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N11tn Petrol Subsidy, Illogical

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  • N11tn Petrol Subsidy, Illogical

Terminally ill refineries, unsustainable imports, intermittent scarcity and a notoriously opaque accounting system; things might not get better anytime soon for Nigeria’s petroleum industry, let alone the economy.

It is why the Federal Government has spent more than N10 trillion on petrol subsidies in the past six years, the Senate recently stated as it approved another subsidy payment of N129 billion to 67 oil marketers. This is a wasteful hole that ought to be sealed swiftly.

In all, the Senate Committee on Downstream Petroleum Sector estimated that it cost Nigeria N11 trillion to fund petroleum subsidies in six years. For a major crude oil producer, this is an irrational economic model. Nonetheless, this is not new because the country’s refineries, with 445,000 barrels per day name-plate, have been obsolete for decades. In turn, the country has depended heavily on imports to sustain itself. How ridiculous.

Until the 1990s, the imports were minimal, but the refineries progressively degenerated due to mismanagement, cronyism and corruption. Predictably, massive imports ensued, which the Olusegun Obasanjo, the short-lived Umaru Yar’Adua and the Goodluck Jonathan administrations failed to tackle. Amidst all this, corruption and product scarcity thrived.

Undeniably, the sleazy bazaar reached its zenith on Jonathan’s watch. Import contracts were dished out to shell companies and the Peoples Democratic Party’s cronies. In one unforgettable episode, a committee discovered that the Accountant-General of the Federation’s office made 128 subsidy payments of N999.99 million in the space of 24 hours between January 12 and 13, 2011.

Subsequently, the number of petrol importers rose geometrically from 19 in 2008 to 140 in 2011. Most of the products were supplied only on paper; many importers got paid for products never imported. Products loaded in tankers did not reach their destination; others were smuggled to neighbouring countries. In total, the Jonathan government paid out N2.57 trillion as subsidies, 900 per cent more than the N245 billion in the budget. Bizarrely, that was half of the total federal budget for 2011. Rightly, when that administration raised petrol prices in January 2012, it triggered a backlash.

It is unfortunate that the Muhammadu Buhari government is enmeshed in the same subsidy folly in the guise of “under-recoveries.” On assuming power in 2015, the President had declared that he would stop petrol subsidies and rehabilitate the refineries. On both counts, he has failed woefully. This is incomprehensible: Buhari campaigned for office promising to enthrone financial rectitude; his experience as oil minister during Obasanjo’s military dictatorship in the late 1970s has been of no use.

These days, it is the public entity, the Nigerian National Petroleum Corporation, that shoulders the burden of importing petroleum products. Absurdly, the oil ministry regulates the price of petrol, capping it at N145 per litre though it has deregulated diesel imports. By fiat, the NNPC solely determines the quantity of petrol being consumed daily. This is anti-competition, locking out a chunk of business organisations in the downstream sector.

Moreover, it is subject to confusion and opacity. First, the NNPC labels whatever it spends on subsidies “under recovery” in an attempt to bypass scrutiny of subsidy payments by the National Assembly. This is a weird and illegal accounting system, which landed Jonathan’s administration in hot water in 2012. Second, Nigeria’s daily consumption has creased up astronomically. From about 35 million litres in 2011, the NNPC claims that Nigerians now consume over 53.2 million litres daily. This is suspicious. Instructively, the regulator of the downstream is also the sole importer.

In all this, the economy suffers profoundly. Too much money is being wasted on importing refined products and subsidy payments. That N11 trillion would have gone a long way in completing the 11,886 abandoned federal infrastructure projects compiled by the Presidential Projects Assessment Committee in 2011. There is yet the issue of agonising periodic scarcity. Unwittingly, the regulator has excluded the investors who would have built their own profit-making refineries. This is wrong.

In other oil producing countries, high premium is attached to refining for domestic consumption and exports. Aiming to double its refining capacity, Angola’s Sonangol has recently signed a partnership with an independent, United Shine, to construct a-60,000 barrels per day refinery in its Cabinda province. In 2013, Singapore (which produces very little crude), was refining 1.1 million barrels per day, stated the Organisation of Petroleum Exporting Countries. Indeed, OPEC estimates that by 2021, refining by member countries of Kuwait, Saudi, Venezuela, Ecuador, Angola, Iran, Algeria and the UAE will reach 13.3 million barrels per day with an investment profile of $66.5 billion.

In contrast, Nigeria’s four moribund refining entities run at a loss, with scant hope of resuscitation. This is illogical. An NNPC report stated that in Buhari’s first term, the refineries lost over N231 billion. A note by BudgIT, a non-profit, estimated in its “Inside Nigeria’s Local Refineries” report that the refineries incurred a combined loss of N159 billion in 2018, with capacity utilisation at a mere 8.6 per cent. This is not a business model that can succeed, which should provoke serious thinking in the Buhari government.

To show seriousness, Buhari should end the conflict of interest in the industry. Henceforth, the President should cease to be the oil minister. The Petroleum Resources Minister, who also heads the NNPC board, should not head the boards of other agencies under the NNPC. This way, these other agencies can act independently.

Crucially, Buhari should privatise the refineries. Holding on to them is a massive disservice to the national economy. Shell Petroleum constructed the first refinery in partnership with the government. Using this model, the Buhari government can enter into partnerships with the oil majors to build new refineries. With a modern rail network, products can be transported to all parts of the country. At the same time, this policy will encourage those acquiring licences to begin work on their refineries and save the economy from ruin.

