Daily Independent (Lagos)
By Abel I. Obaka
6 July 2009
analysis
Ajaokuta — Successive Nigerian governments since the mid-1970s have been advocating and implementing 'appropriate pricing' of petroleum products, which is a euphemism for price hike and oil subsidy removal. I intend to undertake an empirical and verifiable analysis of the much misunderstood concept of subsidy as applicable to the downstream sector of the Nigerian oil industry.
Domestic demand for petroleum products was entirely met through importation by the private sector before 1965. The then Shell-BP built Nigeria's first refinery in Port Harcourt in 1965. However, the coming of the oil boom in the mid-1970s compelled government to become directly involved in the downstream sector. Government built refineries at Warri, Kaduna and a second one at Port Harcourt after taking over the first one built by Shell-BP.
The main reason for the government's involvement was to ensure availability of petroleum products throughout the country. Government also controlled the prices of the products. The NNPC, through one of it subsidiaries, the Petroleum Products Marketing Company (PPMC), ensures that refined products are distributed nationwide through its pipelines network to designated depots. The system of pipelines is complemented by roads, rails and coastal barges haulage from the refineries and depots to several marketers' outlets nationwide.
Consequently, it is government through the Petroleum Price Regulatory Agency (PPRA) which determines the prices of refined products at the pump, and the price of the negotiated margin for distributors and marketers. Since 1973 the uniform prices for petroleum (same product price irrespective of location) fixed by the government have been adjusted several times to narrow down the gap between domestic petroleum products price and the international price of crude oil.
Nigeria's four refineries have a combined installed capacity of 445,000 barrels per stream day (BPSD). The refineries were designed to produce Liquefied Petroleum Gas (LPG) or gas, Automotive Gas Oil (AGO) or diesel, Premium Motor Spirit (PMS) or petrol, also called gasoline, Household Kero (HHK) or domestic kerosene, Aviation kerosene, Low Pour Fuel Oil (LPFO) and High Pour Fuel Oil (HPFO).
The average daily demand of petrol in Nigeria is estimated at 30 million litres per day, which cannot be met by the four local refineries even if they were producing at 100% capacity, which is 17 million litres per day. This leaves a shortfall of about 13 million litres per day for importation. The true picture, however, is that the country virtually imports all the petrol it needs because of the dwindling supply from the nation's four refineries, which have remained comatose as far back as the military era. More worrisome is that all the proffered solutions, including Turnaround Maintenance (TAM) of the refineries, have proved ineffectual. Even the issuance of licences to private companies to establish refineries in the country is a mirage as none of them has built any refinery in Nigeria up to this moment.
And since government resorted to importation of petroleum products due to the collapse of the downstream sector, Nigerians have been forced to pay the international price of fuel. Successive Nigerian governments hinged their arguments for higher fuel prices on the necessity for the removal of the so-called subsidy, on the one hand, and the need to use the freed additional revenues for development purposes, on the other.
Moreover, government said price hikes were intended to stop fuel shortages, long queues at the filling stations, black-marketeering, product diversion, product adulteration, fire incidents and smuggling. The excuses are endless!
Now, if there is a subsidy on petroleum products, what actually is the extent? To me, pegging the price of fuel to the price of crude oil or refined products as obtains around the world is a misnomer, since the Almighty in His infinite mercy has endowed us with hydrocarbons. The so-called subsidy is also a misnomer since oil is our natural asset, which must be used to better our lot. Using the price of fuel in the developed countries like Britain and America as a bench mark for domestic fuel pricing is very wrong. Also, using the foreign price index to apply in Nigeria is akin to asking Nigerians that are barely surviving on the poverty threshold of one dollar per day to perish.
If government's subsidy is the difference between the international price of petroleum products and their local price, pray, who should bear this cost? Should it be the poor rural dwellers, the wretched and weak of the Nigerian society? Is the subsidy the same thing as potable water, constant power supply, good jobs, good roads, living wages, social security, regular pension, functional health-care delivery system and improved education? Come to think of it, even if it is true that government is subsidizing fuel, is that a sin? Is Nigeria the only country in the world subsidising products? Even countries like Britain and America that are highly industrialized still subsidize their agricultural industries. Why didn't these nations leave their agriculture to market forces?
Obviously, the so-called oil subsidy is not based on empirical and verifiable indices. Rather, the subsidy hullabaloo is a product of government's incompetence, misplacement of priorities and misallocation of resources. If I may ask, how many times will government remove the so-called subsidy? When crude oil price was $140 per barrel, government said it was subsidizing fuel, yet it is still singing the same tune even when crude oil price per barrel has gone down to about $50! Curiously, government is now shifting the blame to independent marketers as the cause of the recent fuel crisis, for refusing to import fuels. This is one of the curious acts of government, which we, the uninitiated, can neither decipher nor fathom.
Even if we accept that the local price of petroleum products is lower than the international price, we must be quick to point out that this is the irreducible minimum the government can go to compensate the citizens of an oil-rich country, where there are no economic shields for the poor. And applying the simple economic indices, the price difference is government's way of compensating Nigerians for its failure to discharge the simple responsibility of good governance to the people. As an economist, I consider the so-called subsidy as the opportunity cost for the near criminal neglect that the people are made to suffer and the unlimited sacrifices they make to endure our elite's insatiable parasitism in government.
Obviously, our past leaders have not done anything positive to alleviate the sufferings of the masses. We should, therefore, not compare ourselves with the developed nations, where the basic amenities are taken for granted. For instance, does Nigeria pay unemployment benefits? Does the country have any form of social security as obtains in the developed world?
Finally, as the Holy Book says, it is a sin to fight somebody whose back is already on the ground. Consequently, the prices of petrol, diesel and domestic kerosene should not be increased by government in the guise of subsidy removal, until such a time when the economic situation of the pauperised Nigerians has improved. The prices could even crash, if government puts in place appropriate policy frameworks. Otherwise, it is a precursor to mass protests since an old man does not keep quiet when a grave is being dug in front of his house.
Obaka, an economist, writes from Ajaokuta, Kogi State.
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Only the people can pay for anything. We pay both as workers and as consumers. The delusion that "the company" or "the government" is paying for things is the root cause of most bad economic policy. The people pay for it all, and each place where that is hidden or delayed is another place where costs increase and graft can take place. When a company appears to be paying for something, what it is actually doing is employing fewer people than the market would justify, and not servicing its market properly: unemployment, shortages and neglect of preventive maintenance. Any cost a company cannot pass on to its customer is paid for repeatedly in jobs both present and future.
Your nation's problems can only be solved with your own resources and labor. You have plenty of each. Foreign money mostly helps you employ foreign labor. Get your economic thinking mostly aimed at the domestic market, and less on export. You can be a very rich nation.
It is perfectly true that most other nations have played these games with money, too. The current financial meltdown is the long term result of some of these in the lending market. If the richer nations had been paying full price for energy, they would now be entirely solar powered. Anything that stands between the people and the real cost of the goods and services they need is a disservice to the people in the long run.