January 26, 2022

Fuel Subsidy Removal: Let Market Forces Determines The Price

5 min read

By Adewole Kehinde

 As part of my continuous education on the benefit of fuel subsidy removal, I will be looking at the impact of Market Forces on Subsidy Removal.

First of all, what is a subsidy?

Subsidy is aimed at lessening the burden or cost of certain products and an attempt at financial support by the government.

There are two types of subsidy; they are direct and indirect subsidies. Direct subsidies are targeted towards a particular group, individual or sector.

Indirect subsidies on the other hand include activities such as price reductions for required goods or services that can be government-supported.

Indirect subsidies lead to subsidized products being bought below-market rates. In this case, the government fixes the price of petrol below the ‘international’ rate and pays the difference.

Subsidy means that a fraction of the price meant to be paid by consumers is paid by the government to ease the burden off consumers. For petrol, the argument is that the amount paid for petroleum by Nigerians is lower than international benchmarks.

Subsidies were first introduced in Nigeria in the 1970s as a response to the Oil Price shock of 1973. The situation of the shock led to a global rise in oil prices and if the international rates were to be used would have made Nigerians pay more, thereby forcing the government to regulate local prices for energy products. A decree which was further enacted in 1977 institutionalized subsidies in Nigeria.

If subsidy is removed, for instance, it means that the international market determinants will also decide what the price of petroleum will be in the country.

The removal of subsidy is expected to open up the market to more private competition even as the government may still intervene in regulating the market ‘when’ needed, due to the essential nature of petrol.

The amounts spent on petrol subsidy have been questioned by stakeholders including Trade unions, Civil society organisations among others.

Nigeria’s refined petroleum import is put at $10 billion by the Observatory Economic Complexity widening Nigeria’s subsidy requirement.

Earlier in March 2021, the country was said to be spending N102.4 billion monthly on fuel subsidies. The figure increased to N150 billion in June 2021, when the NNPC GMD, Mele Kyari was quoted as stating that the government was subsidizing petroleum by N92/litre.

The amount spent on subsidy has been varying due to varying market conditions at the international market; especially as the amount that will be spent on subsidy is largely dependent on what the price of petroleum is at the international market in the prevailing time.

What Are Market Forces?

Market Forces are the actions of buyers and sellers that cause the prices of goods and services to change without being controlled by the government: the economic forces of supply and demand.

Market forces push prices up when supply declines and demand rises, and drive them down when supply grows or demand contracts. When demand equals supply for a product or service, the market is said to have reached equilibrium.

Supply and demand for products, services, currencies and other investments creates a push-pull dynamic in prices. Prices and rates change as supply or demand changes. If something is in demand and supply begins to shrink, prices will rise. If supply increases beyond current demand, prices will fall. If supply is relatively stable, prices can fluctuate higher and lower as demand increases or decreases.

 It is to the credit of this present Federal Government, under President Buhari and the National Assembly under Ahmed Lawan that the Petroleum Industry Act was enacted.

The sole aim of the Act is to ensure that the NNPC Limited conducts its affairs on a commercial basis in a profitable manner without recourse to government funds and their memorandum and articles of association shall state these restrictions.

Also to grant licences to capable persons to be part of the management of the oil industry. This in effect should usher in the liberalisation and commercialisation of the oil industry, which the country desperately needs. It is summarily called deregulation.

The success or failure of this scheme will depend on the transparency of the licensing regime.

We experienced incredible success in our telecommunication when competent persons and companies were granted licences and this crashed the prices of buying a telephone line from hundreds of thousands of Naira, when it was the exclusive privilege of NITEL, and when a sitting Minister of Communication proclaimed that telephone was not made for poor people, to free of charge, within two years of the licensing.

The price of making calls fell from N50.00 per second, when licences were issued, to about 8k per second today, on some networks. There’s no reason the price of petroleum products wouldn’t have been one of the cheapest in Nigeria today but for the corruption in that sector.

It is with indignation that the entire Nigerian people welcomed the news of a possible increase in the price of fuel from the present N165.00 to about N340.00 or N420.00 in the first quarter of 2022.

No doubt there is a sound economic and business case in favour of fuel subsidy removal. But the social and political contexts are equally critical.

What Nigeria is yearning for is deregulation not price hike. If deregulation is perfectly carried out, although there might still be a mild increase in prices initially, the prices will soon come down when more experts flood the petroleum sector with better technological ways of refining oil.

Can you imagine how low the price of fuel will be in Nigeria if the cost of shipping our crude abroad and the cost of shipping the refined oil back to Nigeria are removed because the entire oil required for domestic use will be domestically refined?

Discontinuation of fuel subsidy is an economic imperative but the petroleum industry and electric power industry need to be fully deregulated first.

Deregulation means that the government will no longer monopolise the management of the oil sector. It will imply that our refineries should be working in full capacity. It is in this regard that the recent decision by the current Minister of Petroleum to invest $1.5b of borrowed foreign money to the refurbishment of our refineries is an avoidable waste of resources.

Telecommunication is a more security prone product, yet the Government is not interfering with the services of the private telecom providers. Oil should be treated the same.

The Government should refrain from mentioning premeditated high prices, because that is a testimony that it is not deregulating. In a fully deregulated economy, it is the market forces that determine the price not the Government.

It is high time the government borrows a leaf from other countries that have had policies on making the Oil sector better.

I will also advise that there is a need to invest in Education, Infrastructure and creating employment, that way, people can be empowered to economically make decisions and fend for themselves, instead of paying subsidies that only a few enjoy and also giving grants that reach a few persons or more places than the others.

The removal of subsidy was long overdue as the introduction of subsidy in the 1970s was meant to be short term.

The subsidy regime has encouraged corruption and the amount spent on subsidies is alarming when Nigeria cannot even finance its budget.

Adewole Kehinde is the Publisher of Swift Reporters. He can be reached via 08166240846 and 08123608662

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