Petroleum Subsidy Removal; A Case Between the Devil and the Deep Blue Sea for Working Nigerian Consumers.

INTRODUCTION; its no longer news the advent of Covid -19 and the intendent negatives impact it has done to the world economy in which Nigeria is part of cannot be over emphasize, However Some will argue that the Nigeria economy which is just recently recovering from the 2016/2017 economic recession is already fragile and the Covid-19 effect on it was like a relapse in all the recent effort the government has been putting in order for the economy to rebound back. Some of the recent economy policies the government put in place in order to mitigate the effect of Covid-19 in the economy includes; Reviewing the 2020 fiscal budget, Aggressively borrowing to balance the budget deficit, providing low interest loan to the populace and yes finally agreeing to the controversial subsidy removal due to the collapse of global oil prices.

Subsidy Removal; Why Now;
It was important for the government to seize the opportunity now that oil prices was low and remove subsidy as the landing cost is now far below the subsidized retail price of fuel, as the government was now able to reduce the pump price and sell at a margin at which the fuel is no longer subsidized, with this in play the government next move was to consolidate on this, as the NNPC would no longer be importing fuel at a loss into the country since before now they were the sole importer of the product to Nigeria, The government achieved this without any public outcry or protest from the masses but instead there were a lot of praise and applause from the industry players who have longed called for the removal of subsidy which the usually term wastage and a stumbling block to the lack of investment in the downstream oil and gas sector of Nigeria.
But as the global oil prices begins to soar and there was subsequent increase in the landing cost, Subsidy era gone and government no longer planning to control prices, even the regulators I.e. Petroleum Product and Pricing Regulatory Agency (PPPRA) , Ministry of Petroleum Resources (MPR) and the Nigeria National Corporation (NNPC) are disorganized as to what next to do, as NNPC controls depot prices, PPPRA in their part has earlier said prices of fuel will be control by market forces, but they have also come out to deny this, insisting they have not completely leave the control of prices to the oil marketers while the MPR is insisting there will be no going back on the policy of subsidy removal and deregulation of the downstream oil and gas sector of Nigeria.

Where do all these leave the Masses?

In order to know if this policy is favourable to the masses or not we have to examine past precedence;
Nigeria started subsidizing its petroleum industry in the 1980's after the state-owned company, the Nigerian National Petroleum Corporation (NNPC), had planned to unify the price of crude oil in accordance with the global market. But then-incumbent president, Olusegun Obasanjo, said average Nigerians would not be able to afford a gallon of petrol at the pump. Instead, President Obasanjo introduced subsidy plan to keep the price of petrol low. overtime the cost of the fuel subsidy has continued to grow exponentially. This is partly due to the rising cost of fuel—which meant that the government had to spend even more to keep domestic prices low— and also due to Nigeria’s increasing population— which resulted in increased fuel consumption; together these pressures made the cost of the fuel subsidy unsustainable. The price of crude oil increased from 30.4 dollars per barrel in 2000 to 94.9 in 2010 over the same period Nigeria’s population increased from about 123 million to 158 million. By 2011, the fuel subsidy accounted for 30 percent of the government’s expenditure and it was about 4 percent of GDP and 118 percent of the capital budget.
Fuel subsidy continues to crowd out other development spending. By comparison, the total allocation for education is about $2.2 billion and it is not much higher for health care. Infant mortality in Nigeria remains unacceptably high at 90.4 per 1,000 live births. In 2004, it was estimated that only 15 percent of the country’s roads were paved. The $8 billion from the fuel subsidy could help to address some of these issues.

Some Problems/Key issues associated with the Administration of Fuel Subsidy Regime in Nigeria
i. Lack of Investment
Fuel subsidy has discouraged additional investment in Nigeria’s downstream oil sector. This is especially problematic given that the oil sector is the lifeblood of the Nigerian economy. Since 2000, Nigeria has issued at least 20 refinery licenses to private companies. However, not one refinery has been built because investors could not recoup their investment under the artificially low-price structure.

ii. Who Benefits More?
In debating the merits of Nigeria’s fuel subsidy, it is important to understand who benefits the most from the program. Contrary to popular belief, it is the rich not the poor who disproportionally benefit from Nigeria’s fuel subsidy. With the government subsidizing the market to keep domestic fuel prices artificially low, it is those who consume the most that have a greater benefit from the subsidy. Nigeria’s poor rely primarily on public transportation as such their per capita fuel consumption is significantly less than the country’s rich, who generally use private vehicles. Neighboring countries also benefit significantly from Nigeria’s fuel subsidy through smuggling.

iii. Corruption
The government has spent trillions on naira over the years on keeping fuel subsidies. It is said that the subsidy on oil has encouraged corruption in the system because the people benefitting from it are mostly wealthy oil companies, the rich, smugglers and neighboring countries where the products are smuggled to. The greater the consumption, the greater the benefit. Typically, only the rich have financial power to acquire cars Nigeria, the rich have several cars. This increases fuel consumption per week; hence the government has to make more subsidy payment and the rich benefit more than the poor who cannot afford cars.
The subsidy is meant for the benefit of the average to low income earners, Yet the oil marketers have been revealed to fake bills of laden without any vessel of oil actually coming in. This way, the government pays the subsidy on the phantom oil brought in with these vessels and the marketers pocket the money.16 Since the wealthy companies are receiving most of the benefits, hence, it will be easier to manage the corruption if the subsidy is taken out. The process of subsidizing fuel has not alleviated the sufferings of low-income earners nor end fuel scarcity.

