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THE SOCIO-POLITICAL DYNAMICS OF FUEL SUBSIDY IN NIGERIA

Updated: Aug 12, 2023

Challenges, Impacts, and the Path to Sustainable Energy


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.


FUEL SUBSIDY IN NIGERIA

The history of this 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 petroleum product pricing and distribution aspects. 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. Today, the difference, which is borne by the government, is caused by eight import–induced costs. These costs have been discovered to be responsible for the high prices of petroleum products in present-day Nigeria. Fuel subsidy was before the coming of the Jonathan administration, a policy of the federal government meant to assist the people of Nigeria to cushion the effects of their economic hardship. Fuel subsidy seeks to enhance financial capacity but also to accept the implied financial losses by it in the spirit of its national responsibility to ensure the well-being of the populace.


President Tinubu instructed NNPC to terminate all Crude Oil Swap contracts while making decisions to pay cash for crude oil import and export. This means that NNPC which is now privatized as well as other Private firms will now purchase Petroleum Products in cash. This further implies that our refineries will be fixed, and will work as most of our crude oil will now to go our local refineries in Nigeria. This is also seen in the instructions that all local refineries should be fixed and working in the next six months. This will bring an end to the cartel-dominated Oil & Gas industry which manipulates prices, through artificial supply restriction, determine the volume of importation, allow a few product holders to supply the market and the proportion that should be released to the market. Thus, Peter Akpatasan former president of NUPENG has stated in the past: “Deregulation cannot work in a market dominated by cartels.”


Nigeria's refineries have a maximum capacity of processing 445,000 barrels of crude oil per day, but this is not enough to meet the daily national consumption requirement. There is a significant price disparity between our markets and neighbouring countries, leading to product smuggling and a widening gap between supply and local demand. The NNPC (1993) states that subsidies hinder energy efficiency in developing countries, and should focus on healthcare, mass transit, and education. Oil subsidies are calculated by the revenue loss from selling crude to the NNPC instead of international market prices. proceeds and savings from subsidy withdrawal towards fixing existing refineries, constructing new ones, and investing in infrastructure, education, and healthcare.


Fuel subsidies in Nigeria have been a contentious issue, leading to economic hardships for the poor. To address this, the government needs to implement measures such as building more refineries, tackling corruption, and establishing protective regulations. Additionally, oil windfall proceeds and savings from subsidy withdrawal should be channelled towards fixing existing refineries, constructing new ones, and investing in infrastructure, education, and healthcare.


leading to economic hardships


Oberaifo Udoh, who has shared his concern for Nigeria is an experienced Entrepreneur, Business Management Consultant, and Strategist with a remarkable 13-year track record. A registered IPM & NUPENG Member in Warri Refinery, Delta State. He holds a SMEDAN license as a Business Development Service Provider and is recognized as a digital transformational leader for Nigerian and African businesses. Hailing from Edo state, Oberaifo currently serves as the Group Managing Director of VINES REALTY, a rapidly expanding international real estate company located in Lekki, Lagos state.


Beyond his professional endeavours, Oberaifo is a passionate humanitarian and serves as the President of the Edo Arise Initiative. He is also an accomplished writer, a compelling public speaker, and the lead consultant of Oberaifo Udoh Consults and Vines Realty Advisory and Consultancy Services Ltd.

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