₦airaland Forum

Perhaps the article below shed more light on the pros and cons of subsidy of fuel consumption for a country like Nigeria.

The Fuel Subsidy Debate: Placing all the cards on the table - By Oluwole O. Adesina, PhD



As the news broke that the Nigerian government has decided to remove the oil subsidy effective January first, I wondered how I could simply explain the word “SUBSIDY” to my mother and some elders in my community. All they know is that government took away subsidy on petroleum products and that caused an increase in price from N65 to N142. How this can help or hinder growth of the country is not completely known or clarified.



Some other words for subsidy can be: Aid, Grant, Funding, Support, and Discount. I decided to use the word “discount” to explain subsidy to my mother and some elders in my community so that they can understand the concept completely. Thus this work is just to shed more light on the pros and cons of fuel subsidy, I am totally neutral on the subject however, I just want to share what recent research says on fuel subsidies, its economic and social impact and let readers decide on which side to swing either to the left or to the right.



Nigeria has over 159 million inhabitants. It covers an area of 924,000 square kilometers. Abuja, the Federal capital since 1991, has a population of more than one million. English is Nigeria’s official language, although many local languages such as Hausa, Yoruba, Igbo and Ijaw are also spoken. Major resources in Nigeria include petroleum, natural gas, tin, iron ore, coal, limestone, niobium, lead, zinc and arable land. The capital-intensive oil sector provides 20 per cent of our country's gross domestic product, 95 per cent of foreign exchange earnings, and about 65 per cent of budgetary revenues.



Oil was first discovered in Nigeria in 1956 at Oloibiri, in Nigeria’s Bayelsa State and since then Nigeria has been able to join world leaders in oil production and eventually became a member of Organization of Oil Exporting Countries since 1971. Other members include: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. The secretariat or headquarters of OPEC has been located in Vienna Austria since September 1965.



The Secretary General is the legally authorized representative of the Organization and Chief Executive of the Secretariat. In this capacity, he administers the affairs of the Organization in accordance with the directions of the Board of Governors. The current holder of that office is Abdalla Salem El-Badri. The Nigerian representatives in this organization are: Mrs. Diezani Alison-Madueke; Minister of Petroleum Resources, Eng. Goni Musa Sheikh as the governor for OPEC/Chairman of the Board of Governors, and Mr. Suleman Ademola Raji as National Representatives (OPEC 2012)



There have been many researches on subsidy reform and how it affects a country; the economic, environmental, and social impact of removing subsidy at a global level (Burniaux et al., 2009; Koplow, 2009). In developed and developing countries, subsidies to the production and consumption of fossil fuels exist in a wide variety of forms including direct budgetary transfers, tax exemptions and price controls.



Subsidies can be justified in theory if they promote an overall increase in social welfare. However, the consensus of expert opinion is that fossil-fuel subsidies have a net negative effect, both in individual countries and on a global scale (Von Moltke et al., 2004).



According to Jenifer Ellis 2010, removing fossil-fuel subsidies is considered by many to be a win-win policy measure that would benefit both the global economy and the environment and therefore a “no regret” option for climate-change mitigation (Burniaux et al., 2009). In theory, eliminating fossil-fuel subsidies would result in higher fossil-fuel prices in countries that currently subsidize consumer prices, which would reduce consumption and thereby Green House Gas (GHG) emissions. At the same time, removing subsidies would remove a costly drain on the government budget. Consequently, eliminating subsidies to fossil fuels may be one of the most cost effective and least distortionary options available to governments for reducing their GHG emissions.



However, governments contemplating fossil-fuel subsidy reform should carefully evaluate the environmental and economic benefits of doing so. It is possible that reforms could provoke some unintended negative environmental effects. In some poorer countries, for example, the sudden removal of subsidies for cooking fuels could lead to a reliance on biomass for cooking and heat in some areas, increasing pressure on forests and negatively affecting indoor air quality (Von Moltke et al., 2004). And at a global level, subsidy removal could result in downward pressure on international prices of fossil fuels, resulting in increases in consumption in regions not subject to a cap on GHG emissions.



