Petrol Subsidies in Nigeria - Case Study Example

Running Head: PETROL SUBSIDIES IN NIGERIA Oil Subsidies in Nigeria Student’s Name: Course Code: Lecture’s Name: Date of presentation Petrol Subsidies in Nigeria (a) Initial situation of oil in Nigeria Over the years, Nigeria has been subsidizing its local refined petroleum needs. This has been happened despite it being one of the leading exporters of crude unrefined oil. As a matter of fact, Nigeria produces an average of two million barrels per day, however, due to corruption and mismanagement, most its oil refineries are in bad state and can barely meet the ever rising oil demand of the second largest African economy. Ordinary Nigerians believe that low cost fuel is the only favour they genuinely get from their central government. The subsidies have ensured that pump prices are as low as $0.40 per litre in a nation where a considerably size of its population survives on less than two dollars a day (“The Economist”) Although Nigeria is the biggest petroleum producer in Africa, majority of the oil produced is usually exported in unrefined form. Due to decades of corruption and poor governance, the country lacks proper infrastructure and refineries necessary to refine the oil not only for export but for meeting local consumption, thus resulting to importation of refined oil products. Secondly, Nigeria unnecessarily consumes a huge amount of oil, this is due to the nations erratic main grid electricity supply leaving majority to rely on power generators for both domestic and industrial use. Successive leadership have tried with no success to regulate the oil industry. The various government leaderships believed that by deregulating the fuel subsidies and imports it could save about $6 billion dollars. In addition, this regulation was not only proving to be unsustainable in long run, but it was increasingly draining the public funds. Many believed that that this regulation only benefited the private oil importing firms. The government promised that in return the Nigerians would get new infrastructure and better electricity network. However, the local Nigerians population lacked confidence in the leadership as most of the recovered money would easily be embezzled by the political leaders. In 2011, President Goodluck Johnson announced that among his priority agenda included the deregulation and removal of the petrol subsidies by year 2012. As life devoid of subsidies dawned to the Nigerians, long queues were witnessed at service stations, tension heightened as various civil unions threatened full blown strikes and boycott. The president promised safety packages to protect the poor and vulnerable as well as better infrastructure. The government also shares the blame by its failure to repair and maintain the existing four refineries. This has worked well for some unscrupulous oil cartels and middlemen who “hijack” oil in transit and sell it off to neighbouring nations where it fetches over three times its cost in Nigeria. Over the years, unpatriotic corrupt leaders ensure that the status quo is maintained by embezzling billion of dollars set aside for both repairing and maintaining the existing refineries or building new refineries. It was therefore expected to be a huge victory for President Goodluck in killing this scam, which surprisingly keeps the local population quiet (“The Economist”). (b) The aftermath of the removal of subsidies The level of subsidy that the government aimed at curtailing was $(0.93-0.41) =$0.53 per litre of oil. The total cost of subsidy was $(0.53Q2) which was believed to be about $7 Billion (“The Economist”). The workers union announced a nationwide strike, shops, banks, markets and even public offices were subsequently shut for three long days. The situation deteriorated to a point where some flights to international destinations were cancelled. The streets were no longer crowded with vehicles but hundreds of protesters staged demonstrations in all major towns and cities. Although these demonstrations were largely peaceful, three deaths were reported and dozens were injured as the rioters engaged anti-riot police in running battles in Lagos and Kano cities. Workers union leaders called for these “mass demonstrations” as they and many Nigerians believe that this subsidies of low cost fuel was the only benefit the reaped from the nation’s petroleum wealth. Although the Petroleum regulatory body assured the population of steady and adequate oil supply at competitive prices, the two labor workers unions i.e. the Trades Union Congress and Nigerian Labor Congress though a joint communiqué vehemently condemned the move. They argue that as a result the poor people in the country were to suffer a lot due to skyrocketing foot prices as well as transport cost. The officials were angered by decades of excessive government spending on non essential services as well as embezzlement and corruption exercised by past and present regimes. The argued that monies misused by the governments was enough to fund this activities other than punishing the poor who live at barely a dollar a day. However, economists supported the move saying that the oil subsidies have wasted the Nigerian economy by keeping investors away. Despite the threat of “no work-no pay” threat issued by the government, the protesters were adamant on their demands claiming that “political disobedience” exercised by the protesters was to remain until the government acted accordingly to lower the pump prices. Analysts estimated that Nigeria was losing millions of dollar daily as a result. This was complicated by tension of possible sectarian instability and violence which meant that the president was gradually being pushed to limit. This was even complicated when a thread to shut down petroleum production was made. (c) Key economic demerits of oil subsidies The subsidies not only drained the state resources, but benefited only few companies owned by rich and prominent people. One such company Oando; the biggest locally owned private oil firm is believed to have earned $1.4billion in rear 2011. The state oil corporation, Nigeria National Petroleum Corporation (NNMC) has been accused of intentionally over approximating the cost of buying the refined fuel and then bags the surplus of the inflated import cost. The body apparently conceded to a parliament committee that it could not account for over 65,000 barrels of oil refined daily with a current market price of over $7 million (“The Economist”). (d) Effect of partial reinstatement of fuel subsidies While making the announcement, the president reiterated the government objective of pursuing the complete deregulation of the oil sector but noted that the after consultations with the relevant stakeholders on the imminent suffering of the common Nigerian, the government had proposed a reduction of the fuel oil pump prices from the all time high of $0.93 to an average and more realistic $0.60 per litre (“The Economist”). The authority claim that the central government was losing about $8 billion annually and that this money would be actively ploughed back to the economy to improve infrastructure, a above that has for long been pushed for by the International Monetary Fund (IMF). Although it’s in a reduced form, the subsidy is likely to increase inflammatory pressures in the oil industry in Nigeria particularly the transport and energy sectors. This will mainly have a short term devastating effect on the psyche of the local common people of Nigeria, thus posing some survival risks. Since most Nigeria depend on power generators as mentioned earlier for their electricity needs, the sudden and highly publicized pump price increase will no doubt increase the cost of operations of micro small and medium business enterprises. Due to the cheap fuel costs, it’s obvious that a lot gets wasted unnecessarily thus increasing more pollution. If the subsidy removal decision is upheld, no company or individual would willingly lose any fuel thus having optimum oil consumption with limited pollution. . (e) Effects of deregulation of the oil sector It’s pretty obvious that no private oil company that can practically sell oil in Nigeria. This can only happen if there is total removal of subsidies and hence the monopoly currently enjoyed by the Nigerian National Petroleum Corporation. Higher oil prices will definitely make Nigeria look for other alternative sources of energy such as geothermal which have proved to be clean and economical. Other secondary energy sources worth considering include solar and perhaps nuclear which is crucial to provide the gigantic power requirement as the country struggles to achieve year 2020 development targets Any deregulation will most likely cause sudden retrenchment and lay-offs in the short term, however in the long run job opportunities can be unlimited. Although the idea is proving difficult to sell it will be the only way out as it has never ending benefits. It can be analogically compared with a bitter medicine that a patient desperately requires. References ““The Economist”” Lecture Notes Read More