Nigerian fuel crisis highlights potential for further shortages as Buhari takes power

01 Jun 2015

Nigerian fuel crisis highlights potential for furt...

On 25 May, the Nigerian government agreed to pay fuel wholesalers USD 1 bn to end weeks of fuel shortages that had resulted in widespread disruption to businesses. Despite the agreement, many companies have continued to report difficulties, and a backlog of supplies mean shortages could continue for at least another week. In the longer term, the crisis highlights the potential for a confrontation between President Muhammadu Buhari and wholesalers as the new administration considers removing fuel subsidies altogether.

Wholesalers’ refusal to distribute fuel due to the government’s alleged failure to pay USD 1 bn in subsidies forced many businesses in Nigeria to operate reduced services. At least four Nigerian banks, including Guaranty Trust Bank, were forced to close early in response to the shortages, citing the difficulty of running diesel generators with insufficient fuel supplies. Additionally, airlines were forced to reduce internal flights and international carriers were rerouted due to a lack of aviation fuel. Arik Air, Nigeria’s largest airline, cut two-thirds of its daily 120 flights. Three of Nigeria’s mobile phone operators said that networks would be degraded if the shortages continued, while Dangote Cement was obliged to shut down several of its operations. The crisis also affected businesses in neighbouring Niger, where companies in the capital Niamey were compelled to suspend operations due to delays in the supply of electricity from Nigeria.

Despite the signing of the agreement, fuel shortages are expected to continue in the coming days, though should gradually improve. A strike by tanker drivers, which also ended on 25 May, has added to the backlog in fuel supplies, delaying the resumption of normal service. Oil company officials cited by the Financial Times on 28 May said it would take between seven to 14 days for services to resume to normal. Africa’s largest telecoms operator MTN Group said on 26 May that it was still struggling to cope with the shortages and that it did not expect business to return to normal for “some time”. The crisis has forced many to resort to the black market, where prices are reported to be around five times the normal rate.

The crisis highlights the enormous challenges President Muhammadu Buhari faces in reforming the oil and gas sector. Despite being a major producer of crude and natural gas, Nigeria depends on imports to meet more than 70 percent of its domestic fuel consumption requirements. To keep prices low, the government pays importers huge subsidies that are widely believed to be exaggerated and fraudulent. Critically, the artificially low prices have removed incentives to provide much-needed investment in Nigeria’s four-state owned refineries. The facilities were built to produce 445,000 barrels per day (bpd) of crude oil, more than enough to meet national demand for around 300,000 bpd, but they are poorly maintained and are currently running at a fraction of capacity.

The latest crisis has added to calls for the removal of subsidies, and Buhari has previously said he plans to review the payments as a priority. However, with the refineries running at such a low capacity, the country will remain dependent on imports for the period immediately after subsidies’ removal. In this eventuality, there is a risk that importers could refuse to maintain supplies without the subsidy payments. There has been some suggestion in Nigerian media that the latest shortages were called for by wholesalers in an effort to demonstrate to Buhari how difficult it would be to remove fuel subsidies and pressure him into reneging on his promise to eliminate the payments.

In the event that importers do agree to continue selling fuel, they would likely only do so at market rates, with the potential for significant price rises and a hostile public reaction. Although the lower global price of oil will protect against this to an extent, there remains the potential for widespread unrest as occurred when the government previously attempted to end subsidies in 2012. Both the Nigerian Labour Congress (NLC) and Trade Union Congress (TUC) announced their opposition to the decision not to allocate funds to service the payments in the 2015 budget, suggesting large-scale strikes could still occur in the event that subsidies are removed. Both unions played a major role in mobilising dissent in the 2012 unrest, resulting in nationwide protests and violence and severely disrupting transportation and businesses.

The probability of further fuel shortages remains high. Although an agreement has been reached with the wholesalers in the latest crisis, there is no evidence of how the Independent Petroleum Marketers Association, which represents the importers, came to the USD 1 bn figure for the payout. Should the body feel threatened during Buhari’s first 100 days, they could feasibly demand more money, leading to further disputes and shortages. Businesses will need to develop contingency plans for potential additional fuel emergencies to ensure business continuity in the event of fuel strikes or shortages. These may include maintaining reserve supplies capable of sustaining operations for several days and identifying non-essential operations that can be shut down during periods of scarcity. Businesses operating in neighbouring countries that are heavily dependent on Nigeria for electricity, such as Niger, will also need to be aware of the continuing volatility of the fuel supply in Nigeria and be prepared for power cuts over the short to medium term.

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