In addition, there is concern that subsidy removal could have adverse social impacts, or that the social benefits may not be fairly distributed. Pearce and von Finckenstein (2000) observe that, by their very nature, subsidies redirect economic rents to certain stakeholders. Thus subsidy removal could, in the short-term, create some economic losers.



The International Energy Agency (IEA, 1999) notes that even if there are some losers from subsidy reform, solutions that increase overall net economic and environmental well-being should still be implemented, and measures to compensate the losers considered. The money saved from subsidies could, in theory, be redirected to transfers or social programs that are better targeted for the poor.



The timing and speed of reform is also critical. Many countries that have eliminated food or fuel subsidies in recent years have experienced large-scale civil unrest (Coady et al., 2006). For example, when the Government of Indonesia dramatically raised fuel prices twice in 2005—thereby escalating the prices of food and commodities—demonstrators took to the streets throughout the country, with mobs burning tires and effigies, and throwing stones in protest.



According to recent study conducted by Jennifer Ellis (2010), the major economic, and social and impact of fuel subsidy reform are:



Economic Impact

The precise economic impacts of fossil-fuel subsidies are in part related to whether they take the form of:

a) producer supports that lower prices for consumers by lowering production costs for producers;

b) consumer supports that lower prices for consumers but also reduce returns for producers; or,

c) price support, which increases revenues for producers but increases prices for consumers.


For example, subsidies that lower the cost of fossil fuels generally increase the consumption of fossil fuels and sometimes demand (if the fuels are not available to consume), which in turn generates a whole range of additional economic impacts. The level of subsidies for each type of fossil fuel also distorts interfuel substitution decisions. For example, in the 1990s, subsidies for coal fostered excessive production in many developed countries, and excessive consumption of coal in many developing countries (Anderson and McKibben, 1997).



1. Subsidies can increase energy consumption and reduce incentives for energy efficiency. Subsidies that reduce prices for consumers promote higher consumption of energy, and reduce incentives to use energy efficiently. Subsidies that reduce production costs for producers reduce producer incentives to minimize costs and increase efficiency (Morgan, 2007).



2. Subsidies can decrease foreign exchange revenues. Subsidies that encourage greater consumption reduce export opportunities for fossil-fuel-producing nations and revenues from those lost exports (Birol et al., 1995; de Moor, 2001).



3. Subsidies are a drain on government finances through direct financial transfers from government budgets, government expenditures on infrastructure or research and development or reduced government income from taxation. This can lead to fiscal deficits and debt accumulation



4. Subsidies can increase countries dependence on imports. Subsidies that increase fossil-fuel consumption in non-fossil-fuel-producing countries increase those countries’ dependence on imports.



5. Subsidies undermine investment in alternative energy sources and alternative energy technologies. By increasing consumer demand for fossil fuels, or decreasing production costs for producers, subsidies distort the market and reduce investment in alternative energy sources or alternative energy technologies that are potentially more efficient or less environmentally harmful (Varangu and Morgan, 2002).



6. Subsidized fuels are used for purpose for which they were not intended. By lowering prices for certain fuels, subsidies can result in misuse of those fuels for purposes that were not intended. For example, in India and Indonesia subsidized kerosene intended for household cooking has been used illegally or as a cheap addition to transport fuel (Committee on Pricing and Taxation of Petroleum Products, 2006).



7. Subsidies can promote smuggling and corruption. Subsidies that lower prices for consumers but also lower returns to producers can encourage smuggling of the fuels to countries where prices are higher. This has occurred in Africa and Indonesia and benefits those selling the fuels while having negative economic impacts for the country as a whole (Clements et al., 2003). Corruption is another common consequence when fuels are subsidized and scarce as attempts are made to control distribution channels, in the case of LPG and kerosene.



