Dickerman: Unintended Consequences of Economic Policy on Markets, Investment Hurt Competition in Petrol 

In this interview with Peter Uzoho, at the ongoing 2023 OTL Africa Downstream Conference in Lagos, the Managing Director and Chief Executive Officer of Pinnacle Oil & Gas Limited, Mr. Robert Dickerman, spoke on challenges facing the downstream oil and gas sector in Nigeria, and proffered some solutions. Excerpts:

ECONOMIC POLICY

Economics can be a treacherous and complex subject, not because the concepts and formulas are complex. For example, most people understand how free markets work. Supply and demand for a product or service share a cause/effect relationship with price. They each affect price, which in turn, affects supply and demand. The goal of this system is for the market to always seek an equilibrium where these forces are in balance. 

Government fiscal policy and monetary policy similarly seem to behave in rational ways, at least in the short term. If a government determines infrastructure requires more direct investment to enable further private sector investment, they can allocate funding, and in theory, the infrastructure assets will grow or be improved. 

Monetary policy for market liquidity is also a known tool to balance supply and demand for currency and cash alternatives; too little, and the economy will slow; too much and it will create inflation, which creates demand for more liquidity and more inflation. 

But these theoretical models make two dangerous assumptions which must be examined: 1) That the short-term objectives of the country align with its long-term objectives; and 2) That corruption is not institutionalized, so that allocation of scarce resources and even scarcity itself is not creating additional inefficiency, income inequality and resentment of the populace. 

SHORT TERM VS. LONG TERM

There are lots of examples where short-term objectives directly conflict with the long-term objectives of the same administration.  When sectors of an economy are in trouble, political forces and outcry seem to all call for an urgent, immediate fix. If the pain is related to poverty, first the policy makers must decide how to address it. Some examples:

Give cash handouts, presumably to the poorest; Reduce the cost of staples such as food, transport or shelter through subsidies or price caps; Cut taxes;  Focus on the development of a productive middle class and job creation. 

Regrettably, only one of these solutions (D), will solve the long-term problem. It’s not easy to do, but not impossible to figure out, either. The challenge is that all paths to improving the standard of living and income broadly take time and a serious, consistent effort over several years. Governments who have focus and determination have a clear edge. 

In the meantime, quelling the public outcry often drives policy makers to pursue short term solutions. I will use just one example from my industry, the downstream oil industry. 

ADVENT OF SUBSIDY 

Starting in 1977, Nigeria’s government decided to subsidize the retail price of petrol to absorb some of the impact of rising crude oil prices, which make up around 80% of the price of petroleum products, including PMS, AGO, jet fuel and cooking gas. 

The problem with palliative measures such as subsidy is that while easy to implement, they are very difficult to remove and resistance can come from not only consumers, but other players who are making unhealthy “extra profit” from the mispriced commodity, in the form of an allocation premium or even smuggling the product to other countries. 

SUBSIDY STILL PRESENT 

Currently, only PMS is still subsidized. This may surprise some people who are aware that our current President has removed the direct subsidy on PMS (which was causing great financial distress to the FAAC, hitting federal and state revenues very hard). The govt also changed the role of the downstream regulator, to regulate licenses, safety, quality and other traditional roles, but not the price of PMS any longer at wholesale or retail classes of trade. 

But the cost of imported PMS has two components, not just one, and the second component is still heavily subsidized in effect. PMS’ landed cost is the product of the international price (including freight) and the cost of FX. Because all oil is traded globally and priced in USD, we cannot import and have a Naira/Litre cost without paying the (N/USD) cost. 

If all market participants were paying the same rate for USD, the wholesale and retail prices would reflect the global price for both petrol and dollars. These prices may be much higher than traditionally, but the forces that drive prices down and maintain supply would work to do both over time. But only one company, the former National Oil Company, has the USD from crude sales at the official subsidized rate. 

UNINTENDED CONSEQUENCES

One unintended consequence of this monetary decision is that it hurts competition in PMS, as the potential importers and marketers in the business cannot compete with a massive cost disadvantage. Without active, healthy market participants, the role of NNPC will grow and take over the downstream business, except for refining, where we assume the Dangote refinery will be commissioned before long. 

An even worse consequence is the message that it sends to international investors, companies, DFIs and banks who want to invest in Nigeria’s largest market. The sharp fall in the value of our currency, combined with these anti-market positions is suppressing investment in equity and debt in all the major sectors of our economy, not just oil and gas. 

SOLUTION

We urgently need responsible policies, support for free markets and a fully convertible currency to gain investment in modern agriculture, in manufacturing, in trades and in future skills such as tech based.

I hope and pray that our leaders and thought leaders are aware of these issues and are working to devise solutions for long term economic growth and stability for Nigeria.