Nigeria, a significant crude oil producer, is grappling with an unusual paradox. The country boasts substantial oil reserves and recently commissioned one of the world's largest single-train refineries. However, despite these advantages, Nigerians face exorbitant fuel prices, with petrol selling for around ₦1,400 per liter in Lagos and Abuja and up to ₦1,500 in some northern regions. This situation has led to questions about the tangible benefits of Nigeria's oil wealth for its citizens.
The issue is not merely about expensive imported petrol; it's about creating a sustainable energy policy that balances market dynamics, investment incentives, and affordable fuel prices for consumers. The removal of the petrol subsidy in 2023 aimed to address unsustainable practices but has left consumers shouldering the brunt of international price shocks. Experts argue that a new petroleum bargain is needed, one that ensures producers and refiners have incentives to invest while keeping government finances sustainable and providing ordinary Nigerians with some tangible benefits from their country's natural resources.
For decades, Nigeria has followed a peculiar economic model, exporting crude oil and importing refined petroleum products. This approach has involved substantial costs for shipping, insurance, foreign exchange, refining, and distribution. The recent operationalization of the Dangote refinery has altered this dynamic by enabling Nigeria to process a significant portion of its crude domestically. However, the refinery has also highlighted deeper challenges, including the international trading of crude oil and the vulnerability of the naira to exchange-rate movements.
The Dangote refinery's enormous capacity has not solved Nigeria's energy-pricing problem, as refining, transportation, and storage costs remain significant. When international oil prices rise, the economic value of crude also increases, exposing Nigeria to global oil-price shocks. Recent price hikes have demonstrated this vulnerability, with petrol prices climbing sharply despite the refinery operating at full capacity. This situation underscores the need for Nigeria to determine what proportion of its petroleum value should be exposed to the global market and what proportion should be converted into a domestic economic advantage.
A critical step towards addressing this challenge is establishing a transparent domestic crude supply and pricing mechanism. The Petroleum Industry Act includes a Domestic Crude Supply Obligation, requiring producers to make crude available to domestic refineries. There have been improvements in implementation and pricing, with domestic refiners receiving 53.7 million barrels in the second quarter of 2026, representing 97.4% performance against the domestic supply obligation. However, experts suggest that a transparent domestic crude-pricing formula could further enhance the situation.
Such a formula would involve taking a relevant international benchmark, deducting legitimate costs, adding a reasonable domestic supply adjustment, and publishing the formula for independent audit. This approach would allow producers and refiners to make profits while ensuring the Nigerian economy captures the benefits of not importing finished products. The focus should shift from disputes over pricing to discussions on how Nigeria can benefit as a whole from its petroleum resources.
Another crucial reform is the establishment of a Petroleum Price Stabilisation Fund. When global petroleum prices surge, Nigeria receives additional revenue, a portion of which should be allocated to a professionally managed stabilisation fund. This fund would temporarily cushion domestic petroleum prices during price shocks and rebuild when prices fall. This approach differs from the old subsidy regime, as it would not promise permanently cheap petrol but offer protection against extraordinary price increases.
Key points
- Nigeria needs a new petroleum bargain that ensures the country's oil wealth benefits its citizens.
- Establishing a transparent domestic crude-pricing formula is crucial for ensuring fairness and profitability in the petroleum industry.
- A Petroleum Price Stabilisation Fund could help cushion the impact of global oil-price shocks on domestic fuel prices.
