An Essay on the Political Economics of Removing the Nigerian Fuel Price Subsidy By C. E. Oyibo

The Nigerian federal government under President Goodluck Jonathan and Finance Minister Ngozi Okonjo-Iweala, is proposing to remove the government subsidy on the downstream oil sector—specifically the pump price of fuel. The government’s arguments fall into two categories:
1. That the subsidy is expensive, and that the funds applied to the subsidy are better expended on development programmes; and,
2. That removing the subsidy is a necessary step towards liberalizing the downstream oil sector through privatization.
This paper argues that the premises of these arguments are basically flawed and then recommends that the government should revive the country’s refinery and boost local refining of crude oil before it contemplates a removal of the fuel price subsidy.
Government Argument 1: Fuel Price Subsidy is Expensive
The government’s foremost argument is that the fuel price subsidy is expensive; it however conflates this argument with the suggestion that funds applied to the subsidy are better expended on development programmes.
The second half of the argument must be taken as a disingenuous palliative: the government’s failure to develop infrastructure has had more to do with its own corruption and ineptitude than with the existence of a fuel price subsidy. As such, it is useful to disregard the government’s suggestion that: if it were not for the expense of the fuel price subsidy, Nigeria would be better developed. At this juncture, it is critical to pause to challenge the premise that there is, in the first place, a subsidy— that is, to ask: is there really a fuel price subsidy in Nigeria? To answer this question, we must develop the contextual background of the oil industry. The Nigerian oil industry is divided into two sectors: the upstream sector, which deals with exploration and extraction of crude oil, and the downstream sector, which deals with refining and marketing of crude oil.
Nigeria has four refineries: two in Port Harcourt, one Warri, and one in Kaduna. However, as a result of a combination of inefficiencies, mismanagement, corruption, and sabotage, the refineries operate at less-than-optimal levels; as such, the downstream sector does not produce nearly enough to meet local demand —a situation which the government resolves by importing refined crude oil. The problem is that imported crude oil is more expensive than locally-refined crude oil. Furthermore, the total per-liter cost of imported Premium Motor Spirit (PMS) is generally significantly higher than the government-set per-liter pump price of PMS; as such, the government subsidizes the fuel price—that is, it pays the difference between the per-liter cost of the imported PMS and the per-liter pump price set by it.
It is very important to note from this discussion that the government does not subsidize locally-refined crude oil, since the per-liter cost of locally refining crude oil does not approach the government-set per-liter pump price. On the other hand, the government does subsidize imported refined crude oil because the per-liter cost of imported crude oil usually exceeds the government-set per-liter pump price. In this sense, the so-called “subsidy” should be seen as a cost to the government of being inefficient by importing a product at a cost that is higher than that of which it can locally produce the product.
Subsidy as Incentive for Rent-Seeking Behavior
Another argument is that the fuel price subsidy provides incentive for rent-seeking behavior, particularly smuggling, which results in a benefit to the rent-seeker at the economy’s expense. Smugglers, for example, illegally divert crude oil to foreign refineries and then re-import the refined crude oil, which they sell to the government at market rate. In effect, such smugglers directly capture the government subsidy on the refined crude oil that they import, resulting in a loss to the public.
Another mechanism through which losses accrue to the public is when government cronies purchase locally refined crude oil from the government at an official ex-depot price, but then immediately resells it to petroleum marketers at a markup, making significant sums of money, without having performed any economic activity of commensurate value. Alternatively, rent-seekers smuggle refined crude oil out of the country, only to re-import the same product for sale to the government at market prices—again, capturing the fuel price subsidy and imposing a loss on the economy. Given these examples, it is easy to see how a comparatively small number of illegal actors de facto exact significant costs on the economy as a whole. It is also easy to see how the interests of those actors can become so entrenched to the point where they are driven to explicitly sabotage efforts aimed at improving the local refining capacity, as a precursor towards eliminating the importation of refined crude oil, and, ultimately, removing the fuel price subsidy.
The rent-seeking behaviors described in the preceding paragraphs provide the basis for the government’s assertion that the fuel price subsidy does not go towards the poor, but towards enriching a cadre of powerful, wealthy, and well-positioned politicians, their cronies and foreign associates, as well as the multinational oil companies.
Government Argument 2: Fuel Price Subsidy is a Roadblock to Privatization
The government’s second argument is that it would like to liberalize or de-regulate the oil sector by allowing fuel pump prices to be determined by the market rather than being set and subsidized by the government—as a step towards privatizing the downstream oil sector. The rationale for the proposed policy can be found in neoliberalism, a set of economic principles that emphasize the private sector and free markets, arguing that the private sector and markets are more efficient at running enterprises than the government or public sector. The complication in the Nigerian downstream oil sector, however, is that under the prevailing regime of government-control of fuel pump prices, private investors are unwilling to invest, since it is virtually impossible to predict which direction the fuel pump price will go in any reasonable planning period. As long as the government controls the fuel pump price, liberalization through privatization of the downstream oil sector is highly unlikely.
Arguments against the Removal of the Subsidy
This paper has so far presented the government’s position as well as the context within which the fuel price subsidy removal debate rages. Unfortunately, the government appears to be dead-set on rushing headlong into removing the fuel price subsidy, without conducting a detailed study as to the potential impacts on the economy of the removal of the fuel price subsidy, nor presenting the public with a credible development plan. As to its proposal of the development program, it purports to be committed to pursue using funds recouped from the fuel price subsidy, if it is removed.
Finance Minister Okonjo-Iweala was trained at Harvard and brought-up at the World Bank. It is safe to assume that she has fully imbibed the neoliberal economic policy doctrine and the Washington Consensus. However, the fallacy in the government’s decision to remove the Nigerian fuel price subsidy, with neither detailed study of the effect of the removal, nor presentation of a credible development plan of how the government intends to redeploy the trillions of Naira that will be re-captured as a result of the removal of the fuel price subsidy, is that economic policies that are successful in market economies and liberal democracies like the United States will work, to the same effect, in Nigeria.
Neoliberal economic policies are a product of Western economic philosophy, and are ideal for market capitalist economic systems and liberal democratic political frameworks, such as the United States and Western Europe. Indeed, Great Britain and the United States are the very cradles of neoliberal economic policies; and these two countries remain at the vanguard of neoliberal policies, using, as instruments, the Bretton Woods institutions to spread the gospel of free trade. As it turns out, subsidies are specifically anathema to the notion of free trade.
