The Upsurge in Cooking Gas Prices – Views and Prospects
As a youth corper serving his father’s land, I cannot help but reflect on the good days when we buy things cheaper. During my days in the polytechnic, sometimes around 2016, my roommates and I bought a 5kg gas cylinder for as low as
N4000. After collecting NYSC “Allawee for December 2021, I proceeded to the market to get cooking gas and other foodstuffs with the mindset of reducing my spending on buying cooked food knowing-fully well that prices must have ticked up due to the national average inflation rate (15.40% y/y) at that time. To my surprise, the price of that same gas cylinder (5kg) now cost N14,000 – representing a 250% increase in five years.
The Cost of Filling Cooking Gas is on Steroids
Based on the recently released data by the National Bureau of Statistics (NBS), the average price of filling a 5KG cooking gas rose by 8.5% m/m to
N3,595 as of December 2021 compared with N3,312 in November 2021. On a year-on-year basis, the data showed an 84.37% increase in the price of filling 5kg of cooking gas from N1,950 as of December 2020. For the 12.5KG cooking gas, we highlight that the average price for refilling it rose by 76.49% y/y to N7,332 as of December 2021 compared to N4,154 in the corresponding period of 2020.
Comparing Current Prices with the 5-Year Average – While the average cost of filling 12.5KG cooking gas between 2016 and 2020 was
N4,253, the price surprisingly within a year jumped by 72.39% to N7,332 by the end of 2021, likely due to the global surge in the price of gas. Similarly, the cost of 5kg cooking gas soared by 73.71% to N3595 by the end of 2021, against the 5-year average of N2069.
A Dig into the Hole
Our analysis suggests that COVID-19 was responsible for the upsurge in gas prices even though the increase in gas prices did not occur in 2020 but 2021. This lagging effect can be attributed to the recognition lag between the lockdown period, and the post-COVID-19 era as pandemic related supply shocks colluded with robust demand after the countries eased lockdown measures. Expressly, gas prices declined in 2020 from the start of the critical period of Covid-19 (April 2020) until we gradually felt an economic expansion in the nation (October 2020). For example, compare the
N1,957 price of 5KG in April 2020 to N1,954 in October 2020; it represents a -0.18% decline. In the same vein, 12.5KG gas prices declined by 1.99% between April 2020 ( N4,1625) and October 2020 ( N4,079). As a result, the year-on-year inflation during this period (April-Oct 2020) climbed from 12.34% to 14.23%. This further proved that the economy did not realize the full consequence of COVID-19 on gas prices during this period, not until the aftershock had played out.
Digging into the aftershock, we consider the rally in the global price of gas as it hit a new milestone as high as $6 per MMBtu as the critical factor behind the local upsurge in cooking gas price. Recall that the natural gas price was $1.64 per MMBtu during the peak period of Covid-19. As countries started easing measures to curb the virus, preference and demand for natural gas increased. Supply was inadequate to meet demand because some productions were shut because of the pandemic. Hurricane Ida also did its part, contributing to the shutdown in the US. Demand in Europe and Asia further skyrocketed due to a long winter as the heating was needed for homes. This led the natural gas price to rise from $1.64 to $5.4 per MMBtu – representing a 230.85% increase as of October 2021. Though the price moderated to $4.87 as of January 31, 2022, this is still an increase when we compare it to the $1.64 per MMBtu as of March 2021. This global rise in oil price mounted pressure on the local gas price, contributing to the soar. This is reasonable as Nigeria imports a significant portion of its natural gas, given that local production is inadequate.
Nigeria’s large infrastructure gap has made it difficult to improve the production and distribution of LPG locally. Therefore, the country resorted to importing LPG of about 65%, while 35% of consumers’ demand is locally supplied. Even though the LPG is precluded from Value Added Tax (VAT) according to section 38 of the Value Added Tax Act, the imported LPG is not free from the 7.5% VAT charges. This increases the landing cost of LPG, which is finally passed on to the consumer. Adding to the pass-through on consumers is the effect of the devaluation of Naira and the difficulty of importers to source foreign exchange needs at the official exchange rate. As a result, many LPG importers now source Dollars from the black market at an expensive rate contributing to the price hike.
We expect the recent NLNG’s approval to supply 100% of its LPG production to Nigerians to have a positive impact on reducing local gas prices. This will increase supply and, to some extent, offset the market shortage. Similarly, provided the Nigerian Gas Flare Commercialisation Programme is well compensated to address the issue of gas flaring in the country, LPG supply to the market will improve and be made more available to the consumers. Furthermore, we advise the government to consider removing the 7.5% VAT charges on LPG. This will have a positive impact on reducing the price of cooking gas to some extent. As these occur, the global rise in gas prices will have minimal effect on cooking gas prices in Nigeria. Overall, using the Auto Regressive Distributive Lag with excel, we expect the average cost of refilling the 5kg of cooking gas to settle at
N5000 by July 2022. We also expect the average cost of filling 12.5kg cooking gas to price above N8000 as of the same date, provided the current momentum persists. In a best-case scenario, considering the effect of the potential increase in supply, stability in the value of Naira, and the availability of US Dollars to importers, the price of refilling 5kg of cooking gas is likely to stay at N4,812 on average throughout the year while that of 12.5kg touch N6,746.
This is beyond trial, you killed it sir
YISA, Gafar Opeyemi
This is quite insightful. Thanks for sharing