iv. Foreign exchange crisis
The government determines how much foreign currencies private businesses receive to import fuel into Nigeria. There are few oil refineries in the country, but most of them are unable to meet domestic demand. Hence the country relies on fuel importers to fill the gap.
But due to less availability of foreign currencies in the Nigerian market, fuel importers have had to turn to local ‘black markets.' This means fuel importers have to spend more local currency, the Naira, on buying the dollar. Fuel importers hence have a major influence on the prices of fuel. So low fuel prices at the international market, does not automatically translate into low fuel prices in Nigeria.

A further look at Fuel market regulations around the world The extent of state intervention in the energy markets differs considerably across countries. There are various forms of fuel market organization and methods of fuel pricing. Although each country has specific fuel market characteristics, three main methods for retail fuel price determination could be distinguished;

1. Market-determined retail fuel prices. This pricing type is typical for liberalized fuel markets. In countries with such markets the state intervention is limited to establishing terms and conditions that promote market transparency and free competition. Fuel retailers set their selling prices freely without major restrictions. Therefore, the fuel prices at different stations and in different regions of the country could vary.

2. Price ceiling. Under this form of price regulation, fuel retailers are also free to determine their selling prices as long as they do not exceed the specified ceiling. The government influences retail fuel prices by setting maximum prices for petroleum products, which are revised regularly. The purpose of this form of price control is to protect consumers from sudden upward price fluctuations or unreasonably high market prices.

3. Fixed price. The most extreme form of price control is when the government or another authorized institution fixes the retail fuel prices. All retailers must sell their fuels at exactly these prices.

In a studies carried out by Globapetrolprices.com an online publication site, comparing 97 countries depending on which of the three main retail fuel pricing methods they apply. Data was gotten from ministries, agencies and market analyts to categorize the countries it was learnt that;

• In 60% of the reviewed countries fuel markets are liberalized and the retail fuel prices are market-determined. The majority of the countries that fall within this category have a high level of economic development: Canada, USA, Japan, Australia, New Zealand and most European countries. But there are exceptions such as Afghanistan, Uganda, and Kyrgyzstan.

• In the remaining 40% of the countries the government is involved in the retail fuel pricing with a price ceiling or a fixed price.

• Fixed prices are the more common form of price control: 60% of the countries with regulated fuel markets apply this method. In the remaining 40% of the countries with regulated markets the governments set maximum retail prices.

• Within the group of countries with regulated markets fall both less developed countries such as Nepal, Zambia, and Tanzania as well as highly developed countries such as Belgium, Luxembourg, and Malta.

• It was notice that the OPEC countries and some other major crude oil producers choose to control strictly the retail fuel markets by introducing fixed subsidized retail fuel prices. Therefore in these countries retail fuel prices are among the lowest in the world.

Major Concerns for the Nigerian Masses.
From the above it is evident that the intention of the government to subsidized fuel for the masses is quite noble and well thought of. However, it is apparent the masses are being reaped of and in fact, only benefiting the remnants of fuel subsidy after the middlemen (oil marketers) have taken the lion share. As a result, it is becoming increasingly expensive to pay for subsidy. In 2006, a reported $1.6 billion (261billion NGN) with an inflation rate of 7.8%10 was spent on subsidy. By 2010, $4.2 billion (673billion NGN) with an inflation rate of 12.8%11 was spent as payment for subsidy. This means $29 was spent per person.
Though Nigeria is a member of OPEC, it cannot continue to subsidize fuel due to the fact it’s a net importer of the product when compare to other OPEC countries who locally refined what the consume. The removal of fuel subsidy will further lead to the operations of the forces of demand and supply. This will attract new sellers, buyers and investors into the market. A direct result of this will be an increase in competition, promoting overall higher productivity and lowering prices over time. References have been made to the historic success of deregulating some other sectors of the economy.
The major worries for the Nigerian consumers at this point in time should be the following;

a) With continuous increase in global oil price there are concerns over the retail price of fuel as regarding whether the government is leaving the control of prices solely in the hands of oil marketers or having minimal control of prices and how far reaching this controls will be.

b) Concerns over the pricing template by PPPRA and the true landing cost of fuel at the terminals.

c) Concerns over government policy structured geared towards granting only few elites the license to import fuel to the country, as the process required huge amount of capital to be invested.

d) Concerns over how the government will be spending the additional money realize from the removal of subsidy.

Probable Solutions to the Concerns Raised Above.

a) The government needs to clarify all the grey areas in implementing this policy, whether it will be adopting the market determine price or price ceiling and define each agency role in determining price moving forward.
b) There is needs to continually audit the process of importation of oil into the country in order to ensure the prices are not being inflated and the masses ending up paying more.
c) The requirement for issuing of license to companies to import oil should be review downward and license should be given to more companies so their can be competition which will further drive prices down.