Social Impact

Subsidies to fossil fuels, particularly those that keep down the price of liquid fuels, natural gas or electricity, are often justified in non-OECD countries on the basis that they benefit the poor and reduce the cost of living (IEA, 1999). There is an argument to be made for subsidies of this kind, particularly with respect to electricity, which is considered key for reducing poverty and indoor air pollution (Varangu and Morgan, 2002). H[b]owever subsidies do not always accomplish this, and may not be the most efficient mechanism for poverty alleviation. Subsidies may be regressive, benefiting middle- and upper-income groups more than lower-income groups. Direct transfers to target groups rather than general subsidies may be more effective in reducing poverty.[/b]



1. Subsidies may benefit the rich more than the poor, who spend more money on energy and have greater access to energy than the poor (Clements et al., 2007; UNEP, 2008). A study by the World Bank (2008) found that the bottom 40 per cent of the income distribution receive only 15 to 20 per cent of fossil-fuel subsidies. Even when the rate of energy consumption by the poorest quintiles increases as a result of subsidies, the wealthy derive larger absolute benefits from lower energy prices (World Bank, 2008).



2. Subsidies may reduce energy available to the poor because in an artificial low price environment, producers may have little incentive to produce or supply more, and a higher percentage of what is produced may be consumed by the rich (UNEP, 2008).



3. Subsidies often do not target types of energy that would be more beneficial to the poor. Subsidies may favor larger capital-intensive projects, such as dams or power plants, at the expense of local labor intensive means of providing energy services (IEA, 1999). Power plant and dam construction can displace or create negative environmental impacts that primarily affect poor communities, while not improving their access to energy.



4. Subsidies may divert government money that could be more effectively directed to social program such as healthcare, free education, food coupons or targeted cash transfers.



5. Fossil-fuel consumption and production produce local emission that cause many health effects that impact the poor in particular, due to their more limited choices regarding where they live (Von Moltke et al., 2004).

http://www.africanoutlookonline.com/index.php?option=com_content&view=article&id=3579:the-fuel-subsidy-debate-placing-all-the-cards-on-the-table&catid=96:allcomers&Itemid=54

Without any iota of gainsaying, Nigeria has no business whatsoever subsidizing fuel consumption. The resources (billion of Niara or trillion in some cases) spent on this wasteful venture are better channel into productive ventures. Lazy, and bigoted hypocrites brandishing themselves as detribalise are wont to make us believe otherwise. But we all know that in saner climes, market forces determine the prices of good and services.

Nigeria's petroleum resources is limited, and the earlier we wean ourselves of cheap fuel the better for everyone. Besides, case have been made and rightly so that subsidizing fuel does not encourage building of private refineries, and other investment in petrol chemical industry sub-sector. Let's not lose sight of the fact too that in as much as government continue to spend money subsidizing fuel consumption, Nigerians, even those usually honest will be attracted to the allure of free money. Corruption will only be more sophisticated and well masked.

Various presidents have tried in the past to get rid of this waste, without success. A half-hearted reform will not take us anywhere. A whooping N971 billion has been budgeted for fuel subsidy in 2013. This waste must not be allowed to continue. Nigeria need to get rid of subsidy on fuel consumption, as a way of eliminating corruption in the sector. The country needs to free up funds for investment in other sectors. This is the best way to go, as any other way amounts to cosmetic surgery.

Hmmmn, thinking . . .


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Fast forward to page 11
https://www.nairaland.com/1118156/politics-section-poster-year-2012/11#13304410

And you will see why sensible Igbos should not participate in this election. Jarus the Mod and his bigoted management have managed to make this an all Yoruba affairs!

DANILSA: UNTILL SHE DISGRACE THEM AGAIN, THEN THEY CAN REST

lol. I guess they've missed her alluring and assuring presence. They need her to come and deliver speeches and lectures. E no easy oo.

