Fuel Subsidy: Agony Of An Oil Producing Nation

TO cushion the effects of abnormal price of essential products is not a bad idea. But fuel subsidy in Nigeria has turned out to be an economic tool that is difficult to understand.

The last Forensic Audit of Nigerian National Petroleum Corporation (NNPC) by PricewaterhouseCoopers showed that fuel subsidies cost Nigeria almost $10 billion between January 2012 and July 2013.

In the last few years, fuel subsidy has been between two and five times the size of the federal education budget and up to seven times the health budget.

Most of the subsidy does not reach the poor because only about 40 per cent of Nigerians consume 85 per cent of petrol, while the poorest 20 per cent consume only 2.1 per cent. . Subsidy experts say, discourages investment in refineries, which is one reason why Nigeria is refining only 10 per cent of the local fuel consumption.

Meanwhile, efforts to halt subsidy and the quests to expose infractions in the application have always hit the brick wall. For example, Farouk Lawan headed ad hoc Committee of the House of Representatives, which probed into matters relating to fuel subsidy.

The committee found that subsidy payments were in excess of N2.5 trillion as at December 2011, about 900 per cent over the N245 billion budgeted for it that year.

Also, former Finance Minister, Ngozi Okonjo-Iweala constituted a subsidy review committee chaired by the former Access Bank Managing Director and Chief Executive Officer Mr. Aigboje Aig-Imoukhuede.

The committee submitted its report on 13 July 2012 and reduced the Lawan committee’s figure of N2.5 trillion to N422.5 billion. A Senate Committee on Environment and Ecology, chaired by Bukola Saraki now senate chaired probed the fuel subsidy matter, but never released its report. All these scenarios showed how powerful the forces are behind the subsidy phenomenon.

These indications spelt out a single factor that the fuel subsidy regime in Nigeria requires urgent reform. Former President Goodluck Jonathan had responded to the escalating cost of fuel subsidy through a one-off increases in the prices of various fuels.

He tried to increase the pump price from N65 per litre to about N140 per litre in January 2012, but was forced by widespread protests to reduce it to N97 per litre and later to N87 per litre in January 18, 2015.

A recent report by Nextier Advisory compiled by the Economic Policy Programmer at Oxford Policy Management (OPM), Neil McCulloch and a Principal Partner at Nextier Advisory, Patrick O. Okigbo III, suggested strategies for the new government to remove subsidy, including one-off increase in fuel prices; new formula for price adjustments; fix the subsidy, rather than the fuel price; or abolish the subsidy entirely at least for PMS.

To cushion the effect of subsidy removal, the group said government could set up cash transfer programme; introduce free education programme; free healthcare; transportation subsidies; pensions for the elderly; cash for work scheme; and fertilizer vouchers among others. “If the government decides that it wishes to eventually abolish the fuel subsidy, it may be concerned about the speed at which this adjustment is made.

One option therefore is to switch from a fixed domestic price to a formula-based mechanism. There are a number of different formulae that could be used to move gradually from the existing price up to the international price. “The advantage of a formula based approach is that the subsidy is gradually eliminated and sudden price spikes are avoided.

The disadvantage is that the budgetary gains from removing the subsidy are also only obtained gradually; and, as prices rise, political opposition to the changes can grow, threatening the ability to complete the transition to international prices,” it stated while explaining the formula based strategy.

Some stakeholders are optimistic that with deregulation of the sector, the prevailing pump price of N100 per litre at some dispensing stations could be maintained going by the recent scenario at the international market. Investigations by The Guardian showed that some refineries across the world particularly in the United States (U.S.) sell fuel around $1.76 cents per gallon, whereas a gallon is up to 3.8 litres.

This indicates that the terminal gate price of fuel per litre will be N84.00 (at the current exchange rate of N222), excluding the cost of freight and other local costs.

The PPPRA template states that the cost of fuel plus freight is N105.76, but other local cost could bring it to as much as N117.69. The agency however puts the subsidy payable of Expected Open Market Price (EOMP-RP) at N46.18 per litre.

The President, National Union of Petroleum and Natural Gas Workers (NUPENG), Igwe Achese, had urged the new administration to consider the removal of fuel subsidy and stop importation of petroleum products into the country.

Achese, while sympathizing with Nigerians on current hardship, said the on and off problem of scarcity would continue as long as local refineries are redundant, new ones not built and Nigeria remains import dependent.

He said the oil and gas sector was saddled with a lot of insincerity, both on the part of the government and operators. “It is only in this country that government will keep subsidizing business for businessmen, in terms of paying loan interest and foreign exchange (Forex) differentials.

This has continued because the government itself has failed to provide the necessary environment, that is, ensuring that the refineries are rehabilitated and new ones built. “The past government had never exonerated itself from this ugly situation.

And I will keep saying that until our refineries begin to work effectively, and those we’ve asked to manage the oil and gas sector also have the consciousness of doing the business well, we will not go forward.

Today, the highest importer of petroleum products into Nigeria is the NNPC. And who operates the refinery? It is NNPC. Why will NNPC own depots that they are not using and still contracting the function to private depots and pay them? These are some of the issues.

Our problem is beyond N200b that government is owing marketers and until government wakes up to her responsibility, we will always remain at the same point, ” he said.

Also, the Group Coordinator, Corporate Strategy and Planning, NNPC, Mr. Timothy Okon, strongly advocated the complete halt in the payment of subsidy on PMS.

Okon explained that since government does not control the prices of crude oil, its fluctuation often creates fiscal instability in the country, a situation that impacts negatively on Nigeria’s revenue.

He also noted that subsidy on petrol creates uneven distribution of revenue, round tripping and unnecessary carry-over of funds from one year to another in a manner that is difficult to control by the Federal Government. “So, from the technical analysis made, it is obvious that subsidy is real. And from our analysis, we look at it as something that should go because it is not sustainable.”

Meanwhile, many countries of the world, such as Indonesia, Guinea, Cameroon, Ghana and Chad, among others have successfully removed subsidy. Indeed, the International Monetary Fund (IMF) in a report estimated that fossil fuel subsidies world-wide was at $1.9 trillion in 2013.