Benefits of Fuel Subsidy Removal

Peter Uzoho writes on the benefits of the decision by the federal government and the Nigerian National Petroleum Corporation to heed to the demand to allow market forces determine the pricing of petroleum products

The Petroleum Products Marketing Company (PPMC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC) last week announced an increase in petrol price of N151.56 to N162 per litre and directed all operators in the petrol retail business to comply immediately. The development was hinged on the deregulation of the downstream petroleum sector, whereby market forces are to determine prices of petroleum products.

The new price with its cost-reflective nature is expected to help to improve product availability and attract investments to the sector as marketers now have increased margin.

Expectedly, due to the sensitive and controversial nature of petrol pricing in the nation’s polity, the announcement received mixed reactions. While the government and those sympathetic to its decisions and policies as well as operators in the Nigerian downstream petroleum sector have backed the hike in petrol price, some other Nigerians who feel that the increase would add to the hardship being experienced by the poor masses in this pandemic period, have kicked against the new price and called for its review.

Sometime in March, at the heat of the dwindling crude oil price and its negative impact on other economic activities, which plunged many countries, especially the oil-dependent ones into revenue crisis, the federal government had approved the deregulation of the petroleum sector.

In rare radical step, it had announced an end to the wasteful petrol subsidy and also ended the sole importer status of the NNPC, paving the way for private marketers to resume importation of petroleum products.
The government announced a reduction in petrol pump price from then N145 to N125 per litre, as a palliative to the scorching effects of Coronavirus on Nigerians.

The government had said prices of petrol going forward would be determined by market forces.
It had explained that the Petroleum Product Pricing Regulatory Authority (PPPRA) would be giving monthly guidance on petrol prices through price modulation method, meaning that when crude price goes up, petrol price would go up, and when it comes down, petrol price would follow suit.

Since then, the PPPRA had been issuing petrol prices monthly, beginning with the first reduction from N145 to N125 on March 19, 2020, and later from N125 down to N123.50 per litre in April. In June, petrol pump price was further reduced to between N121.50 to N123.50. But petrol pump started going up again in July as the PPPRA announced an upward price of between N140.80 to N143.80; and it continued till the latest price increase.

However, these did not go on without marketers expressing concerns over the government’s continuous meddlesomeness with petrol pump price, which they believed should be allowed to float. They argued that such model was not in tandem with the principle of market forces that takes into account, the basic market fundamentals.

With the latest increase of petrol pump price which has an element of cost-reflectivity, the federal government has finally heeded to the demand of market forces.

Benefits

Both the government and marketers have justified the decision to increase the pump price of petrol, explaining that the decision took into consideration developments at the international oil market where prices of oil have been recording recoveries.

The federal government reiterated its position that subsidy on petrol had gone and would never return and that the cost of petroleum products would henceforth be determined by the vagaries of the international crude oil market.

The Minister of Finance, Budget and National Planning, Mrs Zainab Ahmed, who advanced government’s stand on the issue while speaking at a session, stressed that incurring further costs on under-recovery has now been stopped permanently.

According to her, “Specifically, in relation to the extractive industry, we took the opportunity to remove fuel subsidy that has been a significant drain on our resources and on the economy.

“This we have been able to do by adopting a price modulation mechanism and the government has removed fuel subsidy provision from its revised 2020 budget and also from the Medium Term Economic Framework (MTEF) for 2021-2023. We don’t have plans to incur any expenditure on fuel subsidy.

“What that means is that the price of refined products (petrol) will be determined by the global price of crude oil, so the price will keep changing according to how the global market operates.”

The Minister of State for Petroleum, Mr. Timipre Sylva, said Nigeria was no longer in the business of fixing fuel prices, adding that global oil price crash had made removing the subsidies inevitable.

“It is about the survival of our country. There are certain things that the country can ill-afford at this time,” he said.

The minister however, urged Nigerians who could not afford to buy petrol at the current pump prices to embrace the use of alternatives to be provided by the federal government, noting that the government was not insensitive to reservations expressed by some Nigerians over the issue.

While declaring that removing subsidy was the way to go, he disclosed disclosing that the government was spending over N1trillion yearly on under-recovery, a development he described as unsustainable.

Sylva reiterated that in the next few weeks, the government would be rolling out the alternatives in the form of Compressed Natural Gas (CNG) and Liquefied Petroleum Gas (LPG), which are cheaper and better alternatives.
“In the end, I do not think that people will even feel the increase because by the time you get used to gas to fuel your car at half the price of petrol, you probably won’t think of petrol anymore.

