The end users are the worse for it when diesel continue to rise in an ailing economy. What are the implications on market forces?
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As the organised labour and the Federal Government continue their engagement on what the appropriate price of petroleum motor spirit (PMS), otherwise known as petrol should be, oil marketers in the country recently raised the price of diesel to between N340 and N350 per litre, up from between N280 and N290.
In fact, findings show that the recent increase was caused by the increase in global crude oil prices at the international market.
And with crude oil price moving northward (hit $86/barrel this month), diesel price in the country may continue to go up, experts have said.
In July 2020, the price of diesel across Nigeria was between N238.43 (mostly in the North-East) and N212.39 (mostly in South-East), while in January 2021, the price increased to N241.24 at many filling stations in the North. However, the price came down in the southern part of the country as diesel was sold at N210.17.
In February, some filling stations in Lagos increased diesel price to N250 per litre, while many others sold it between N220 and N245 per litre, according to media reports.
Though the price of diesel, otherwise known as automotive gas oil, had long been deregulated, meaning that marketers have the right to fix price according market forces, the recent increase caught many manufacturing companies unawares.
This is because they are already grappling with high production costs and low sales. The manufacturers rely mostly on the automotive gas oil to power their generating machines amid lack of reliable power supply from the national grid.
When gas prices rise, it can be a drag on the economy—impacting everything from consumer spending to the price of airline tickets to hiring practices.
Gas is an important input for transportation, which directly impacts households as they drive, but also businesses that rely on logistics and transportation chains around the globe.
If discretionary spending is hampered by higher gasoline costs, it can have knock-on effects throughout the broader economy.
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A side effect of high gas prices is that the discretionary spending of consumers drops as they spend a relatively larger portion of their income on gasoline. Higher prices also mean that shoppers will tend to drive less—including places like the malls or shopping centres. Indeed, academic and industry studies provide support for this, showing that driving miles are directly tied to gas prices.
While shoppers may not drive, they do switch to online shopping more when gas prices rise. According to Marin Software, searches for online shopping increase dramatically along with an increase in gas prices.
However, all retailers are further squeezed as they are forced to pass on the higher expenses they also incurred, which are associated with increased shipping costs to consumers. Anything that has to be shipped or transported—from apples to electronics—could cost more as gas prices rise.
This is especially true for products, or components for products that are manufactured overseas. Likewise, many products that contain plastics or synthetic materials are based in part on petroleum and refining. Higher oil prices mean higher prices for these materials too.
Higher gas prices can result in noticeable increases in some public transportation ridership. Shared and public transportation may become more appealing if gas prices continue to rise as it provides a more cost-effective alternative to sitting in traffic with expensive fuel in the tank.
The automobile industry has historically responded to rising gasoline prices by using these periods as opportunities to manufacture smaller, more fuel-efficient cars, such as hybrids and, most recently, all-electric cars that can travel up to 250 miles between charges. Consumers have largely supported this move; sales of hybrids and all-electric vehicles in the recently have been on a strong upward trajectory.
The largest operating cost for airlines, on average, are the companies’ fuel expenses and those expenses related to the procurement of oil. Fuel costs are such a large part of an airline’s overhead percentage-wise that the fluctuating price of oil greatly affects the airline’s bottom line. When gas prices rise, airlines are forced to increase the price offered to travellers for flights, which may discourage non-essential air travel and put a further burden on consumers’ wallets.
To protect themselves from volatile oil costs, and sometimes to even take advantage of rising gas prices, airlines commonly engage in the practice of fuel hedging.
They do this by buying or selling the expected future price of oil through a range of investment products, protecting the airline companies against rising prices.
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In addition, job growth is carefully watched as an indicator of the recovering economy. And some economists warn that rising gas prices could negatively impact an economic recovery in terms of hiring practices.
It’s also worthy of note that, rising gas prices may force some businesses to re-evaluate their hiring plans, holding off because they are uncertain about the economy’s health. Less discretionary spending results in decreased sales, both of which can influence a company’s ability to hire.
Many job candidates have to weigh prospective positions against the costs associated with the commute. Some workers who have been offered new jobs have been forced to turn down the position simply because the costs to get to and from work would eat up such a large percentage of the salary.
Freelancers can also be affected by higher gas prices, limiting the geographical region in which they will do business because commuting costs make it impossible for some gigs to be profitable.
Though economists and analysts may argue about the extent to which gas prices have an effect on the economy, there is, at the least, a correlation between consumer confidence, spending habits, and gas prices. An August 2020 Gallup poll in the United States, for example, showed that individuals’ views of the economy appear to be inversely correlated to the price of gasoline. The poll showed that increases in state gas prices made respondents feel more pessimistic about the economy over the time period in question.
Therefore, the handlers of Nigeria’s economy must come with policy and innovative ways to cushion the effect of the hike in diesel price on the Consumers.