POLITICO-ECONOMY OF FUEL SUBSIDY IN NIGERIA 

  Government should build more refineries and upgrade our infrastructure from proceeds of subsidy withdrawal, argues Felix Oladeji

The issue of fuel crisis has become a common phenomenon in Nigeria that is richly endowed with large crude oil deposit and a greater exporter of the God-given commodity. It is pathetic to observe that no other OPEC member or even country that does not produce oil, share similar ugly experience with Nigeria. Subsidy in economic sense exists when consumers of a given commodity are assisted by the government to pay less than the pump price per litre of petroleum product. On the other hand, fuel subsidy could be described as the difference between the actual market price of petroleum products per litre and what the final consumers are paying for the same products.

Today, the difference, which is borne by the government, is caused by eight imports – induced costs. These costs, have been discovered to be responsible for the high prices of petroleum products in present day Nigeria. Fuel subsidy was before the coming of the Jonathan administration, a policy of federal government meant to assist the people of Nigeria to cushion the effects of their economic hardship. Fuel subsidy seeks to enhance financial capacity but also to accept the implied financial losses by it in the spirit of its national responsibility to ensure the wellbeing of the populace. 

Nigerian oil and gas downstream sector is dominated by cartels who manipulate prices, through artificial supply restriction. These cartels determine volume of importation and the proportion that should be released to the market. At times, they only allow a few products holders to supply the market, while others hoard. Peter Akpatasan former president of NUPENG has stated thus: Deregulation cannot work in a market dominated by cartels. This cartel is so strong that it can continue to manipulate prices out of the reach of common man. You cannot deregulate when you have no refineries. There will be serious economic crisis. 

 Nigeria’s first refineries have a maximum nominal or installed capacity to process 445,000 barrels of crude oil per day. This is less than 40% of the daily national consumption requirement; such relatively low production capacity is further hampered by maintenance and operational shortcomings. This has resulted in inevitable severe product shortages. The situation is further compounded by the price disparity between the Nigeria markets and her sub-regional neighbours, which encourage product smuggling and further widen the gap between supply and local demand.

Today, more than 90% of petroleum products consumed in the domestic market are imported usually at costs, which naturally reflect international crude oil prices. This is clearly a dysfunctional state of affairs for a policy which is one of the top ten oil producers in the world. The history of fuel subsidy removal in Nigeria is rather a long one particularly with the negative effects it has on the polity.

Indeed, oil has significantly shaped the nature of the Nigerian state. The various ways in which it has shaped the political economy of the state as one involving the compradors and state elites. Nigeria’s political economy is underpinned by oil, which is the basis of its insertion into the global capitalist system.  It is noteworthy that Nigeria has been described as a rentier state in the literature on politics and development. The state collects rents from the sales of oil and these are merely distributed through the bureaucratic mill where they are appropriated, misappropriated and siphoned. Local participation in the oil production process is negligible, which explains the dependency on expatriates in the sector and the country’s continuing reliance on imports of refined oil into the country, to the detriment of her current account balance.

However, it can be opined that developing countries, by and large, tend to be less energy efficient than they could be, because of subsidies. Even when rationalized principally on grounds of income distribution, it is noted that subsidies for fuel usually tend to favour the rich more than the poor because the former own more cars and use more fuel. In this wise, the NNPC (1993:3) averts that “the subsidy that would be beneficial would be in health care, mass transit and education”.

There is the need to price fuel in a way that recognizes its temporariness since a barrel of oil once lifted is gone forever and is no longer available for lifting at a future date. In this context, there should be a “user” cost to compensate for the fact that future generations are permanently denied access to the same barrel. A consumption tax or subsidy phase out could prove useful in making up for this by releasing resources with which to transform the economy. Because oil and fossil fuels have a limited lifespan, they fall into a category known as exhaustible resources.

