Hi guys, I've been seeing this question asked in many quarters and i just thought i shed some light on how subsidy is calculated and how the 2011 subsidy amount was arrived at, its just a simple calculation of volume and price
Products subsidized in Nigeria - PMS and Kerosene
Demand
PMS - 35 million litres /day
Kero - 8 million litres/day
Prices
PMS Open market Price (OPM) - N145/L ( this number varied from N125 - 165 in 2011 because of crude oil price in 2011)
Kerosene Open Market price - N150/L (this also varies)
Subsidy Per Liter
PMS Subsidy per liter = 145-65 = N80/L
Kerosene subsidy per liter = 160-50 = N110/L
Subsidy Per day
PMS = N80/L* 35,000,000 L = 2,800,000,000/day = 2,800,00,000*365days = 1,022,000,000,000 = N1.022 Trillion/year
Kero= N110/L * 8,000,000 L = 880,000,000/day = 880,000,000*365days = 321,200,000,000 = N321 Billion/Year
Total Subsidy
PMS subsidy + Kerosene Subsidy =N 1,022 billion + N321 Billion = N1.342 Trillion
This is a very good estimate on how 2011 was arrived at.
Why the change of subsidy value from previous years, the average crude price for last year was largely above $100/bl, coupled with exchange rate differentials and increase in energy demand due to population growth, GDP growth & increase in smuggled products across Nigerian borders.
I hope this helps
I modified the posting based on questions asked
Example of Subsidy Calculation for August 2011 - A Bit More Detailed
Let me give more clarifications on how the Open Market Price (OPM) which determines the subsidy per liter is arrived at. The OPM is the end price that arises after all the players in the product value chain are being compensated. It is PPPRA that sets the benchmark compensation (margin) for each player in the value chain. Below is actual detail computation of Subsidy for the month of August 2011 for PMS showing the players in the value chain, their margins and thus the Open Market price and finaly the subsidy per liter.
PMS Template August 2011 (from PPPRA Website)
Price Element/Player Naira/Litre
PMS International Price 123.00
Freight 3.23
Lightering 3.94
NPA 0.60
Fiancing 2.91
Jetty 0.80
Storage 3.00
Retailers 4.60
Transporters 2.99
Dealers 1.75
Bridging Fund 5.85
Marine Transport 0.15
Admin 0.15
Final price (OPM) 152.97
Pump Price 65.00
Subsidy 152.97-75 = N87.97/L
This implies Subsidy for the month of August for PMS only will be based on 31 days in August with 35 million Litre of PMS per day
= N87.97/L*35,000,000L/day*31 days = N95,447,450,000 ie N95 Billion Naira for August 2011 for PMS only.
Computations for Kerosene are similar, the major difference will be the international Kerosene price and the Pump price of Kerosene, and volume of 8 million litres per day
Brief Explanations of the Cost Elements/Players
PMS Import Price - this is the international price for PMS for a refinery offshore(mostly Europe) as quoted on Platts. Also includes the traders margin.
Freight - Cost of shipping it to Nigeria
Lightering - Cost of Ship to ship transfer to bring the product to berth at the Jetty. It includes demurrage allowance of 10 days
NPA - Nigerian port authority charges
Financing - Interest incurred by the traders or marketers on money they got from bank to buy the product
Jetty - provides a platform to pipe the product from the ship to the depot on the land
Storage - Cost of storing at the depot
Retailers - This is the person buys bulk from depot and takes to a dealer or his own petrol station
Transporters - sure u know these guys, they drive the truck from the depots to the petrol station
Dealers - the person running the petrol station
Bridging Fund - this pool is created to compensate longer haulage trucks with trucks travelling shorter distances
Marine Transport - provision for marine transport
Admin - administrative charges
Final price - this is the open market price and is the sum of all these on top
Pump Price - this is the regulated price at the pump price which was N65/L.
Subsidy - THis is the difference between the Open market price (real cost of delivering the petrol at the pump) and the pump regulated price of N65/L.
Anwser to a question on Why Smuggling increased over the years from 2009
This is how it works the Higher the difference between the Open market price (OPM) and your regulated official selling price of N65/L, the higher the opportunity/incentive for arbitrage (arbitrage is the practice of taking advantage of a price differentials between two or more markets). So what this means is that the incentive for arbitrage has increased over the years. (an incentive is any factor (financial or non-financial) that enables or motivates a particular course of action (smuggling))
Year OPM(N/L) Pump Price Subsidy(N/L) Incentive
2009 90 65 25 1.0
2010 112 65 47 1.9
2011 145 65 80 3.2
From the above looking at the subsidy(N/L) column, you can see that the incentive/opportunity for arbitrage has more than tripled from N25/L in 2009 to N80/L in 2011 (320% precisely). As the incentives (rewards) increase more investors (smugglers) take the risk of smuggling to take advantage of the arbitrage, its a Risk/Reward thing. This naturally pushes up the demand volumes that could be diverted to markets of economic advantage. The lower the incentives the lower the investors that will take the risk, the higher the incentives, the more the investors that will take the risk. Its is basic economics.
You can cross check some of these figures from PPPRA, website its public information though they might have removed some of historical numbers due to the change in the pricing regime. You might also need to process the information to make more sense of it.
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