It is barely a year since oil prices fell because of the pandemic-induced lockdowns and breakdown in OPEC+ talks. While the commodity shock strained fiscal coffers, the slump gave fiscal policy managers the opportunity to deregulate the downstream sector, thereby subduing pressures on the lean treasury. Thus, the subsequent deregulation came with initial declines in fuel prices, serving as a brief relief to consumers and business owners.
Upon subsequent reopening in advanced economies, gradual oil price recovery was accompanied by monthly upward adjustments to pump prices. However, the pace of oil price recovery was accelerated by the arrival of vaccines on the global scene. The rally in oil prices has been rather significant, beating consensus expectations of a lower-for-long oil price environment, as oil prices touched highs of $60 and $70 levels in the first quarter of 2021 alone. Although, these increases were driven by supply-side factors, vaccine-induced oil demand recovery could sustain the pace in the nearest future.
However, implementing commensurate increases in PMS prices could have had dire implications on slim consumer wallets, given pre-existing high inflation levels. While the Petroleum Products Pricing Regulatory Agency recently revealed the market-reflective price of PMS as between the range of ₦209 and ₦212 per litre, the Nigerian National Petroleum Corporation (NNPC) reiterated its stance on maintaining PMS prices at current levels. This allayed the pressures, the decision could have mounted on commodity prices, although panic buying led to queues at filling stations, which could be contributory to inflationary pressures.
With respect to peer countries, Ghana and Kenya have both recorded a 22% and 15% rise in gasoline prices in 2021, respectively. South Africa is likely to record a historic petrol price hike within the next two months, not only as a result of higher oil prices, but also as an offshoot of higher fuel levies. However, fuel prices remain relatively lower in Angola, due to the presence of subsidies, despite the conclusion of technical work for subsidy withdrawals in the oil-rich state.
Like Angola, the balance between fiscal sustainability and welfarism could be a key reason for the delay in market-reflective pricing in Nigeria. While subsidies could reduce fiscal deficit, a significant adjustment in fuel prices could weaken economic activities and stall recovery from the pandemic-induced recession, which is currently frail. However, the need to carry out reforms in the downstream sector has led to the involvement of labour unions in such discussions before new prices are announced. Nonetheless, given the role of the Nigerian National Petroleum Corporation (NNPC) as the sole importer of Premium Motor Spirit (PMS) currently, its crude oil swap arrangement could support efforts in navigating the current situation.
Going forward, we expect the pendulum to swing between welfarism and fiscal sustainability, especially as labour unions strive for better living conditions amid the absence of fuel subsidy provisions in the 2021 budget. While we do not expect abrupt changes in fuel prices in the short term, we keep our fingers crossed as we await the outcome of FG-Labour talks.