War in the Middle East and our economy, by Adekunle Adekoya

IT is no longer news that the United States, in coalition with Israel has been bombarding Iran. It is also no longer news that the aerial bombardments targeting Iran’s military and defence infrastructure claimed the life of the country’s leader, Ayatollah Ali Khamenei. Again, it is also not news that the conflict has triggered spikes in the price of crude oil in the international market. These price hikes has impacted the economy of Nigeria, with petrol adding between N450 to N600 at the pump, depending on which part of Nigeria you are. What will be news is when the conflict will end, and normalcy restored, to the extent that crude price will revert to pre-conflict levels.

To those of us who are aloof about happenings in other parts of the world, this is wake-up time. Abuja, our capital is at least 5,352 km away, by air or if you opt to drive, some 8,975 km. Similarly, Lagos, our commercial capital is 5,861 km away from Teheran by air or 9,659 km by road. Quite a haul. That conflicts thousands of kilometres away from us can have so much immediate and remote impacts on our daily lives here indicate how hugely the world has shrunk and has become interconnected and interdependent.

Oil prices are up because the body of water called the Straits of Hormuz through which at least 20 per cent of global crude shipping passes is firmly in the theatre of war. Shipping companies are having to divert to longer routes, with higher costs in terms of travel time and insurance. You probably already know all of these, but real reason this conflict is impacting our domestic fuel market is because of the way things are with us.

First, we have no functioning refinery; in the not too distant past some people who opted to trade and joke with our collective destinies played a fast one on all of us, from the President to the commonest man. They did a kick-start sakamanje at the Port Harcourt and Warri refineries and told us that they were back to life, and are now refining crude. The joke lasted a few days and cost us, as a country, some US$7.5 billion. Perpetrators of that sakamanje, if they did it in a country like China, would have faced a firing squad, but are cooly enjoying the proceeds of that sakamanje in cushy residences in foreign cities. 

At the end of the sakamanje, we were all thankful that a businessman had opted to invest in the establishment of a refinery. That refinery, which ought to be the game changer in terms of fuel energy security became the object of serial machinations by peoples in high places. First, there was the allegation that the refinery was turning out sub-standard fuel. After, the next issue was that the refinery could not get crude locally. It took a presidential intervention to get crude allocation for Dangote Refinery. Normally the refinery, a 650,000 bpd affair needs 12 cargoes of crude. Crude cargoes range from 500,000 to over 2 million barrels, depending on the vessel size. Thus, there are ULCCs (Ultra-large Crude Carriers) and VLCCs (Very Large Crude Carriers), which carry more than three and two million barrels of crude over long distances respectively. There are also the Suezmax, which carries one million barrels, and Aframax, which takes between 600,000-800,000 barrels. As of now, Dangote Refinery gets only five of the 12 cargoes it needs locally. The remaining seven are imported. That is one explanation for the impact of conflict on domestic fuel prices. The second leg of it is that crude is sold to Dangote Refinery in Naira at dollar prices. So the local refiner pays naira equivalent of the dollar price of the crude it gets. As I write this, Bonny Light Crude, our own blend, is selling for US$90.82 in the global market

As far as I’m concerned, there should be price differentiation for local refiners as opposed to international buyers. This is because the crude is ours, and it is being refined for sale to our people. Since it is being paid in Naira at dollar cost, the cost of crude will also be impacted by prevailing rates in the forex market. The NNPC, by government policy, gets 445,000 barrels per day to refine in local refineries for domestic consumption. That crude allocation was sold in the global market and the proceeds used to import refined products when our refineries died one after the other. Right now, the value of 445,000 barrels of crude is being used to pay the salaries of workers employed by four refineries that have not refined one drop of crude in years.

All of us, particularly those in government, need to pray that this conflict ends fast and situation normalises as soon as possible concerning oil. Ah, I don’t think people in government will do that. This is because government will earn more money as crude prices rise higher. It means there will be more money to loot and waste on white elephant projects. And since they don’t care a hoot what happens to those they are ruling, paying as much as N2,500-N3,000 per litre of petrol is nothing, despite the fact that the gains made by the economy are being eroded by skyrocketing prices of fuel energy. In short, let Nigerians who love themselves pray to God to minister onto Donald Trump, Benjamin Netanyahu, and Mojtaba Khamenei to sheathe their swords and call a truce, before our economy heads for Golgotha. TGIF.

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