BURDEN OF SUBSIDIES: The Case for Nigeria Downstream Oil Sector Deregulation

By Ahmed Adamu

Despite the huge amount of money spent in Nigeria to fund subsidies, its cost is observed to outweigh the social benefits and environmental improvements. Other adverse effects of subsidies include the following: 

DEMAND GROWTH: 

Providing subsidies tend to encourage individuals to consume more even inefficiently due to the lower petroleum products prices they face in the market. Over-consumption of fossil fuels will lead to environmental degradation. This is observed in major Nigerian cities where pollution is highly concentrated in the atmosphere and congestion across the cities. Moreover, no one pays for the environmental degradation hence negative externalities. Similarly, the cost of addressing the environmental challenges could also be more costly. Therefore, removing subsidies will help address the environmental issues because consumption of fossil fuels will reduce relatively. 

BUDGETARY BURDEN: 

 Despite the billions of dollars Nigerian government gets from exporting crude oil, the country faces deficit budgeting due to the heavy subsidies on fossil fuels; this has restricted the government commitments and concentration on some other basic infrastructural projects. Subsequently, the government has to borrow from international financial institutions to fund the budget and pay for the continued increasing interest on previous loans thereby adding more burdens on the government. The Nigerian government claims that, if relieved from funding subsidies it will use the money to pay back these loans and deliver its statutory functions effectively.[1]

HINDERED GROWTH OF ALTERNATIVES: 

Due to the heavy subsidies on the fossil fuels in the country, petroleum products tend to be more attractive and highly concentrated in terms of consumption. Oil consumption constitutes 53% share of the total energy consumption in Nigeria[2]. This has discouraged the discovery and development of some other alternative energy like Solar, wind, geothermal, biomass and hydro. Subsequently, the country is exposed to the imminent predicament of fossil fuels depletion. This justifies the necessity to embark on deregulation so that the savings could be used to develop other alternative energy source for energy security in the country. 

TARGETED INDIVIDUALS NOT ACHIEVED: 

As earlier mentioned, subsidies are aimed at providing support to the poor. However, due to the fact that fossil fuels have dominated every aspect of human lives whether rich or poor, the Nigerian government provides subsidies to make the petroleum products affordable to the poor. But practically, in Nigeria only the rich people who could conveniently afford the real petroleum products prices enjoy the subsidies because the poor cannot afford to buy some of the appliances or equipments that require fuel, for example if Gasoline has been subsidised, it ends up that only the rich benefit from it, because the poor man cannot afford to buy a car or motorcycle. Therefore the targeted individuals do not benefit from the subsidy. 

REGULATED PRICE NOT REFLECTED: 

 The petroleum products prices are being regulated in Nigeria but still consumers pay beyond the regulated prices, this could be due to corruption, inefficient regulation and monitoring. For example, Gasoline price is regulated to be fixed at N65 (43 cent) per litre[3] but some of the marketing and distribution agents sell at a higher prices. Dealers sometimes deliberately hoard the Gasoline and later sell it when it is scarce at higher prices sometimes higher than N100 per litre. Despite the huge amount of money Nigerian government spends to provide the petroleum products at subsidised prices, the aim is not achieved. It is only at the NNPC retail outlets which are owned by the government that sell at the regulated prices.[4]

WHY DEREGULATE NIGERIAN DOWNSTREAM SECTOR? 

“Reform and change are difficult undertaking in any nation. Poor economic performance in the 1990s, therefore, sparked a vigorous domestic debate over the need for government administrative reform, economic deregulation , new accounting rules and other changes to spur more efficient corporate behaviour” (Edward 2001). Nigeria, like other developed countries decided to reform its downstream sector to achieve the following: 

AVAILABILITY OF PRODUCTS 

The deregulation proposal is based on the assumption that in freeing the Petroleum products market from its current quantity and pricing restrictions, the market forces of supply and demand would invariably operate to determine the delivered quantity and price which would prevail in the domestic consumer market. A further addition of this logic claims that the operation of market forces would ultimately intervene to ensure that the right quantity of products demanded would be supplied at the cheapest market price. [5]

INCREASED GOVERNMENT SAVINGS: 

 The government, and indeed a large school of informed public and petroleum industry opinion, generally subscribe to the belief that the proposed market liberalization policy would upon implementation, lead to the recovery by government of significant economic benefits including the opportunity to dissociate from the difficult burden of subsidy payments, which restrict it from concentrating on the provision of the major infrastructure in the country. Recently, it is estimated that the projection for the level of subsidy commitments which the government was constrained to underwrite for fiscal 2009 amounts to a huge N675 billion or roughly about a quarter of the entire national budget for the year. The sum of N675 billion recoverable by way of subsidy cost savings from the proposed deregulation of the petroleum products market could be used to buy a tremendous amount of goodwill, social security and welfare if properly utilized in the development of infrastructure and facilities which benefit the Nigerian working class/struggling class. [6]

ENVIRONMENTAL STANDARD: 

Environmental degradation which is largely believed to be as a result of too much consumption of fossil fuels is believed to be doing harm to the society, and managing that could be costly as well. By deregulating and removing subsidy, there will be an efficient and reasonable level of fossil fuel consumption in the country thereby mitigating the country’s vulnerability to pollution and global warming. 

