Dangote Petroleum Refinery’s decision to price Premium Motor Spirit (PMS), diesel and aviation fuel in U.S. dollars has sparked widespread debate about its implications for fuel prices and exchange rate market.
While the announcement triggered fears of an immediate increase in petrol prices, the reverse is actually the case, reports Daily Trust.
Although the refinery has switched to dollar-denominated pricing, the naira equivalent of its ex-depot price remains broadly unchanged when converted using the prevailing official exchange rate.
At an exchange rate of about N1,376.54 to the dollar, Dangote’s new gantry price of $0.779 per litre translates to roughly N1,072 per litre, which is largely in line with its existing ex-depot pricing. This means marketers are not immediately paying significantly more for petrol than they were before the currency switch.
But the challenge remains the far-reaching implications for Nigeria’s foreign exchange market, inflation and future fuel pricing if it becomes a permanent arrangement.
Why did Dangote switch to dollar pricing?
The refinery’s decision is largely driven by commercial realities. While oil is traded globally in U.S. dollars, a large share of the crude processed by Dangote Refinery is currently purchased in dollars in addition to other logistics costs, taxes, levies which are priced in dollars.
The refinery was supposed to receive a substantial portion of its crude through the federal government’s naira-for-crude arrangement with the Nigerian National Petroleum Company Limited (NNPC Ltd.).
Under that policy, crude would be supplied in naira, allowing the refinery to also sell refined products in naira without assuming significant foreign exchange risks.
However, reports indicated that crude allocations under the arrangement have consistently fallen below the refinery’s requirements, forcing it to source additional crude from international suppliers and pay in dollars.
Why are petrol prices not increasing immediately?
Despite public concerns, the transition to dollar pricing does not automatically translate into higher petrol prices.
The refinery simply converted its existing ex-depot prices into dollars using the prevailing exchange rate.
As long as the naira remains relatively stable, marketers will pay approximately the same amount in naira after converting their dollars.
In other words, the change is more about the currency of payment than the actual value of the product. Checks by our correspondent indicated that pump prices have not changed as there is normalcy at filling stations in Lagos.
“This decision is largely a commercial decision to ease pressure of sourcing for dollars to import crude oil since the naira-for-crude deal with the federal government has not achieved much result.
“The crude supply obligation on the part of the federal government is not being met. We only struggle to get three cargoes monthly when we require about 15 cargoes for our operation. Over 70 per cent of our feedstock is sourced through importation.
But what the refinery has done is to ensure uninterrupted product availability,” a source close to the refinery said.
What could change?
The situation changes if the naira depreciates.
Once petroleum products are priced in dollars, the naira cost automatically rises whenever the local currency weakens against the U.S. dollar.
For example, if the exchange rate moves above the current N1,376/$, marketers would need significantly more naira to purchase the same quantity of petrol while the additional costs are likely to be transferred to consumers.
This means that domestic fuel prices become more directly linked to movements in Nigeria’s foreign exchange market. What this implies, according to economists, is that there would be pressure on Nigeria’s foreign exchange market.
What experts are saying
Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr. Muda Yusuf, believes the reported move reflects the growing volatility in the global oil market rather than an attempt to arbitrarily increase prices.
According to him, refiners worldwide are facing heightened uncertainty as geopolitical tensions continue to push crude oil prices up and down within short periods.
He argues that businesses naturally adopt pricing strategies that protect them against both commodity price swings and exchange-rate risks.
Oil and gas analyst Dr. Ayodele Oni also views the decision as commercially rational.
According to him, once crude purchases are made in dollars while products are sold in naira, the refinery assumes exchange-rate losses whenever the naira weakens.
Pricing products in dollars therefore allows the refinery to align its revenue with its foreign currency obligations.
An oil and gas industry analyst, Otunba Tunji Oyebanji, while speaking on the development in a chat with our correspondent said, “This means he’s not getting the crude or the arrangement is not working as expected. We’ve said it from the beginning that this is a tall order. Nigeria was not producing enough crude to start with. Then they have already pledged some of that crude to third parties. They took some advanced money from some of the buyers and then they are paying them back with crude oil. That limits the amount of crude available to sell either to Dangote or the international market.
“Don’t forget crude oil is also our number one export earner. I’m not standing in for NNPC. I’m just saying this might be the challenge that has made it not to work. What is the implication? That means more of Dangote crude has to be bought from other sources outside Nigeria and of course he has to pay dollars. So I think that’s why he said he is going to start selling in dollars. The implication of this of course is that it is going to increase demand for dollars and that means the naira may weaken.”
