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Nigerian govt at crossroads, as oil price nears $75 per barrel



The Federal government appears to be at a crossroads as Brent crude soared closer to $75 per barrel on Monday, June 21.

According to data, the oil price finished Monday at $74.93 a barrel, up $1.42 cents or 1.93 percent, while the US West Texas Intermediate (WTI) climbed 2.61 percent or $1.87 to trade at $73.66 per barrel.

Both benchmarks have risen for the past four weeks on optimism over the pace of global COVID-19 vaccinations and expected pick-up in summer travel.

Traders had also taken a look at research from Bank of America, which predicted that oil might reach $100 per barrel next year as travel demand recovers.

The bank stated in the report issued over the weekend that global oil demand would continue to outpace supply in 2022 as the economy recovers from the epidemic, while investment in new production is hampered by environmental concerns.

Forecasts of limited growth in US oil output have also aided the surge in oil prices.

While the higher price should be a sign of hope for Nigeria’s economy, it will also imply an increase in the cost of fuel subsidy.

This concern was recently highlighted by Mr. Mele Kyari, Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), who warned that states may not receive anything from the FAAC because the country spends about N112 billion monthly subsidizing fuel due to the inefficient state of the nation’s refineries, which are currently in comatose.

At the time he made this statement, oil price was at $68 per barrel with daily consumption of petrol at 55 million litres per day.

With the price of oil approaching $75 per barrel, the N112 billion monthly subsidy claims might balloon to more than N200 billion.

Speaking in April at the fifth edition of the special ministerial briefings coordinated by the presidential communications team, Kyari said while the actual cost of importation and handling charges of petrol amounted to N234 per litre, the government was selling the product at N162 per litre. That development, according to him, cost the country about N120 billion monthly.

While pump prices grew gradually, the conflict between labor unions and the federal government has left the latter in a bind.

The unions had already pushed the government to reduce the pump price from N168 to N162 per litre last year and warned against possible increase.

Ripples Nigeria had earlier reported that NNPC in the first four months of this year has already spent N336 billion subsidizing fuel price.

Read also: Oil price opens the week at $73 per barrel

Breakdown examined from NNPC’s Federation Account and Allocation Committee (FAAC), showed Fuel subsidies cost N25.37 billion in January and N73.13 billion in February.

In March and April, the NNPC boosted fuel payments to N111.97 billion and N126.30 billion, respectively.

The International Monetary Fund (IMF) last week also issued a warning to Nigeria that the expected growth rebound in 2021 could be impeded if fuel subsidy payment continues.

Country director Jesmin Rahman, describe fuel subsidies as a disturbing trend and warned the government to allow market trends to determine fuel price.

The Fund also stressed the importance of introducing market-based fuel pricing mechanisms and the need to deploy well-targeted social support to cushion any impact on the poor.

Only time will tell if the federal government will heed the IMF’s warning or continue to pay fuel subsidies.

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