ENERGY SECURITY: 

Speculation is continuing to spread on the imminent fossil fuel depletion, this could be substantiated by the fact that the world is increasingly relying on the fossil fuels in meeting energy needs and its production is proportionally reducing. This has given a signal to most of the developed countries which have started to develop some other alternative energy sources for energy security. Nigerian government if relieved from the burdensome funding of subsidies could be able to develope its potential alternative energies especially renewables. 

OTHER ECONOMIC BENEFITS: 

Apart from the potentials which exist for the elimination of the government’s current subsidy burden, there are also other significant economic benefits which are expected to accrue from the implementation of the market liberalization policy. There will be efficiency in terms of operations in the refineries and also improvement in investment thereby creating job opportunities to some Nigerians. The deregulation will also help to provide correct price signals to the investors as all prices will be set by the invisible market forces. 

CHALLENGES OF DEREGULATION 

LOSS OF JOBS: 

It is possible that in the short term unemployment may arise due to price increases and the attendant problem of potential job losses by workers in the refineries; this will be done by investors who aim to maximize efficiency, once they acquire control.[7] Schipke (2001) notes that, “Countries in which government was a dominant player in terms of both ownership and intervention are also likely to have highly regulated labour markets. Hence, a reduction in government ownership without the simultaneous liberalization of the labour market will lead to increases not only in temporary but also permanent unemployment.” 

INFLATION: 

An abrupt removal of subsidy may cause dislocation to prices of petroleum products because with high demand, and not enough supply the price would sky rocket. Similarly, prices of other inputs and commodities will increase due to the increase in the transportation cost; this may lead to labour strikes and chaos. This may encourage the military to try and take over governance using the threat of insecurity to justify their actions as it use to happen in some developing countries. 

RESURGENCE OF TRADITIONAL ENERGIES: 

Due to the fact that majority of Nigerians are poor, people may resort to revive the use of traditional energy sources after the subsidies have been removed, because the people may not be able to afford the un-subsidised prices of fossil fuels. Usually this may happen in some of the developing countries. 

MARKET EXPLOITATION AND LACK OF TRUST IN GOVERNMENT 

The deregulation constitutes selling of refineries to investors, while in Nigeria only few individuals could be able to buy a major part of the shares, this exposes the consumers to market exploitations and collusion among the suppliers. Similarly, most of the Nigerian government have been criticized for corruption and in-sincerity; therefore if the present administration exhibits these habits then it may end up benefiting few groups of individuals and exposing the masses to difficulties. 

NUTSHELL:

This is the second of a 3-part analysis on Deregulation in the Nigerian Downstream sector. The first instalment focused on the deregulation question. In this article, Ahmed has outlined the case for Nigeria Downstream Oil Sector deregulation by focusing on the burden of subsidies. Given the recent bruhaha in Nigeria over a stymied full deregulation from January 1, 2012 do you agree that the Nigerian Government should press for full deregulation; or is it a question of application- Shock Therapy versus a Gradualist approach on an inevitable policy imperative? Let us know. For more information on this article and to view Ahmed's professional profile, Click here -->

[1] Kupolokun, Funsho, (2005); Liberalization: the experience of the Nigerian Petroleum Sector, Alexanders Gas and Oil connections, volume 10, issue No. 2, 27 jan. 

[2] EIA US energy information administration (2009); Nigeria , country analysis brief, http://www.eia.doe.gov/cabs/nigeria/background.html

[3] Petroleum Products and Pricing regulatory Agency (2010); official website, http://wwwpppra-nigeria.org/

[4] Hary, O. C., (2006); Nigeria’s petroleum market segements: characteristics and financing requirement in oil gas financing in Nigeria: issues, challenges and prospect. Lagos, Nigeria; CIBN. 

[5] Emmanuel, Ihenacho, (2009); who is afraid of deregulation of petroleum sector, news paper article, daily trust 7th November. 

[6] Supra Notes 7, at 13. 

[7] Ifiok, Ibanga, (2006), The Economics of privatizating and deregulating the Nigerian Downstream oil sector, florin.com