Petrol Price Hikes: Dangote Is Not the Villain, He Is Operating Within Business Reality

The pricing of petroleum products is determined by several key components:

1. Crude Oil Cost: Crude oil accounts for about 50-60% of the total cost of refined petroleum products. The cost also depends on the type and grade of crude oil used. Higher-quality crude grades means higher prices, which consequently increase the cost of refining and the final product price.

2. Refining Expenses: These include all operational costs incurred during the refining process. Such as additives, catalysts, skilled human capital, utilities (power, water, steam), maintenance, and other operational requirements needed to convert crude oil into refined petroleum products.

3. Capital Cost Recovery: Refineries require significant capital investment to construct and operate. The cost of building the refinery must be recovered over time through the sale of refined products. Highly complex refineries, like the Dangote Refinery, built at over $20bn, means higher capital recovery components must be embedded in every litre of refined product sold. The recovery period for such investments is also longer.

4. Profit Margin: Every business operates to generate profit, particularly during periods when loans are being repaid and capital investments are being recovered. Profit margins are necessary to sustain operations, repay loans obligations, and deliver returns to shareholders. These margins vary depending on market conditions and operational realities.

5. Petroleum product prices are also influenced by government taxes, statutory levies, regulatory fees, and other fiscal obligations, all of which add to the final market price of the products.

Dangote Refinery and the Pricing Dynamics

6. Like most refineries around the world, the Dangote Refinery also relies on global market-based pricing benchmarks, particularly those provided by Platts. These benchmarks incorporate many of the pricing components I mentioned above.

7. Platts is a globally recognized provider of energy and commodity market intelligence and benchmark price assessments. It supplies independent pricing data for markets such as crude oil, refined petroleum products, and natural gas, while also providing market news, analysis, and regulatory insights to industry participants.

8. When crude oil prices rise significantly, as seen now with prices rising to above $110 per barrel due to the tension in the Middle East, the cost of refined products such as Premium Motor Spirit (PMS) inevitably increases because crude oil remains the dominant input cost.

Our Crude-to-Naira Arrangement?

9. Nigeria’s Crude-to-Naira arrangement with the Dangote Refinery is designed primarily to reduce pressure on foreign exchange demand. However, crude supplied under this arrangement is still priced at international market equivalents on every market day. The economic implication therefore remains largely the same, although it reduces pressure on the naira.

10. Dangote Refinery is a business entity and must do business as one. Crude is a global commodity and must be treated as one. Exceptions in global commodity transactions is very minimal as there are more external than internal factors for decision.See more. .

Dont blame Dangote.