As for Nigeria, its proven reserves are estimated at 40 billion barrels. This figure could be augmented by new offshore findings. At the rate of 2.5 million barrels per day, the life index of the oil can be put about 43 years. This merely brings home the fact that oil is finite and that the well will soon dry up. The common argument advanced for having subsidy for fuel in Nigeria is that it is endowed with huge oil reserves and thus making energy cheap could enhance economic growth and protect the populace from needless hardships arising from exorbitant prices.

This is nevertheless untenable, as nothing is passed on to future generations. Accordingly, the best way to ensure continuity and inter-generational equity is to exploit the resources optimally and use proceeds from it to transform the economy so that long after the point of reserve exhaustion, the society can continue to be self sustaining. It is ridiculous to expect the nation to invest heavily in oil production only for just recovering the cost of production at the end of the day.

The cost of producing crude is irrelevant in the calculation of fuel subsidy. Fuel subsidy is the loss of revenue that should have accrued to the federation account were the crude allocated for domestic consumption sold at international market prices, rather than at the price for which it sold to the NNPC. The importance of appropriately pricing fuel is underlined by the fact that firstly, it provides arbitrage opportunity for marketers who buy cheaply at home and sell exorbitantly at the border. Thus, it is generally accepted that rational energy pricing (avoidance of subsidies) constitutes the most viable long- term options for bringing about efficiency because low domestic prices work against efficiency improvements. It is also averred that there is a sense in which the existence of subsidy accentuates the activities of smugglers. The neighbouring countries of Chad and Cameroon have much higher prices than Nigeria, a scenario which has increased smuggling activities across the borders with these countries. Moreover, the National Treasury is allegedly denied funds amounting to the level of the implied subsidy, part of which appears in the form of huge profits for smugglers. 

The classical argument for having a subsidy, relates to the need for accelerated development and to improve income distribution. However, the income distribution argument is faulted on grounds that petroleum subsidies are blazed in favour of the urban sector. It is not surprising therefore that it has been concluded that fuel subsidy policy benefits the rich more than the poor. Accordingly, the diversion of scarce resources from other deserving sector such as education and health in the name of fuel subsidy is believed to exacerbate inequality and poverty.

Hence, the politics of fuel subsidy removal has showed that Nigeria is a country of paradox. How can citizens of an oil producing country pay more for fuel which is found in abundance in the country? Successive government appears adamant in the quest to remove fuel subsidy.  The removal of subsidy, ostensibly to halt the activities of corrupt oil marketers/smugglers and make money available for infrastructural development appears to have worsened the economic conditions of Nigerians, particularly the poor. With the removal of fuel subsidy comes indiscriminate and exponential surge in fuel pump prices along with increases in the cost of food, rent and transport and so on. Moreover, unlike in Ghana, imperative measures were not put in place to cushion the harsh effects of fuel subsidy phase-out on poor and vulnerable groups before embarking on the policy which has to resistance and protects.

In Nigeria, increases in fuel pump prices have historically dovetailed with promises for economic reconstruction since the 1970s. However, the sacrifices made hardly ever yield considerable benefits, this development has ruptured the social contract between the people and the government which has led to the former’s distrust for the latter’s institutions and programmes.

Nigerian government should build more refineries through PPP while effort should also be made to ensure proper maintenance, the strengthening of the fight against corruption and the establishment of a regulatory framework to protect citizens as necessary measures to increased capacity utilization on the existing refineries to stem the tide of petroleum products importation to improve the poor state Nigeria’s economy and society Government should create an enabling environment to engender private investor’s for the purpose of improving the local refining capacity to meet the ever increasing local demand of petroleum products and indeed for exportation purpose. Related to the above is the need to use the oil windfall proceeds and the savings realized by the federal government and from the withdrawal of subsidy to be channeled towards fixing the refineries, building new ones or upgrading and developing of infrastructure within the polity in areas such as water ways, rail and mass transit system, thus providing cheaper alternative transportation methods. There is also the need to budget more funds towards improving both education and the health care delivery system in Nigeria.

 Oladeji writes from Lagos