Many Nigerians struggle to understand why the dollar is always mentioned in discussions about petrol (PMS) pricing, especially when the country produces crude oil and now has a functional refinery.
The key point to grasp in crude oil pricing is that the price of crude oil is driven by global supply and demand — because it is a global commodity, it is traded predominantly in U.S. dollars. While countries can decide to trade using their local currencies, the price must always be pegged to the dollar value of crude oil. Here’s a practical example:
Assume that crude oil is priced at $80 per barrel today, and the Nigerian government supplies 395,000 barrels to the Dangote Refinery. Dangote would be required to pay the Naira equivalent of 80 x 395,000 barrels ($31,600,000). At the current exchange rate of N1,660 to the dollar. This means Dangote Refinery will pay about N52.46 billion.
The cost of crude oil, which is a raw material, directly influences the production cost, refinery price, and ultimately, the pump price of petrol. Now, consider if the exchange rate drops to N1,000 per dollar for the same transaction. Dangote would pay N31.6 billion for the same amount of crude—a reduction of 40%. This lower cost would result in lower production expenses and, eventually, a lower pump price.
For perspective, if the pump price of PMS at filling stations is N1,000 per liter when crude is bought at N1,660 per dollar, the price would drop to around N660 per litre if the crude is bought at N1,000 per dollar.
Basically, the price of PMS is tied to the value of the Naira: as the Naira strengthens, prices drop, and as it weakens, prices rise.