HammedSodiqq: National unity remains sacrosanct untill a federating unit is granted or gains autonomy. Any policy or programme that threaten national unity must be crushed with a sledge hammer. The introduction of flag, anthem, pledge and other rituals like forceful introduction and embrace of foreign languages are threats. The NASS must look into it

If National Unity remains sacrosanct as you put it, then every request for autonomy, loose federation etc will also be crushed by the NASS as they also threaten national unity. We simply should not cut our noses to spite our faces.

Eze Promoe: In other words, are you saying that whenever we have complaint, we should PM either Afam, UJchief or 9ja_i_hail?

Exactly. Afam, UJchief or 9ja_i_hail will handle all election related issues.

Including the incumbent Eze at ezendigbo_nl @ hushmail.com who handles Eze Ndi Igbo institution related issues

You can also send to myself at pointb2012 @ yahoo.com if it connected to this or previous exercise, and sundry issues.

I believe the ban was against 'commercial' motor bike? When did it become an offense to privately own and ride a motor bike?

I don't get this argument of threat to National Unity. Is national unituy sacrosanct? If people feel alienated by the country shouldn't they seek solace and outlet in their state, culture, and symbolism associated with it? It will be a shame if SW, and other affected reps fail to stand their ground on this issue.

I don't get this argument of threat to National Unity. Is national unituy sacrosanct? If people feel alienated by the country shouldn't they seek solace and outlet in their state, culture, and symbolism associated with it? It will be a shame if SW, and other affected reps fail to stand their ground on this issue.

Eze Promoe: LOL @ chinosism

BTT,
What i wan't to ask is that, is there any complaint committee i.e people who we can forward our complaint too by PMing them. If any let's know them and how will can forward our complaints to them.

lol. But you must agree with me that the Eze need to clamp down on such behaviour.

I also agree that complaint/disciplinary committee should be set-up. But I believe it should be the responsibility of the new Eze and his council to do that. We can only suggest at this time. At the moment, the incumbent Eze and the Tribunal Members (Afam, Ujchief, and 9ja_I_hail) are the one responsible for handling complaints until further notice.

I think it's a smart move to slash the fees for non-indigene. Hostel building (and associated activities) is about to witness a boom in Imo State. LASU students will surely benefit from this move!

No country can develop without plan.

Haphazard conception and citing of infrastructure in the country has led to serious distortion and in some cases disruption. While I can not comment with conviction on the choice of 29 years, an Infrastructural Master Plan, backed by law is indeed very much desirable, and should have been done much earlier.

Failing to plan is very much same as planning to fail!

Kudos to Mr. President and his team.

Let's get a few things clear. Is it absolutely necessary for a House of Rep Committee to order around ministers who obviously have their jobs, and tight schedules to worry about? Is is not prudent to put a call through, or send an e-mail, internal memorandum, etc to her Ministry for whatever clarifications they need? Must they necessarily obstruct the wheel of progress every now and then simply because they want to feel powerful? Furthermore, since virtually everything revolves around Finance, how many more summons should the honorable minister of finance expect from the various House of Rep, and indeed Senate Committees? Are these multiple summons - especially of a Minister who doubles as co-coordinating minister not counter productive? Finally, does a Committee have the Power to issue arrest warrants? Are they not suppose to report back their finding or frustration to chamber that set them up? Is this not all grandstanding, and gross show of incompetence by the honorable members of the house of reps?

kawkab: Objective post free from tribal and regional sentiments.

Please Desola, geez*, PointB and other Nairalanders should take note. Look at isues objectively stop the abuse Please

You are preaching to the choir!

jjc-to-nl:
If the fear of Jonathan is that Lagos borrowed money might go into Tinubu's pocket, then he is clueless as people say. I thought he has the control of EFCC, ICPC and NPF's Special Fraud Unit.

TeamB, I am beginning to suspect you to be a PDP apologist. What has brought Tinubu into this? No matter how genuine Lagos's case may be, you will always see it differently. I shouldn't have wasted my time debating with you.

