Why domestic refineries can’t insulate fuel prices completely amid US-Israeli, Iran war – Yusuf
CHIGOZIE AMADI
The Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf has faulted the widespread expectation that the presence of domestic refineries should automatically translate into significantly cheaper petroleum products admist the ongoing US, Iran – Israelis war.
Dr. Yusuf noted that the economics of refining suggests otherwise, explaining that
crude oil feedstock for refineries is priced using international benchmark prices and denominated in U.S. dollars, irrespective of the location of the refinery.
He argued that domestic refineries in Nigeria procure crude oil at prices that reflect prevailing global market conditions.
“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.
“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.
“Therefore, while local refining can improve supply stability, it cannot completely shield the domestic market from global oil price volatility,” he averred.
On the contrary, the CPPE Chief Executive noted that the main cost advantage of domestic refining lies in reduced freight and logistics costs, stating that importing petroleum products or crude oil involves significant expenses relating to shipping, marine insurance, port handling, demurrage and other logistics charges.
According to him; “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 acknowledged that the most strategic benefit of domestic refining is the strengthening of national energy security, stressing that 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.
“The emergence of significant domestic refining capacity is beginning to change this dynamic. Local refining enhances 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.
“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.
“With the expansion of local refining capacity, the need for large-scale fuel imports has declined significantly. This 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 earnings.
The transition from being a major importer of refined petroleum products to a potential net exporter of petroleum products represents a major structural improvement in Nigeria’s external sector outlook.” Dr. Yusuf affirmed.
Industrial Linkages and Economic Multipliers
On industrial linkages and economic multipliers, he explained that domestic refining generates substantial industrial and economic multiplier effects, adding that
refineries produce a wide range of intermediate products that serve as feedstock for industries such as petrochemicals, fertilizers, plastics, pharmaceuticals, paints and other chemical-based manufacturing sectors.
He maintained that these linkages help strengthen Nigeria’s industrial ecosystem and promote deeper value addition within the economy.
The economiest stated that refining industry also stimulates economic activity across the petroleum value chain, including storage, transportation, distribution, marketing and retail operations, thereby creating jobs and supporting broader economic growth.
He argued that policy prioritising for sustainable refining investment was of strategic importance.
“Given the strategic importance of domestic refining to Nigeria’s energy security, external sector stability and industrial development, it is essential that the policy environment remains supportive of investment in the sector.
“Government policy should continue to encourage domestic refining through a coordinated mix of trade policy, fiscal policy and monetary policy measures. Priority areas should include ensuring reliable crude supply arrangements, strengthening petroleum distribution infrastructure, introducing tariff protection, encouraging additional refining investments, and promoting export competitiveness for refined petroleum products.
“While domestic refining may not completely eliminate the effects of global oil price volatility, it significantly reduces the risks of supply disruptions, conserves foreign exchange, strengthens the balance of trade, and enhances national energy security.
In this regard, domestic refining represents a strategic pillar for improving Nigeria’s economic resilience and long-term energy sustainability.” Dr. Yusuf echoed.
