Different Shades of Subsidy and the Unending Fuel Crisis

In the past few days we have seen long queues returned to fuel stations across the country with the attendant hardship, and loss of productive man hours at a huge cost to the economy (financial and otherwise).

I don’t speak for anyone, neither am I for nor against any government, past or present. I have no political affiliations so you should only read on if you will avoid those sentiments and focus on the facts presented without any bias. I will gladly change my views if you provide a superior argument with empirical data and also suggest other options apart from the status quo which is clearly unsustainable.

Fact #1 – You are not the poorest

If you are reading this article chances are that you are not one of the poorest people in our society, in fact you are most likely in the top 30% of richest people. About 70% of our people live on less than one dollar a day, that’s about N300 (or less than N10,000 a month). They can’t afford a smart phone or any gadget to enable them connect to the internet and many of those who have internet access can’t even afford a data plan or subscription. Nigeria has about 7 million registered vehicles and 5 million registered motorcycles, again the poorest people do not own any of these, at best they own bicycles.

Fact #2 – The poor sacrifices more for fuel subsidy than they benefit from it if at all

Almost everybody desires one form of subsidy or the other but those who really need it are the poorest and most vulnerable. Unfortunately the biggest beneficiaries of fuel subsidy in Nigeria are not the poor, they are the middle class, the rich and those who profit from the chaos. In fact the way the subsidy is being administered makes the poor people poorer. The poorest people don’t own cars, they don’t take taxis, they take general public transport like Molue, Danfo, Keke etc and they don’t own generator sets. Molues, trucks and large vehicles normally used for transporting goods and for intercity travels use diesel which is no longer subsidised. Even kerosene that is used by the poor more than the rich is also already deregulated.

Fact #3 – Yes, there is subsidy

The truth doesn’t change just because we disagree or don’t want to hear it. If crude oil price goes up, the price of petroleum products will go up. The fact that we produce oil doesn’t change that fact. We can call it any name we want – under recovery by NNPC, operating losses or other connotations. Even if the CBN gives a concessionary dollar rate to fuel importers or government gives a tax break as being proposed in some quarters, we would only succeed in changing the agency that bears the subsidy on behalf of government. It seems like our smart way to avoid budgeting for subsidy since some persons in the current government had insisted in the past that there was no subsidy.

Here are some of the other misconceptions about the oil sector and fuel subsidy regime in Nigeria.

  • There will be a hike in the prices of goods and services if subsidy is removed. While this is largely true, the impact is exaggerated. Diesel is not subsidized and molues, intercity mass transit buses, BRT, truck vehicles etc use diesel but no longer increase transport fares arbitrarily and disproportionately whenever diesel price goes up. That needs to happen with petrol. Even factories and industries use diesel to power their operations but don’t increase prices of goods and services arbitrarily either. The reason we associate removal of petrol subsidy with hikes in fares and everything else is because oftentimes increase in petrol price is accompanied by scarcity leading to far more commuters than available public transport vehicles which of itself is a recipe for a price hike. So we need to isolate how much of the rise in price is due to increase in the price of petrol.
  • Refining locally will solve our problem. This is not entirely correct. Local refining will ensure steady supply of products if the refineries work but it will not guarantee a subsidized price. Refineries in Nigeria will have to operate like a proper business as is the case the world over and therefore must charge market price to cover their costs and make a decent profit. Even if we refine products locally, the freight cost component of imported petrol that we will avoid is not significant enough to compensate for subsidy or serve as a permanent buffer for regulated prices.
  • There is really no subsidy since we produce oil, we can allocate some at reduced rates for local consumption. Well, if you grow yams at a cost that is much lower than market price, allocating some to your family members and friends doesn’t mean it’s not subsidized. We prepare our budgets based on optimal oil production volume currently about 2.2 million barrels per day. To that extent, allocating some quantities at below market price effectively means allocating budgeted revenue for subsidy.
  • Nigeria is an oil rich country – compared to our population and infrastructure deficit, we do not qualify as a rich nation based on crude oil. Our gross receipt even at $60 per barrel and 2.2 million barrels per day is only about $48 billion per annum, that’s only about half of the 2018 Budget of New York City which has less than 50% of the population of Lagos. Bear in mind that there is production cost and we don’t own all the oil we produce, oil companies take a significant share. The total revenue that we generate from oil is less than what many non-oil producing countries make from merely taxing fuel products.
  • You can’t compare price of fuel in Nigeria with other countries because minimum wage and standard of living are different. Indeed no two countries are the same but certain principles have been proven to work anywhere in the world so Nigeria cannot be an exception. Market determined prices may inflict short term pains but will solve the fuel scarcity problem permanently. The incessant fuel crisis we face costs us more as a people than the sacrifice of giving up petrol subsidy. We have already done it with diesel so it can be done with petrol.
  • But subsidy was removed when petrol price was increased to N145. Well, subsidy removal and deregulation are not the same. A product can be subsidised whether or not the price is deregulated. Deregulation requires among other things that prices be determined by market forces. This provides the incentive to attract investors into the sector and overtime competition, efficiency and excess supply will moderate price.

The way forward

We will never resolve this embarrassing fuel crisis problem unless and until the sector is fully deregulated. What we have done over the years is to increase the price of petrol to market price level once in a while to eliminate or reduce subsidy as at the time of the increase. What we haven’t done but need to do is allow market forces to determine price while government sets standards and regulate excesses.

Whether you are rich, middle class or poor, these are tough times for everyone and more so for the poor but it is a necessary pain to address one of our biggest challenges once and for all. The option is not easy but so is doing nothing. Like Jean Rostand, the French writer once said “Far too often the choices reality proposes are such as to take away one’s taste for choosing”. But we have to make a choice anyway!


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