Is there a way you can discuss Lagos state financially without bringing in Tinubu who takes a huge chunk of Lagos State IGR as payment for services rendered the state? Do you take time to think how come the ratio of Lagos State recurrent expenses to capital expenses in that huge? You lot's better start thinking for yourself, you've been sold a hug lie! ACN is no better than PDP in lootocracy; the earlier you quit partisanship the better for you!

@topic



Rudolph Okwonkwo is a very imaginative writer. I can almost feel Gowon pissing in his pants!

fyneguy: Pointb,

What stops the FG from deducting from Lagos monthly allocation to retire the loan? It's Lagos money for crying out loud!

Yes it's Lagos state money, but FG has oversight responsibility on accumulation of "External (Foreign) Debts." There are always alternative funding for Lagos State to access rather than trying to blackmail or railroad the FG. So that fact that a state wants to borrow does not necessarily mean that FG should allow it, simply because that state can pay? What if the loan is going to Tinubu's individual's pockets? Should FG continue to guarantee it, simply because the state will pay back?

Demdem: u no get hand to search? Let me help out sha
Sowore is Sahara reporters.
Search for Sowore's articles or better still go here
http://saharareporters.com/articles

Olodo.
See as you fall my hand!
Sowore is an individual, just as the writer of this article. Sahara Reporters by itself cannot write an article, it's deliberate lies, misinformation, and propaganda must necessary be written on it's behalf by someone. And if that person can be Sowore, it could very well be anyone else.

For you information, the writer of this article (in debate) has been writing for sahara reporter since 2011. So if Sowore is SR, so is this writer. I

take dat: You only seek for the easy way out without condemning the activities of government agencies involved in this fraudulent exercise. If budgetary allocation has been provided for the 9million litres per day consumption, shouldnt it raise concerns why NNPC the major importer of the product sells to airlines as against the real consumers of the product? Why has DPR remained toothless inspite of the huge monies allocated to it as the regulator of the industry? It is an indictment on govt for dereliction of their duty cos the agencies involved are govt controlled.

What made you think getting rid of subsidy is easy. If it were why hasn't it been done?

Without any iota of doubt, over 80 pct of the corruption in Nigeria is associated with oil money - via various subsidy regime. This corruption has been well kept in the wraps by past government. It's is mainly due to relative transparency in the current government that these things are coming to fore. It is also my opinion that arrest and prosecution is not going to serve as enough deterrence, it will only help make the criminals more careful in covering their acts, or perhaps more vicious in eliminating those who seek to stop them.

To reduce the sleaze, remove the causal agent - subsidy on petroleum product - completely. Half hearted attempts (partial removal) has never solved the problem in the past. It will only exacerbate it.

Demdem: Yes they do. Individuals also write.

Show me samples of articles whose author is - Sahara Reporter.

AjanleKoko: Why bother with the countryman and his under-bridge ponmo analysis



Honestly, you need to keep these views of yours to the village market, or the meshayi. Don't be saying things like this around people with some small sense. Stop washing yourself o jare.

Even it it beer parlour view, I reserve the right to bear them. Next ===>

naijababe: More brainfarting! Go and read your post again cause your haste to get the above off your fingers is affecting comprehension of your own post.

Why dont you put you micro brain to use discussing the topic. I am not the topic. Perhaps you need a reminder:

FG has refused to guarantee Lagos State world bank loan request. Now you can spill your spleen on the topic. I have no time for you.

Demdem: Was sahara the writer of the article?

Does sahara write articles?

Demdem: ur opinion was wrong.

What crap are you talking about?

Was sahara reporters not referenced as the source of the article?

naijababe: Anyone who says anything good about Fashola is labelled an ACN goon! What kinda brainfarting is that?

Obviously you have to come in aid your boyfriend huh?

Where is the goodness of Fashola mentioned in the thread I quoted? Or you think with your ar.se?

AjanleKoko: You are either living in a remote part of Nigeria with no access to TV or newspapers, or you don't live in Nigeria at all.
My conclusion.