NNPC’s Updated Shift Is The Right Playbook on Petrol Distribution in Nigeria Right Now

“In preparation for the Dangote Refinery’s scheduled petrol loading on Sunday, September 15, 2024, NNPC Ltd. has been mobilizing trucks to the refinery’s fuel loading gantry in Ibeju-Lekki. As of Saturday afternoon, NNPC Ltd. had deployed over 100 trucks, with hundreds more en route.” – NNPC Ltd.

In preparation for the Dangote Refinery’s scheduled petrol loading on Sunday, September 15, 2024, NNPC Ltd. has been mobilizing trucks to the refinery’s fuel loading gantry in Ibeju-Lekki.

As of Saturday afternoon, NNPC Ltd. had deployed over 100 trucks, with hundreds more en… pic.twitter.com/8WTp1ZJx4i

— NNPC Limited (@nnpclimited) September 14, 2024

A very good shift on policy: “The federal government of Nigeria has finalized a landmark agreement with Dangote Refinery, setting the commercial terms for the supply of crude oil to the refinery and the distribution of refined products, particularly petrol and diesel.”

Yes, the decision for Dangote Refinery to sell to NNPC is the right call, and I am happy the energy giant reversed its own policy where it noted that it would allow “market forces” to drive this distribution. In a piece titled “Nigeria’s Mistake of Market-Driven Distribution Pricing When Supply of Inelastic Product (Petrol) is Controlled”, I wrote “So, a village boy from Ovim posits that Nigeria cannot run a market-driven regime on petrol when its supply of petrol remains regulated, restricted and controlled, if we hope to attain parity, without welfare losses, in the market system.”.

Of course, over time, we can allow market forces to drive this. But right now, it makes no sense since Supply remains controlled and restricted.  Under NNPC, Nigeria can manage the vagaries of pricing oscillation better, over leaving the citizens to the mercies of marketers who under “market forces” can do havoc for an inelastic product under short supply.

Comment on Feed

Comment 1: The decision by Dangote Refinery to supply petrol to NNPC Ltd. is a necessary shift in Nigeria’s energy policy, given the inelastic nature of petrol demand. A fully market-driven pricing system would have led to price volatility and consumer harm, especially with restricted supply. By controlling distribution through NNPC, the government ensures price stability and protects consumers. While market forces can play a larger role in the future, this controlled approach is the right move for now to maintain economic stability.

Comment R1: Sir, a lot of people will not completely agree with you on this bcos 1.Controlling distribution through NNPC limits competition, this will hinder market efficiency. A competitive market with multiple suppliers would drive innovation, improve supply chains, and potentially lower prices.
2. By ensuring price stability through a government-controlled entity like NNPC, there’s a risk of artificially distorting prices, possibly reintroducing a form of indirect subsidy, by maintaining tight control, the government is missing an opportunity to liberalize the sector.
3.Relying heavily on a single refinery like Dangote’s and opaque pricing combined with government distribution control, increases systemic risk. If there are disruptions in Dangote’s supply chain or operational issues, the entire country’s fuel supply will be at risk. I stand to be corrected.

Comment R2: Your points are absolutely valid, and they highlight the complexities of balancing regulation with market liberalization in Nigeria’s energy sector.

1. On competition and market efficiency: While it’s true that controlling distribution through NNPC could limit competition in the short term, the current market structure, where supply is restricted, doesn’t lend itself well to efficient competition. Allowing multiple players into a market with constrained supply could lead to price manipulation rather than true competition. Once supply stabilizes, transitioning to a more competitive, liberalized market will certainly drive innovation and efficiency.

2. On price distortions and subsidies: The risk of price distortions and hidden subsidies is real. However, in the current economic environment, where petrol supply is heavily restricted, full liberalization might lead to sharp price increases that could burden consumers. The government’s role here is to manage that transition carefully. A phased liberalization plan, where subsidies are gradually reduced as supply grows and competition increases, would be a more sustainable approach.

3. On systemic risk: Relying heavily on Dangote’s refinery does pose a risk, but this risk already exists in the market, given Nigeria’s heavy reliance on imports and outdated refineries. The short-term objective should be to stabilize local supply through Dangote while other refineries are revamped or new players are introduced. Diversification of suppliers, both local and foreign, remains critical to mitigate the systemic risks you mentioned.

In the long term, a competitive, well-supplied market is the goal, but we must address current supply limitations before fully embracing market-driven forces.

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