Crude Truths: Energy Expert Explains Why Fuel Prices Stay High Despite Local Refining

• Energy economist Kaseem Abidemi Obakhume has explained why petrol prices remain high despite local refining.
• In an analysis sent to Legit.ng, he cited global crude pricing and forex volatility as key drivers.
• He also warned PMS may sell for ₦1,200 without targeted government relief on crude, logistics, and forex.

Despite Nigeria’s push for domestic refining with the commissioning of the Dangote Refinery and others, pump prices for Premium Motor Spirit (PMS) remain high across the country. This situation has left many Nigerians questioning why petrol remains expensive even though it is now being refined within the country.

Energy economist Kaseem Abidemi Obakhume, in an analysis sent to Legit.ng, outlined the multiple cost drivers and macroeconomic conditions that explain this trend. He noted that while domestic refining reduces some elements in the petroleum supply chain, it does not isolate Nigeria from global pricing dynamics and internal structural challenges.

According to him, one of the main reasons petrol prices remain high is that crude oil, the primary raw material for refining PMS, is still sold to local refineries at international benchmark prices. This includes reference prices such as Brent, WTI, and Nigeria's own Bonny Light. These prices are denominated in U.S. dollars, and local refineries, including Dangote, purchase crude at these global rates.

His words:

“The key reason is that domestic refining is not immune to the dominant cost drivers that shape PMS pricing, many of which remain tied to global and macroeconomic variables."

“Crude oil, the primary feedstock for PMS, is still priced on the international market, even when refined locally. Dangote Refinery and other Nigerian refineries purchase crude at the international benchmark (such as Bonny Light, WTI, Brent, etc.), which are denominated in U.S. dollars."

He furthered that with Bonny Light trading above $75 per barrel as of June 25, 2025, and the naira exchanging at around ₦1,600 to the US dollar, the cost of crude oil alone exceeds ₦120,000 per barrel when converted locally.

Obakhume, however, explained that geopolitical tensions, including conflicts such as the Israel-Iran crisis and the ongoing Russia-Ukraine war, continue to exert upward pressure on global crude prices.

“Current geopolitical tensions, including the Israel-Iran conflict and the ongoing Russia-Ukraine war, have heightened risks in key maritime chokepoints such as the Strait of Hormuz and the Red Sea, driving up both freight and crude oil prices.”

“These pressures are especially significant when crude is imported, as shipping costs, marine insurance, and international port charges further increase the total cost.”

The expert pointed out that refining the crude oil locally also incurs its costs:

“This includes the operational costs of converting crude to PMS. That is, energy use, chemicals, labour, maintenance, and overhead. Typically, refining one barrel of crude costs about $5, or ₦8,000 at ₦1,600/$.”

He added that, on average:

“The estimated cost of refining one barrel of crude is between $3 and $5 (source: IndexBox), which further adds to the retail price of PMS. Also, the removal of subsidies in the deregulated downstream sector means that the prices now reflect the market reality. There is no government intervention to subsidise the costs to the consumers, as was the case with the subsidy regime.”

Forex volatility, transport costs drive prices up - Obakhume

In addition to the crude oil feedstock and refining costs, he disclosed that other supply chain factors contribute to the final pump price.

The energy economist noted that inland transportation from refineries to depots, storage, depot handling, and the cost of distributing petrol to filling stations all add substantial value.

In areas far from the coast or major depots, he said bridging costs “can add between ₦70 and ₦100 per litre.”

Retailers, he said, also apply their margins to cover operational expenses:

“Fuel station operators typically add a regulated or market-determined margin per litre to cover operating expenses (salaries, rent, power, POS charges) and profit. Varies around ₦30–₦50/litre depending on location and station ownership model.”

Furthermore, the expert emphasised the impact of the naira's volatility.

“Foreign exchange volatility is a major factor. Since many inputs for the operation of the refinery are imported, the naira–dollar exchange rate fluctuations result in higher naira costs of production, even though the refining is done locally. It is only when Nigeria has a stable currency and a pricing mechanism for crude oil that applies only to domestic refiners that the local refining will result in lower PMS prices for the consumers.”

He also referenced existing regulations such as the 1% levy imposed by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), as stipulated in the Petroleum Industry Act (PIA) of 2021.

While PMS is exempt from Value Added Tax (VAT), this NMDPRA levy is calculated on the wholesale price and contributes to the final cost borne by consumers.

Putting all these together, Obakhume explained that a typical litre of PMS costs around ₦910 when broken down by crude cost, refining, distribution, taxes, and retail margins.

NB:

• A barrel of crude produces about 170 litres of petroleum products. Gasoline (also known as PMS or colloquially as petrol) makes up approximately 45% of these white products.
• 1 barrel of crude oil = 45% of 170 litres = 76.5 litres of PMS
• At $75/bbl., the cost to produce 1 barrel of PMS (or 76.5 litres of PMS) = 45% of $70 = $33.75
• Assuming a total refining cost of $5, then the cost to refine 1 barrel of PMS = 45% of $5 = $2.25

He estimated that the pump price will likely remain between ₦750 and ₦1200 per litre in the coming months if crude prices stay between $60 and $100 per barrel and the naira trades between ₦1500 and ₦1600 per dollar. Inland areas, he said, will continue to experience the higher end of the range due to increased logistics costs.

He, however, noted that “strategic interventions” by the federal government could moderate this trend. These include providing price relief on crude oil feedstock for domestic refiners, improving foreign exchange liquidity, and offering targeted support for distribution and logistics. Unless such measures are introduced, the combined effect of global oil market volatility, exchange rate instability, and internal inefficiencies will continue to keep pump prices elevated.

Obakhume concluded that while local refining offers potential long-term benefits, it cannot by itself insulate Nigeria from broader economic forces.

“Until these are addressed holistically, particularly exchange rate management, domestic energy infrastructure, and crude pricing policy, PMS prices will continue to be driven by both local inefficiencies and global pressures,” he said.

Experts urge support for local refineries

Meanwhile, Legit.ng reported that the Conference of Energy & Finance Consultants urged oil regulators to protect crude supply for local refineries.

The group warned against halting supply to Dangote and others, saying it benefits fuel importers and risks sabotaging Nigeria’s refining ambitions.

They also called on the National Assembly to act fast, investigate imports, and ensure uninterrupted crude delivery to all domestic refineries.

Source: Legit.ng