Experts fault fuel price cap, warn of market distortions, smuggling

Downstream oil and gas experts have warned that the proposed government interventions to cap petrol landing costs and regulate pump prices could distort its market, encourage cross-border smuggling and trigger fuel shortages.

The experts, comprising former Chairman, Major Energies Marketers Association of Nigeria (MEMAN), Mr Adetunji Oyebanji; Independent Consultant, Transition Economy and Hydrocarbons, Ian D. J. Brown and Chief Executive Officer of OTL Downstream Development in Africa, Mrs Joyce Akabogu, cautioned that suppressing prices below market realities could undermine private investments in domestic refining, discourage trade financing and threaten the sustainability of petroleum product supply.

They argued that although rising fuel prices have placed pressure on consumers, price controls could worsen the situation if importers, refiners and marketers are unable to recover their costs.

The experts urged the government to maintain a predictable regulatory framework that allows operators to make investment decisions based on transparent and sustainable market conditions.

According to them, coordinated supply management, combined with competitive market conditions, could help ease shortages and reduce the need for prolonged administrative price controls.

They added that achieving sustainable fuel price stability would require regulatory consistency, commercially viable trading arrangements and closer collaboration between the government and industry operators, rather than measures that suppress prices without addressing underlying supply and financing challenges.

Their reactions came following the proposed measure by the Federal Government to cap petrol prices at about N1,350 naira per litre, asking refiners and fuel importers to absorb temporary increases and recoup losses once costs ease.

The Minister of Finance, Taiwo Oyedele had said the measure had become necessary after fuel costs surged to record highs, driven by rising global oil prices amid Middle East tensions.

The government also plans a 30-day fuel discount programme, selling petrol at cost and prioritising public transport to ease pressure from soaring pump

However, Oyebanji, a downstream industry expert, said that forcing petroleum prices away from prevailing market conditions would create distortions across the supply chain.

“Any time you do not allow the true value of a product to reflect economic reality, you introduce distortions into the market,” he said.

The concerns come amid volatility in international energy markets, with geopolitical tensions and rising refined petroleum prices putting pressure on fuel costs across several countries.

The experts spoke ahead of the 20th anniversary of OTL Africa Downstream Energy Week, scheduled to hold from October 25 to 30,  at the Lagos Oriental Hotel.

The experts noted that Nigeria was not alone in experiencing higher energy prices, citing record-high diesel prices in the United Kingdom as an indication of the wider challenges confronting the global petroleum market.

They, however, expressed concern that domestic political pressures, particularly during election seasons, could encourage demands for pump prices that are inconsistent with prevailing market conditions.

According to them, attempts to compel importers to absorb costs above government-determined landing prices could expose operators to unpredictable financial losses and discourage participation in the market.

They also warned that price controls could encourage the diversion of petroleum products to neighbouring countries where marketers could obtain better returns, potentially reducing domestic supply.

Citing Libya as an example, the industry experts argued that heavily subsidised petrol prices had not eliminated supply shortages and long queues in the country.

They said the experience illustrated the limitations of keeping pump prices artificially low without ensuring adequate product availability and an efficient distribution system.

The experts further warned that administrative price ceilings could undermine investments in Nigeria’s emerging domestic refining industry.

They said that private refiners and investors who secured financing based on the expectation of cost-reflective prices could face difficulties recovering production costs and servicing debt if the government imposed fixed retail prices.

Such uncertainty, they added, could weaken investor confidence at a time when Nigeria needs sustained investment in refining capacity, storage facilities and distribution infrastructure to improve domestic fuel supply.

Ian Brown, a member of the OTL Africa Downstream Advisory Board, stressed that petroleum product availability depended significantly on access to trade finance and commercially viable transactions.

He warned that pricing arrangements that made fuel trading unprofitable could discourage commercial lenders from financing imports and other supply-chain activities.

“A reduction in available financing could subsequently disrupt product procurement and distribution, increasing the risk of shortages and supply instability,” he said.

The experts advocated targeted relief rather than reintroducing broad-based fuel subsidies, calling for targeted interventions to protect vulnerable households from the impact of rising energy costs.

They argued that general fuel subsidies often benefit higher-income households and private vehicle owners more than poorer Nigerians, while imposing substantial financial burdens on the government.

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Among their proposed alternatives is direct transport assistance for commercial transport operators, which could help reduce pressure on passenger fares and transportation costs.

They also recommended strengthening social safety nets, including direct cash transfers to vulnerable households, to cushion the impact of higher living costs; and strategic use of fuel reserves to improve supply during periods of market disruption and help moderate price pressures.