The Subsidy Fallacy & Other Stories

Hi guys,
I am a newbie here so if this has been treated before.oh well.

I went over some post on fuel price increase, subsidy removal and stuff. Its interesting that for ages now, the man on the street and in front of the newspaper and computer has been swallowing wholesale whatever the spin doctors dish out. Looking at the quality of spin, its shocking that people actually do not challenge some of the underlying assumptions but instead spend time defending/challenging the end result.

Do you really believe/think/know that there is a subsidy on fuel (petrol,diesel, kerosene) for domestic consumption in Nigeria?

Some background: I am a strong believer in private sector driven economy. I believe the govt. roles is to create an enabling environment and get out. Allow the private sector to run the system. I don't have sacred cows - medical care, education, transport should all be passed off to the private sector. Back to topic.

Next time someone says there is a subsidy on Nigerian fuel, look carefully at the maths.

Remember some facts:
[list][li]Crude is produced in Nigeria.[/li]
[li]There is a cost for each barrel of crude produced in Nigeria (this cost has no linkage with the cost of crude in the international market which is a function of perceived supply and perceived demand).[/li]
[li]Crude for local consumption is not part of the OPEC quota.[/li][/list]

So to talk meaningfully about a subsidy, we need to start with the local cost of crude.

Next step is refining cost (not the cost of refined products but how much it will cost to refine say a barrel of crude into petrol).

[list][li]Check the local refining cost.[/li]
[li]Check how much it will cost to pay a refinery offshore to refine x amount of crude into gasoline for you.[/li]
[li]Check transport cost to/fro.[/li][/list]

Then you have a better picture for actual cost of refined products locally and offshore.

Most of this information is available in the public domain.

< comments about deregulation of refineries moved >

At any rate, you're right, i never thought about whether the subsidy business was legit. I'm beginning to think it isnt because the rate is close to the international rate. and for an oil producing country thats crazy. The refineries can't be that bad (can they?)

There is none. Everything abut fuel subsidy is pure lie. I pray God would cushion the effect for us always. Pretty hard to survive here in Naija, but with God survival is sure

Inyang,

Subsidising something is not simply be a matter of selling something at less than the price that it cost you to produce... it's also selling it at less for what you could have got elsewhere. Let's first remember that the meaning of the word 'subsidy' is 'financial assistance given by one person or government to another'.

So let's say I buy a tuber of yam at N100. I have the option of selling it for N150 at the market. However, someone comes along and begs me to sell it to him at N120. I may be making money, but really I'm losing N30 that I could have gained by selling it elsewhere. So in effect, I'm giving this person a subsidy of N30 (because he could easily take the tuber of yam he has bought at N120 and sell it at N150, thus making N30).

it's also selling it at less for what you could have got elsewhere. Let's first remember that the meaning of the word 'subsidy' is 'financial assistance given by one person or government to another'.

Thanks Ka.

(Un)fortunately -take your pick- Nigeria belongs to OPEC, that means we have a cap to what we can produce and SELL per day. Production for local consumption is excluded from this quota.
If we follow your logic through, you may actually make more money selling some commodity at a lower price than what you can get elsewhere if the knock on effects of lower price can be shown to increase productivity elsewhere (Eg. Low transport cost can be shown in some instances to have a multiplier effect on productivity out of proportion to the percentage of reduction of cost)

To be exact, you can in a 'semi close' system sell yam at 10 percent below apparent market cost. The yam is sold to a yam processing factory instead of end users. The factory then adds value to the yam (eg yam chips or flour) and sell the chips to the export market and earns hard currency. The total gain of the tax paid by the firm and the forex earning may be more than the 10% reduction in raw material price.

we don't need a fuel subsidy. What we need are local refineries that are free to compete with each other!