Economics of folly

Sanya Oni

Trust most Nigerians to treat the news of Nigeria’s stranded crude cargoes as just another phase of the current crisis that would sooner pass given what we know of the instability in global world prices. As in previous occasions when the country has had to endure the pang of low oil prices for as long as it lasted, again trust Nigerians to resort to doing what they do best in such circumstances – mount supplications at heaven’s gate until recovery happens! This time, even without Mele Kyari, the NNPC helmsman breaking the news about some 50 cargoes of Nigeria’s Light Bonny said to be stranded on the high seas since last month, Nigerians already suspect that the answers to the prayers won’t come easy; not only is the country headed for a long dark night but a future truly pregnant with uncertainties particularly with countries still reeling from the wave of the Covid-19 pandemic.

Nigeria optimistic of price rebound after crude sold for $12’. That was the headline in Nigeria’s online medium Premium Times of April 19 soon after the price of Nigeria’s Bonny Light hit the rock bottom at $12 a barrel – a price said to be well below the cost of production put at about $22 a barrel and most certainly below $30 –the newly adjusted reference price for the 2020 budget.

Optimism? And at this time? The medium quoted Kyari as premising his optimism of oil price rebound on the intervention by OPEC and its allies. We are here talking of a time when leading industrial economies are yet to figure out a way to re-open their economies? Talk of bringing the old worn template underlain by fixations with prices and the perennial tinkering with production all in the name of keeping oil prices stable; the likes of Kyari will sooner learn that the global economy would, just like the typical patient after suffering serious bout of anaemia would require careful nourishment to get back on her feet, require far more than routine doses of production cutbacks to recover!

Which is why I believe that the country, at this time, needs a refresher of sorts on the humongous costs of the road not taken. Here, most Nigerians would probably consider the $12 price of our crude a disaster. Fewer unfortunately, suffer the indulgence of examining the so-called prices of the crude vis-à-vis its value at the end of the product chain! Had they bothered to undertake the exercise, they would most likely have considered the current regime of crude trade as nothing short of treasonable!

Let me illustrate. At N420 to the United States’ dollar, $12 for Nigeria’s Bonny Light comes to N5,040 per barrel!

But really, how much is a barrel of crude worth? To answer to the question, I borrow from an article – In a Barrel of Oil from energyeducation.ca, an online publication of the University of Calgary.

Permit me to quote extensively from the article if only to illustrate the humongous costs of the folly by an indulgent nation: “A single barrel of crude oil – once it has been refined – can yield a large number of different, useful petroleum products. The ability to obtain products like gasoline, asphalt, and propane from a single product is part of what makes refining such a vital process. The refining process separates these different hydrocarbons in a number of different ways, one major way being separation by boiling point in a fractional distillation tower”.

Hardly a rocket – you say. I agree. But then, the economics is even more illuminating.

The publication goes on to say: ‘When crude oil is input into a fractional distillation tower, there is an overall increase in volume of product. If a single barrel of crude oil – equal to about 159 litres – were refined, the volume of the final products is actually greater than the volume of the initial crude oil. In fact, 170 litres of refined petroleum products can be obtained from 159 litres of crude oil. There is an increase in volume through the refining process as a result of an effect known as processing gain. Processing gain simply refers to the volume by which output increases compared to input that occurs as a result of processed petroleum products having a lower specific gravity than the initial crude oil. This results in the final products “taking up more space” than the initial crude oil.”

The publication breaks down the economics in finer detail. From a single barrel, gasoline yield is put at 73 litres; for Automotive Gas Oil – it is 40 litres, while kerosene-type jet fuels make up about 15.5 litres. And that is aside other derivatives like petrochemical feedstock used for a variety of different products from pharmaceuticals to plastics which also make up 4.2 litres.

Yet, there are still  other products, like still gas, petroleum coke, heavy fuel oil, asphalt, lubricants, aviation gasoline, naphthas, and waxes, which although make up a fairly small amount of the final product, are nonetheless widely useful in a number of different applications.

Now you know why America will not flinch when oil prices goes minus zero? Not only are there enough of white products to make up for lost revenue; the endless flow of other ancillary products to other critical sectors are such that would provide mitigation for the slump in oil prices!

In our case, we routinely trade off the crude for a morsel of a few dollars.  In the end, we deploy a huge chunk of it to import refined products! And when oil prices collapses as it cyclically does, we resort to measures that are revealing of how little thinking is going on! As if by careful programming, all the elements needed for the uptake and sustenance of a truly integrated economy are not only denied us, we are expected to count on the mercy of our “friends” both for fuel and vital industrial raw materials!

By the way, the same trade template is true of cocoa, timber, cassava – name it! Ever heard of a country so obsessed with the present that the thoughts of a future comes so distant place?

That is our own dear Nigeria; a classic case of multiple whammies!

Unfortunately, that is how things have been and perhaps will remain in the foreseeable future – Covid-19 or not!

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