Neoliberal policies are ideal for market economies and within democratic frameworks; so it is useful to, at this juncture, determine whether, and to what degree, Nigeria is currently prepared for the application of the shock-treatment of the removal of the fuel price subsidy. First, it is a delusion to call Nigeria’s economy “market-based” or “capitalist.” It is yet a bigger delusion, however, to suggest that Nigeria is a “democracy.” In reality, Nigeria is a mixed economy that tilts, at least apparently, towards being socialistic. While the delusion that Nigeria is a democracy persists, this paper posits that Nigeria is, in reality, an oligarchy and kleptocracy. The truth of this assertion is self-evident, and requires no further explication.
Yet consider, as an example, the recent history of privatization in Nigeria, under the Olusegun Obasanjo regime from 1999 to 2007. There is no disagreement in the public space that the privatization exercise amounted to the government transferring public enterprises to government officials posing as private sector investors. Under these conditions, the public assets were sold at highly devalued prices—practically given away to government officials and their cronies and foreign associates, for peanuts. In the end, the public was worse-off following the privatization, since the new “private sector” owners of the assets had already captured a windfall by paying significantly below the market value of the assets.
The problem is that Nigeria does not currently have the institutions and structures to adopt whole-sale, neoliberal policies à la the West. While it is fully acceptable to adopt the best ideas from elsewhere, we must—as a matter of prudence—adapt such ideas to fit our particular situation. The government commits a grave error of judgment when it conflates Nigeria’s economic and socio-political context with the West’s, and in believing that what has worked there will work in precisely the same way here. In the end, removing the fuel price subsidy, immediately, and without qualification, would be tantamount to administering the wrong medicine to a sick patient.
The effect of removing the subsidy in the manner the government proposes—that is immediately, and with neither study nor plan for deploying the captured funds—is intuitive: fuel pump price will immediately rocket upwards, and will, subsequently, become subject to unpredictable market forces—a situation that is bound to be highly disruptive to an economy as fragile as Nigeria’s. The sharp increase in fuel prices will directly lead to increase in transportation costs, and, therefore, in the cost of every other good and service in the economy—from food stuff, to school fees, to housing rents—severely exacerbating the hardship the Nigerian masses already face. In spite of the acuteness of our intuition in regards the impact of removing the fuel price subsidy in the manner proposed by the government, this paper posits that intuition does not suffice as an acceptable substitute for thorough study of the matter and a comprehensive development plan of what, specifically, the government intends to do with the funds it will recoup from the fuel price subsidy, if it were removed.
The People’s Subsidization of Government
This paper would be incomplete in a very unfortunate sense if it focused entirely on the issue of the government’s proposal to remove the fuel price subsidy, but fails to draw attention to the perversity inherent in the fact that the people of Nigeria have been subsidizing the government in a number of different ways, for decades. It is generally indisputable that governments have a primary role in providing public services such as education, healthcare, affordable housing, police and fire protection, transportation and basic infrastructure, telecommunication, waste management, water supply, social security, unemployment benefits and other forms of social safety nets, et cetera.
To the degree that the Nigerian government has failed to perform these functions, and to the degree that Nigerians have been compelled to provide these services for themselves, Nigerians have subsidized the Nigerian government. When Nigerians procure their own security by employing full-time guards; when Nigerians manage their waste disposal using on-site soak-away pits and unsightly public refuse dumps across rural and urban landscapes; when Nigerians dig their own boreholes or purchase bathing and drinking water by the gallon and the sachet; when Nigerians bear the strain of their extended families and cater for indigent and unemployed relatives and elders; when Nigerians forego medical attention because they cannot afford it and, as a result, suffer a reduction in their quality of their life; when Nigerians face gruesome amputations and deaths in traffic accidents caused by bad roads; when children and youth lose the opportunity for development and self-advancement because public schools are inadequate in quantity and quality; In these and many other different ways, Nigerians subsidize the government daily—using, as currency, the quality of their lives and, often, their very lives.
The fuel price subsidy is one of the last benefits that the people currently enjoy (to use the term very loosely) from the government—to the degree that the subsidy enables the product to be within relative affordability of the common man. As such, to remove the subsidy without thoroughly reflecting on its impacts on the Nigerian people, and without taking steps to mitigate any adverse impacts would be no less than callous. No government so callous would deserve the continued allegiance of the citizenry.
Conclusion & Recommendations
The paper concludes by offering a set of recommendations to the government in regards to its proposal to remove the fuel price subsidy. The assumption, of course, is that the government is serious about resolving this issue in good faith and in a manner that is beneficial to Nigeria and Nigerians.
Step 1: Repair the Refineries
The first step the government should take is to focus its energies on repairing the four existing refineries in order to bring them to the optimal utilization and production levels. The goal should be to at least satisfy local demand, and to, as result, eliminate the need to import refined crude oil—and, hence, fuel price subsidy (since, as this paper has argued, locally produced fuel does not need to be subsidized). The government should then in the interim, develop a comprehensive plan for investing the funds that will be recouped from the removal of the fuel price subsidy—when such a removal is eventually enacted. Specifically, the government should plan to develop alternative transportation systems including intra-city, intra-state, and inter-state commuter and freight railways, inland waterways, and local airports. These investments will reduce the pressure on roads, and, importantly, will also reduce gasoline consumption. The government should also invest in the electric power sector in order to drastically reduce dependency on diesel generators.
Step 2: Arrest Oil Smuggling
Quantitative evidence strongly suggests that optimal production output of the country’s four refineries can satisfy the country’s demand for fuel, as long as—and this is a proviso of grave import—refined crude oil is not routinely illegally commandeered and smuggled out of the country as currently obtains. It is the government’s function to fair, competitive, and enabling environments for economic activity to flourish: this includes deploying the full complement of resources at its disposal—from policy enactment to implementation and enforcement—to arrest smuggling and other rent-seeking activities that are ultimately deleterious to the economy as a whole.
As the paper has previously argued, there are entrenched interests—the majority of whom are well-heeled—who benefit from the status quo: the regime of moribund refineries and fuel importation. If government is serious about address Nigeria’s oil sector problems, it will do well to realize that it has a fight on its hands, while being mollified that it has vastly more resources to bring to bear in the fight against these selfish entrenched interests.

