The dynamics of fuel subsidy in Nigeria

Petroleum pricing is a significant issue in Nigeria, as the country heavily relies on oil for its economic stability.
An attendant pumps fuel into a tank at a filling station in Lagos, Nigeria, on April 20, 2021. - Nigeria's economy was already struggling with a fall in the price of oil, Nigeria's major export, and a weak local naira currency, before the global pandemic struck. Now Nigeria's inflation has soared to a four-year high of more than 18 percent in March 2021, with food prices up 22.9 percent, according to the National Bureau of Statistics. (Photo by PIUS UTOMI EKPEI / AFP)
An attendant pumps fuel into a tank at a filling station in Lagos, Nigeria (Photo by PIUS UTOMI EKPEI / AFP)

Petroleum pricing is a significant issue in Nigeria, as the country heavily relies on oil for its economic stability. The government had implemented fuel subsidies to keep the price of fuel affordable for citizens, as well as to stimulate economic growth. However, these subsidies have become increasingly unsustainable in recent years.

Fuel subsidies are a form of government intervention to reduce the cost of fuel by providing direct financial support to oil companies, and as such, subsidize the product to consumers. Nigeria is one of Africa’s largest producers of crude oil, and it relies heavily on this resource for its economic growth. In addition, oil makes up much of Nigeria’s GDP and provides employment opportunities for many Nigerians.

The history of fuel subsidy dates back to October 2000 due to supply inadequacies from the country’s four refineries. The Nigerian government set up a committee to review all aspects of petroleum product pricing and distribution. The committee recommended establishing a Petroleum Products Pricing Regulatory Committee (PPPCRC), which later metamorphosed into Petroleum Products Pricing Regulatory Agency (PPPRA). PPPRA uses a price modulation mechanism, which allows for adjusting petroleum product prices to reflect changes in global oil prices.
When international oil prices are high, the government may increase the regulated price of petroleum products in Nigeria to prevent shortages and ensure that independent petroleum marketers can operate profitably. When global oil prices are low, the government may decrease the regulated cost of petroleum products to reflect the market conditions and pass on the benefits to consumers.

Under PPPRA, the Nigerian National Petroleum Corporation (now NNPC Ltd) and approved importers bring in petroleum products. These products are sold to independent petroleum marketers at government- regulated prices, usually lower than the landing cost. The independent marketers then sell the products to consumers at a price that includes their operating costs and a government-regulated margin. Although fuel subsidies have been beneficial in terms of making petroleum more accessible to citizens, they have also had some negative impacts on the economy.

For one, they have led to increased corruption and mismanagement due to weak oversight mechanisms, with some individuals and companies taking advantage of the system to make illegal profits. In addition, the government spends a significant amount of money on petroleum subsidies, leading to increased public debt. In some cases, the cost of subsidies can exceed the revenue earned from the sale of crude oil, Nigeria’s main export.
Furthermore, due to the price differences between Nigeria and neighboring countries and the inefficiencies in the distribution and supply chain, petroleum products are often smuggled out of the country, leading to frequent shortages and long queues at petrol stations. Finally, subsidy prices encouraged the overconsumption of petroleum products, leading to increased air pollution and greenhouse gas emissions, discouraging investment in the domestic refining industry and alternative energy sources. Given these issues associated with fuel subsidy programs, it is clear that there needs to be a comprehensive reform effort aimed at addressing them if Nigeria is going to achieve sustainable development through petroleum-generated revenue. First, the government should consider complete deregulation of the petroleum sector to allow market forces to determine the prices. This would reduce the burden on the government to provide subsidies, encourage competition, and attract more private investment into the sector. In addition, the government should incentivize investment in renewable energy sources such as solar and hydro.

This would help to diversify the country’s energy mix, reduce dependence on fossil fuels, and mitigate the impact of fluctuating global oil prices on the economy. Furthermore, the government could encourage investment in refineries to boost domestic refining capacity and reduce reliance on imports.

Addressing the challenges of petroleum subsidy through full deregulation of petroleum products in Nigeria can have significant impacts on Nigerians, including potentially higher fuel prices, increased inflation, and economic hardship. However, there are several strategies that the Nigerian government can employ to mitigate these effects.

One of such is to encourage investment in public transportation infrastructure to provide affordable and accessible alternatives to road transportation. This can reduce the demand for fuel and help mitigate the impact of higher fuel prices on Nigerians. In addition, the government should increase transparency in the downstream sector of the petroleum industry to ensure that fuel prices are fair and reflective of market conditions. This can help prevent price gouging and protect consumers from market abuses.
Furthermore, the government can foster competition in the downstream sector of the petroleum industry to encourage more efficient and cost-effective distribution of petroleum products. This can help keep fuel prices affordable for consumers. Overall, mitigating the challenges of petroleum subsidy in Nigeria requires a combination of policy measures comprising full deregulation of the petroleum sector, promotion of renewable energy, investment in refining capacity, strengthening anti-corruption measures, and incentives to cushion the effects of deregulation.

These policies will ensure energy security and affordability for citizens while also promoting economic growth and sustainability. The Nigerian government should aim to strike a balance between promoting economic growth and protecting the interests of Nigerian citizens. .

It is noteworthy that Ghana, on Wednesday, March 15, 2023, announced the removal of fuel subsidies in the country. Removing the subsidy was part of the country’s implemented regulatory measures to ensure stability across its downstream sector. According to the chief executive officer of Ghana National Petroleum Authority (NPA), the removal became necessary because industries were shutting down as the government had subsidies funding challenges. Considering Ghana’s recent action, the International Monetary Fund (IMF) would seek Nigeria to do the same. Will Nigeria follow the same path…?

Soremekun; an Oil & Gas Professional wrote from Lagos.

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