It’s a common misconception that as a major oil-producing nation, Nigeria should benefit from rising global crude prices. After all, when oil prices go up, the country earns more from its exports, right? While that’s true in theory, the reality for everyday Nigerians is far more complicated, and this is where the paradox lies.
Here’s the core issue: despite being rich in crude oil, Nigeria relies heavily on importing refined petroleum products, like petrol (PMS). The country exports crude oil, but due to the lack of sufficient refining capacity, it imports much of its fuel. This means Nigerians are not just buying petrol based on local production, but rather on the global pricing of refined products, which is closely tied to the rising cost of crude oil and the dollar exchange rate.
Let’s break it down:
- Crude Oil is Priced in Dollars: As mentioned earlier, oil is a global commodity traded in U.S. dollars. When the price of crude rises internationally, the cost of producing and buying petrol increases—even for countries like Nigeria, which produce crude but import refined petrol.
- The Dollar and Naira Relationship: With global oil prices rising, the cost of crude in dollars increases. When Nigeria sells its crude, it earns dollars. However, to buy refined products or even to supply crude to local refineries like Dangote’s, payment is made in Naira, at the prevailing exchange rate. The weaker the Naira, the more it costs to buy crude and refined petrol. A higher exchange rate (Naira losing value against the dollar) means higher production costs, and thus higher petrol prices.
For example, if crude oil is $80 per barrel and the exchange rate is N1,660 to the dollar, importing the refined petrol becomes more expensive. Even if crude oil prices go up, the benefit of increased revenue is outweighed by the rising costs of importing fuel and a weakening Naira.
- Higher Crude Prices Don’t Mean Cheaper Petrol: You’d think that with Nigeria earning more from crude oil exports during times of higher global oil prices, petrol prices should stabilise or even drop. But the reverse is often the case. As crude prices rise, the cost of importing refined petrol also increases, and since Nigeria imports much of its refined fuel, local petrol prices climb. Additionally, higher global oil prices push up demand for dollars, weakening the Naira further, which in turn increases the cost of crude in local currency.
For instance, let’s assume global crude prices spike to $100 per barrel. The Nigerian government still has to supply local refineries like Dangote’s, which will buy the crude at the Naira equivalent. If the exchange rate worsens to N2,000 per dollar, Dangote would pay more for the same crude supply, driving up production costs and ultimately increasing the pump price of petrol.
Finally, while rising oil prices may bring in more export revenue for the government, they often lead to higher petrol prices for Nigerians due to the dependence on imports, the devaluation of the Naira, and the cost of refining. Until Nigeria can refine enough of its crude locally, the paradox remains: higher global oil prices mean more economic pressure on everyday Nigerians at the pump.