Step 3: Liberalize the Downstream Sector
Once the existing refineries are optimally-functional and successfully satisfy local demand, removing the necessity for importation; and once the scourge of smuggling has also been eliminated, the government should remove the fuel price subsidy subject to the recommendations from the study on the matter. Furthermore, the government should earmark the funds accruing from the removal of fuel price subsidy toward planned development programmes.
Additionally, the government should continue to pursue a privatization programme by granting licenses to private sector participants to build and operated refineries as well as encouraging and supporting private sector investors who already hold such licenses to commence operation in order to continue to boost local production, and to target the export market for refined crude oil. As this paper argued previously, a key function of government is to provide an enabling environment for private enterprise to thrive. To this end, the government should see as important functions the provision of adequate security, the tackling of corruption, and the preservation of the rule of law.
Conclusion: The Desired End-State
In conclusion, this paper submits the desired end-state as follows:
1. The four government-owned refineries are at optimal utilization and production levels;
2. The scourge of smuggling is contained, if not eliminated;
3. Numerous private sector-owned refineries operate in a competitive market;
4. Importation of refine crude oil is entirely a private sector activity devoid of any form of subsidy;
5. The government retains the prerogative to employ price subsidy as a domestic industrial policy, in spite of Western neoliberal policy advocates’ desire to the contrary.