“Let us allow this policy to mature. These are just teething problems. Down the line, Nigeria will be happier for it and this country will survive better economically,” he said.
He said announcing a template every month was no longer practicable, saying that it would give the impression that the downstream is still being regulated by the government.

“So, we are now like umpires on the same side. We watch the price. If the price goes beyond our in-house estimate because we take into consideration everything it takes to land this product in Nigeria.
“We are also introducing a complaint box in the ministry of petroleum. If a marketer is raising prices beyond a certain rate, you report to us. We have become the police.

“Because our duty is to ensure the public is not cheated. We are now on the same side to police the marketers and retailers to ensure they do not profiteer from the public,” he stressed.
He said whenever crude oil price goes up, the price of fuel will also move accordingly, since the market is now deregulated.

Sylva added that left to President Muhammadu Buhari, the prices of petrol would not increase, noting that liberalising the market is now inevitable given the impact of the coronavirus pandemic.
He further explained: “It’s like we were burning our candles at both ends. You are subsidising at the pump and subsidising the foreign exchange. So, if you put all the subsidies together, it came to more than N1 trillion and who were we subsidising?

“It is the same rich people that benefit from the subsidy and the poor people continue to lose from even subsidy. This country cannot continue to afford this subsidy.”
Sylva who said henceforth, market forces would determine prices, however, stressed that the government will continue to protect the consumers.

Her added: “We are no longer in the business of fixing those prices. We have stepped back and allowing market forces to determine the price at the pump.
“When the international price of crude oil went down, it reflected at the pump and when it goes up, it also reflects. It’s the same crude oil we are talking about.”

Marketers’ Endorsement

Meanwhile, petroleum products marketers and other stakeholders in the nation’s petroleum downstream sector, who spoke on the issue across the country were unanimous in their views that the decision to allow market forces determine the price of petrol was not only healthy for the downstream sector but was also good for the Nigerian economy which has sacrificed so much to shoulder the now defunct burdensome subsidy system

The Chairman of the Major Oil Marketers Association of Nigeria (MOMAN), Mr. Adetunji Oyebanji, said the association welcomed government’s action in allowing the market to determine prices, noting that this would prevent the return of subsidies while allowing operators the opportunity to recover their costs. He said this will, in the long run, encourage investment and create jobs.

He explained that though prices at the pump would need to be adjusted to reflect realities of the increase of ex-depot prices by the PPMC, the magnitude of the increase, timing and location would be determined by each individual company.

Oyebanji who expressed the views of his members in a statement, said, “Consistent with global best practices, MOMAN does not dictate prices to its members as this would be anti-competition in a fully deregulated market.”
The MOMAN chairman, however, called on the Ministry of Petroleum Resources to intensify its public awareness drive to educate the populace on the current realities.

“The Ministry of Petroleum Resources should also be telling Nigerians that we can no longer afford subsidy. If we keep it, the investment in infrastructure, health, education, etc., will not be possible. We are borrowing so much to finance our budget. We spent over a trillion naira on subsidy last year. It is unsustainable”, he said.
MOMAN’s position was re-echoed by a Director at NIPCO Plc and Chairman of SY Petroleum Limited, Alhaji Sani Yau, who emphasized that the price increase was reflective of trending realities in the sector, noting that deregulation will foster an eventual price reduction in the nearest future when other market fundamentals would converge to create the desired competitive market space.

A stakeholder in the sector and an independent marketer, Mr. John Agidigan, explained that before this increase, market forces had forced the price per litre down to N121, then up to N131 and later N148.
He explained that under a deregulated environment, prices are expected to rise and fall in response to the volatility of demand and supply.

According to him, the new deregulated regime would always ensure the availability of the product in the market at affordable price based on the supply, adding that this regime was better than what obtained in the past when Nigerians had to contend with extreme scarcity and its attendant challenges such as long queues at fuel stations.

Another stakeholder in the downstream sector, Aggrey Koleijo, said Nigerians must consider the benefits of the new pricing regime rather than just reacting to the price increase which could be reversed the moment market forces dictate otherwise.

He stated that the same market forces that brought about price reduction not long ago were still responsible for the hike and can still ensure a reduction, depending on the demand and supply activities within the industry.

Also, an oil and gas analyst, Dr. Mac Udiewe, said the price of fuel would surely go down in a few months’ time when supply of the product would increase geometrically with the entrance of products from private refineries such as the Dangote Refinery and other modular refineries.

Other stakeholders, who responded, were unanimous in their conclusion that deregulation would ultimately favour consumers as soon as the industry stabilises and prices begin a downward trend.