The monetary tag on diesel, the diesel price, is subject to multiple factors. In the Nigerian context, diesel prices sway under the influence of specific elements discussed below.
Factors Affecting Diesel Prices In Nigeria
Crude Oil Price
The heartbeat of diesel prices lies in the crude oil price, the raw material birthing diesel and other petroleum products. Global supply-demand dynamics of crude oil, steered by geopolitical events, natural disasters, and regulatory frameworks, guide crude oil prices. Nigeria, a heavyweight oil producer and an OPEC member, synchronizes diesel prices with global crude oil ebb and flow.
When crude oil prices surge, so does the cost of producing and importing diesel, echoing a dance of cost increments. Conversely, a dip in crude oil prices sends diesel costs downwards. Yet, the relationship between crude oil prices and diesel prices in Nigeria is not a straightforward, linear affair, as other influencers come into play.
Refining Capacity
Refining capacity, the volume of crude oil transmuted into diesel and other petroleum products by refineries, is a key player in the diesel price arena. Nigeria, despite its significant oil production, grapples with a subpar refining capacity. With four refineries in Port Harcourt, Warri, and Kaduna operating at a mere 10.46% average capacity utilization in 2020, the landscape gets marred by ageing infrastructure, corruption, sabotage, and vandalism.
The consequence? Nigeria leans heavily on diesel imports, mainly from Europe and Asia, exposing itself to global market oscillations, exchange rate fluctuations, and the reliability of foreign suppliers. This vulnerability ripples into increased costs and risks, particularly in transporting and distributing imported diesel across the nation.
In the low refining capacity scenario, diesel prices soar due to scarce and costly supply, while a high refining capacity translates into abundant and affordable diesel. Unfortunately, the refining capacity and diesel price relationship is not a linear narrative, as other forces come into play.
Government Policy
The government, wielding a hefty influence through policies, regulations, and actions, helps shape the diesel price landscape. In Nigeria, the government’s presence looms large through the Nigerian National Petroleum Corporation (NNPC), the state-owned oil company, which governs the upstream and downstream sectors of the oil industry.
The NNPC’s responsibilities span exploration, production, refining, importation, and distribution of diesel and other petroleum products. Government policies, aimed at balancing objectives like revenue generation, economic development, social welfare, environmental protection, and national security, result in varying impacts.
The trajectory of diesel prices in Nigeria takes unpredictable turns due to the government’s interventions, from market deregulation in 2016, allowing market forces to determine diesel prices, to the reintroduction of market regulation in 2020, fixing a maximum price of 160 naira per litre in response to the COVID-19 pandemic and its impact on crude oil prices and exchange rates. The relationship between government policy and diesel prices in Nigeria is a tangled web, subject to political, economic, and social forces.
Is Market Competition Affecting Diesel Prices?
The degree of rivalry and interaction among players in the diesel and petroleum products market, known as market competition, significantly influences diesel prices. Nigeria’s market, however, bears the weight of a high concentration of power among a few dominant players – NNPC, major oil marketers, and independent oil marketers.
This concentration fosters collusion, reducing the level and quality of competition. Malpractices like hoarding, profiteering, adulteration, and smuggling further compromise market efficiency and integrity. In scenarios of low and weak market competition, diesel prices surge due to maximized market power and profits by the dominant players.
On the flip side, high and robust market competition tends to drive diesel prices down, challenging the market power and profit margins of the dominant players. Yet, the relationship between market competition and diesel prices in Nigeria is complex, influenced by factors beyond the immediate market structure.
Consumer Behaviors
Patterns and trends in how consumers purchase and utilize diesel fuel and other petroleum products, collectively termed consumer behaviour, add another layer of complexity to the diesel price narrative. Diverse consumer needs and wants emerge, spanning individual households and businesses, each segment reacting differently to the variations in diesel prices and income.
Households, sensitive to fluctuations, adjust consumption and expenditure based on income and preferences. Some businesses operating with less sensitivity to price fluctuations maintain consumption levels. In a robust consumer behaviour environment, diesel prices tend to stabilize at higher levels due to consistent and high demand.
Conversely, weak consumer behaviour results in volatile diesel prices, with demand fluctuations driving instability. The interaction between consumer behaviour and diesel prices in Nigeria defies simplicity, as other influencing factors complicate the relationship.
Conclusion
The monetary tag on diesel, influenced by supply and demand dynamics, production and distribution costs, taxes and subsidies, exchange rates, market competition, government policies, refining capacity, and consumer behaviour, unfolds as a complex tapestry in Nigeria. The nation’s continued romance with diesel prices reflects a delicate interplay of some internal and external forces, where economic, political, and social factors join hands in shaping the ever-changing diesel price landscape.