About the Author
C. E. Oyibo is a graduate student of economic development planning and policy at the University of Illinois at Chicago. Follow him on Twitter, @ibenaija.

2 Responses to “An Essay on the Political Economics of Removing the Nigerian Fuel Price Subsidy By C. E. Oyibo”

  1. Femi Obiomah says:

    Thanks for the paper presented. I have read Dr. Agbon’s write up published on Sahara Reporters website as well. I humbly disagree. Please we should stop this conceit of ‘our oil’. We as Nigerians should grow up. It is this kind of conceit that enables our leaders to continue mindless looting of our economy.
    I have always stated that consecutive governments have failed to manage our economy due to inherent corruption in both high and low places. It is therefore wise that sensitive aspects of our economy should be taken of their hands if we will ever move forward. China and other countries we envy have done the same.
    The issue here is that the government of this country and we the people are so corrupt. A country where parents take it as norm that mercenaries write examinations for their wards. These children are the ‘leaders of tomorrow’.
    The government will vote bogus amounts for repairing the refineries, most of the fund released will be embezzled. Two years later we’ll hear that the refinery has broken down and we need to import (again).
    No crime persists without the backing or support of some classes of the elite so the issue of curbing smuggling can only happen when the smuggled good is less attractive. We should not forget too soon that at a time we were depending on smugglers for most of our rice.
    Liberalization of the oil industry is a must and must be done properly. If the “free crude “ allocated to the refineries is not paid for by them, we will have situations where refineries would ‘break down’ and that crude will be taken out (again) for refining.
    Listen we should stop pretending that we have people up there that would monitor these activities. Believe me you’ll be disappointed with the outcome.

  2. Applying common sense here as I have understood the whole clamour”FUEL SUBSIDY” .
    The gov. Is importing fuel,which they want to stop, because this backyard crop cannot be processed nearby due to tech lag. But who do you blame for this. Nigeria is ceremonious oligarchy. If you to harvad and come back -you take a tittle, no practical reality to solve simple problems which is the foundation of technology . And this attitude is applied every facet of life ;the result is, people ready to abandon project midway when thing begins to get tough_just what the gov. Want to do with one excuse and false enthusiasm.
    Technology should begin from the villages. If we cant processe our backyard crop; let the gov. In all good fate bear up with this burden


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