UN clean-up decision: Tough times ahead as diesel price surges

Nigeria’s diesel-dependent economy may face tough times with prices expected to surge as United Nations (UN) rules aimed at cleaning up international shipping comes into effect on January 1, 2020 with many ships expected to burn distillates instead of dirtier fuel oil.

Slowing economic growth and nascent trade wars could blunt a price spike, and as the shipping industry adapts to the rules, vessels will likely consume less diesel. But in the short term their impact could be profound.

A Reuters report said, estimates vary widely, but observers warn that prices could surge by nearly 20 per cent.

Nigeria’s frenetic commercial capital, Lagos, is plunged into darkness several times a day.

Then its generators roar, and the lights flood back on.

Nigeria is one of the world’s largest economies where businesses rely so heavily on diesel-powered generators.

More than 70 per cent of its firms own or share the units, while government data shows generators provide at least 14 gigawatts of power annually, dwarfing the four gigawatts supplied on average by the country’s electricity grid.

The machines guzzle cash and spew pollution, but they are reliable in a nation where nearly 80 million people – some 40 per cent of the population – have no access to grid power. Now diesel costs could spike globally, and many businesses are not prepared.

With the population growing at 2.6 per cent each year, people are getting poorer.

“In an environment like this, where discretionary spending is very limited, this could have a big impact,” said Temi Popoola, West Africa chief executive for investment bank Renaissance Capital.

A 20 per cent price rise could shave 0.2 per cent off GDP growth, he said.

Nigeria and German engineering group Siemens agreed in July to nearly triple the country’s “reliable” power supply to 11,000 megawatts by 2023. But previous such plans have failed.

While many Nigerian household and small business generators are powered by price-capped gasoline, the big generators for larger firms, apartment complexes and more substantial homes can only run on diesel.

“Businesses may struggle to survive, or in the best case scenario, would at least downsize,” said Tunde Leye, a Lagos-based analyst with SBM Intelligence. Diesel is the second or third biggest cost for many Nigerian firms, he said.

The oil industry, the Nigerian economy’s biggest driver, would not take a big hit as it does not rely on Nigerian consumers being willing to absorb extra costs it has to pass on.

As fuel producers in their own right, its firms can also recoup costs more easily.

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