ur home country cos 'u pledged 2 serve her with allllll ur might'? or would just drive over (not even fly over) 2 ur neighbours where u are assured of ASTRONOMICAL? Patriotism doesn't feed d stomach.

The fact is this guy and Tam David-West (who supposedly has a similar argument) have no clue what they are talking about.