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

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Gold Hit 26.8% ROI YTD, the Highest Increase in Value Among Top Assets

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Gold Delivers 26.8% Return on Investment Year-t-Date

As the world’s earliest form of currency, gold has long been considered a reliable store of value. Unlike banknotes, stock, or other assets, the precious metal managed to preserve the investors’ wealth throughout the years, especially in times of turmoil in the financial markets.

According to data presented by AksjeBloggen, gold hit a 26.8% YTD return on investment, the highest increase in value among top assets.

Gold Return Rate 8.5% Higher than in 2019

Investors tend to focus on gold in times of market volatility, considering it to be a ‘safe haven’ in crises like the coronavirus. In 2019, the value of gold increased by 18.3%, revealed the Blackrock data. The precious metal continued the impressive performance in 2020 with a 26.8% YTD return, 8.5% more than in 2019.

Statistics show that last year, the S&P 500 index increased in value by 31% but was outperformed by Nasdaq, which grew by 35.2%. The MSCI Europe index rose by 26.1% in 2019. China A-shares followed with a 22.3% ROI.

However, the COVID-19 crisis had a massive impact on popular assets, causing a sharp fall in their values during the first half of 2020. The Blackrock data revealed the Nasdaq YTD return hit 23.9%, 11.3% below the 2019 performance. China A stocks reached 10% ROI YTD, much under the 22.3% return in 2019.

Statistics show the S&P 500 index had an 8.4% value increase in the nine months of 2020, almost four times less than in 2019. MSCI Emerging Market Index reached a 4.9% value increase in the same period, compared to 13% in 2019.

The Blackrock data show that crude oil, FTSE 100, and MSCI Europe index witnessed the most significant drop in the nine months of 2020, with their values falling by 34.6%, 22.4%, and 11.5%, respectively.

Global Demand for Investment Gold Surged by 100% YoY

Although many investors value gold as an important portfolio asset, the economic downturn caused by the COVID-19 pandemic led to a surge in global demand for the precious metal.

The World Gold Council data showed the global demand for investment gold increased significantly since the beginning of the year.

In the fourth quarter of 2019, it amounted to 279.2 metric tons. By the end of March, this figure jumped by more than 93% to 539.6 metric tons. The increasing trend continued in the second quarter of the year, with global demand for investment gold hitting 582.9 metric tons, an almost 100% jump year-over-year.

Statistics indicate the global demand for gold for investment purposes hit a record-breaking 1,152 metric tons in the first half of 2020, the highest figure so far.

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Oil Prices News: Oil Gains Following Drops in US Crude Inventories

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Oil Prices Gain Following Drops in US Crude Inventories and OPEC High Compliance Level

Global oil prices extended their 2 percent gains on Thursday after data showed U.S crude oil inventories declined last week.

The price of Brent crude oil, against which Nigerian oil is measured, gained 0.2 percent or 7 cents to $43.39 a barrel as at 12:10 pm Nigerian time. While the U.S. West Texas Intermediate (WTI) crude appreciated by 8 cent or 0.2 percent to $41.12 barrels.

Oil prices extended their three days gain after the American Petroleum Institute said the U.S crude inventories declined by 5.4 million barrels in the week ended October 9.

The report released after the market closed on Wednesday revealed that distillate stockpiles, which include diesel and heating oil, declined by 3.9 million barrels. Those stated drawdowns almost double analysts’ projections for the week.

Much of the fall is due to the effects of Hurricane Delta shuttering U.S. production in the Gulf of Mexico, and as such, will be a transitory effect,” said Jeffrey Halley, senior market analyst, Asia Pacific at OANDA.

“Therefore, I am not getting too excited that a turn of direction is upon markets, although both contracts are approaching important technical resistance regions.”

Also, the report that the Organization of the Petroleum Exporting Countries (OPEC) and its allies, referred to as OPEC+ attained 102 percent compliance level with their oil production cuts agreements bolstered global oil outlook. Suggesting that demands for the commodity are likely not growing and could drag down prices in few weeks, especially when one factor in the reopening of Libya’s Sharara oil field, workers returning to operation in Norway and the Gulf of Mexico.

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Oil Prices Gain on Tuesday Despite Expected Surge in Global Oil Supplies

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Oil Prices Rise Despite Expected Surge in Global Oil Supplies

Oil prices gained on Tuesday despite Libya opening Sharara oil field for production, labour in Norway reaching an agreement with oil firms to return back to work and oil workers in the U.S returning to the Gulf of Mexico region after the Hurrican Delta.

Brent crude oil, against which Nigerian oil price is measured, gained 1.77 percent to $42.46 per barrel as at 11:15 am Nigerian time on Tuesday.

While the US West Texas Intermediate (WTI) crude oil gained 2 percent to close at $40.22 per barrel.

The improvement in prices was after oil prices plunged as much as 3 percent on Monday following a resolution reached by Libyan rebels and government to commence oil production at the nation’s largest oil field, Sharara Oil Field.

This coupled with labour agreement with oil firms in Norway was expected to boost global oil supplies and eventually weighed on prices and disrupt OPEC+ production cuts strategy.

However, prices surged after Nancy Pelosi said she would commence talks on $1.8 trillion stimulus package following President Trump’s return to the White House after he was rushed to hospital following a positive COVID-19 test.

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