Written by Alaba Olusemore and Genesis Obong
The launch of Africa’s largest refinery in Nigeria was met with much anticipation as it promised to alleviate the country’s longstanding gasoline woes. However, a recent announcement by the Nigerian National Petroleum Company (NNPC) has cast a shadow over these hopes.
The NNPC has revealed that it will become the sole buyer of refined products from Aliko Dangote’s mega refinery. This creates a unique situation where a monopsonist (the NNPC) is dealing with a monopolist (Dangote’s refinery). Such an arrangement has significant implications for the production, distribution, and pricing of gasoline in Nigeria.
A monopsony, where a single buyer dominates a market, can lead to lower prices for suppliers. However, in this case, the monopsonist is also a significant player in the market for crude oil, the primary input for refining gasoline. This dual role could potentially limit the bargaining power of the refinery and result in higher prices for refined products.
Furthermore, the NNPC’s decision to become the sole buyer of refined products from Dangote’s refinery could have a negative impact on competition in the Nigerian gasoline market. With fewer players in the market, there is a greater risk of collusion and price fixing.
The implications of this monopsony arrangement for Nigerian consumers are significant. If the price of refined products increases, it will be passed on to consumers in the form of higher retail prices. This could further exacerbate the already high cost of living in Nigeria and put a strain on the budgets of households and businesses.
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In addition to the potential impact on prices, the NNPC’s decision could also have implications for the country’s balance of payments. If Nigeria is forced to import more gasoline to meet domestic demand, it will need to spend more foreign exchange. This could put pressure on the naira exchange rate and contribute to inflation.
The announcement by the NNPC comes as a major setback for Nigerians who had hoped that the new refinery would provide much-needed relief from the country’s gasoline woes. It remains to be seen how this monopsony arrangement will play out, but the potential consequences for consumers and the economy are significant.
Background
CEM reported that the launch of Dangote’s refinery was a major milestone for Nigeria’s oil and gas sector. The refinery has a capacity of 650,000 barrels per day and is expected to meet a significant portion of Nigeria’s domestic demand for gasoline.
However, the refinery has faced some challenges since its launch. In 2023, the refinery experienced technical difficulties that delayed its full operation. Additionally, there have been concerns about the refinery’s ability to source enough crude oil to meet its production capacity.
On Monday, the Dangote Refinery announced that it has started process of petrol refining but quickly added that the NNPC will be the sole buyer when it concludes testing phase of the product. While this decision is a significant development. It raises questions about the government’s strategy for ensuring the country’s energy security and protecting the interests of consumers.
Related: NNPC to Exclusively Purchase Dangote Refinery’s Petrol: A Boon or Bane for Nigerians?
The monopsony arrangement created by this decision could have negative implications for the production, distribution, and pricing of gasoline in Nigeria. Consumers may face higher retail prices, and the country’s balance of payments could come under pressure.
It is essential for the government to carefully consider the implications of this decision and take steps to mitigate any negative consequences. The goal should be to ensure that the refinery benefits the Nigerian people and contributes to the country’s economic development.
