Why Domestic Refineries Cannot Completely Insulate Fuel Prices – CPPE

Domestic refineries cannot completely insulate Nigeria from rising fuel prices because crude oil used for refining is priced according to international market benchmarks, an economic policy group said Monday.

The Centre for the Promotion of Private Enterprise (CPPE) said in a policy brief that the recent adjustment in petroleum product prices reflects sharp increases in global crude oil prices driven by geopolitical tensions in the Middle East.

Global crude prices have climbed from around $65 per barrel to more than $100 in recent weeks, an increase of over 50 percent, pushing up the cost of refined petroleum products worldwide.

The CPPE said many Nigerians expect that the emergence of local refineries would automatically lead to much cheaper fuel, but the economics of refining means domestic facilities remain exposed to global price movements.

“Crude oil feedstock for refineries is priced using international benchmark prices and denominated in U.S. dollars, regardless of the location of the refinery,” said Dr Muda Yusuf, chief executive officer of the CPPE.

According to the group, even when crude oil is supplied by Nigerian producers or the national oil company, the price is still tied to global benchmarks.

Domestic refineries may also pay a premium of between $3 and $6 per barrel to secure crude supply, further reflecting international market conditions.

Although some domestic crude transactions may be settled in naira under special arrangements, the underlying valuation still reflects the naira equivalent of global crude prices, meaning local refineries do not enjoy a price advantage in sourcing crude.

Because petroleum products are traded in an integrated global market, changes in crude oil prices are typically transmitted to domestic fuel markets in most economies, including Nigeria.

However, the CPPE said domestic refining still provides some cost advantages by reducing logistics expenses.

Importing petroleum products involves costs related to shipping, marine insurance, port handling and demurrage, which can be significantly lower when crude is sourced locally and refined within the country.

The group also noted that domestic refining improves Nigeria’s energy security by reducing reliance on imported fuel and limiting exposure to global supply disruptions.

For decades, Nigeria depended heavily on imported petroleum products despite being one of the world’s major crude oil producers, a situation that often resulted in supply shortages during periods of global disruption.

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According to the CPPE, expanding domestic refining capacity can help stabilise supply, conserve foreign exchange previously spent on fuel imports and create opportunities for Nigeria to export refined petroleum products to regional markets.

While domestic refineries cannot fully shield Nigeria from global oil price volatility, the group said they remain important for improving supply stability and strengthening the country’s energy security.