Local Refineries Won’t Fully Shield Nigeria From Petrol Price Hikes—Economist

An economist has dismissed as wrong impression that the presence of domestic refineries is expected to automatically translate into significantly cheaper petroleum products in Nigeria.

They hinged their argument on the economics of refining as crude oil feedstock for refineries is priced using international benchmark prices and denominated in U.S. dollars, irrespective of the location of the refinery.

According to a policy brief on products pricing dynamics amid global oil market volatility issued by the Centre for the Promotion of Private Enterprise (CPPE) domestic refineries in Nigeria procure crude oil at prices that reflect prevailing global market conditions.

Summarising the pricing module, the Chief Executive Officer (CEO) of the Center, Dr. Muda Yusuf, noted that even crude supplied by local producers or the national oil company is priced using international crude oil benchmarks. Additionally, domestic refineries also pay a premium of about $3–$6 per barrel in order to secure crude supply, Yusuf said.

“Although domestic crude transactions may be settled in naira under special arrangements, the underlying valuation is still largely based on the naira equivalent of global crude prices. This means that domestic refining operations remain substantially exposed to global crude oil price movements with no price advantage in crude procurement.”

He pointed that while local refining can improve supply stability, it cannot completely shield the domestic market from global oil price volatility.

Yusuf, added that the main cost advantage of domestic refining lies in reduced freight and logistics costs adding that, ” Importing petroleum products or crude oil involves significant expenses relating to shipping, marine insurance, port handling, demurrage and other logistics charges. These costs are significantly moderated when crude is sourced domestically and refined locally.”

This advantage becomes particularly significant during periods of global supply disruption, when shipping costs and freight rates tend to rise sharply, he said.

He however noted that the most strategic benefit of domestic refining is the strengthening of national energy security.

“For decades, Nigeria relied heavily on imported petroleum products despite being a major crude oil producer. This paradox exposed the country to significant supply chain risks and frequently resulted in fuel shortages and long queues at filling stations during periods of global supply disruptions.” Yusuf stressed.

On the other he stated that the emergence of significant domestic refining capacity is beginning to change this dynamic and ocal refining has further enhanced Nigeria’s ability to secure petroleum products within its own borders, thereby reducing vulnerability to international supply shocks.
Domestic refining therefore serves as a critical buffer against disruptions in global energy supply chains, he noted.

Additionally he said that domestic refining also has profound implications for foreign exchange management and macroeconomic stability.

“Historically, Nigeria spent between $10 billion and $15 billion annually on the importation of refined petroleum products. These imports constituted one of the largest sources of demand for foreign exchange and placed considerable pressure on the country’s external reserves, and posed a major risk to exchange rate stability.”

He said that with the expansion of local refining capacity, the need for large-scale fuel imports has declined significantly which has helped to conserve scarce foreign exchange, strengthen Nigeria’s external reserves position, and improve the country’s balance of trade.

In addition, domestic refining creates opportunities for Nigeria to export refined petroleum products to regional and international markets, thereby generating additional foreign exchange