ECONOMY - 07 AUG 2015

Learning from the Fuel Crisis II: Extortion?

Learning from the Fuel Crisis II: Extortion?
Ngozi Okonjo-Iweala

This article is Part II of a series. Read Part I here 

Too Big to Fail?

In May this year, many parts of Nigeria experienced a severe shortage of petroleum products. It was later revealed that this artificial scarcity was caused by oil marketers withholding cargo at the port and refusing to fulfil their future import obligations. Their gripe was based on a contentious subsidy payment of roughly ₦159 million that the Federal Government (FG) had supposedly reneged on. Although there were a number of other agents involved, the crisis was basically a stand off between the Major Oil Marketers Association of Nigeria (MOMAN) and the FG.

There is a Swahili proverb that says, ‘When two elephants fight, the ground suffers’. This is apt in this case as the masses felt the full brunt of the clash. Unfortunately, another appropriate adage here is one from the last global recession – “Too big to fail”. The argument goes that multinational banks had an incentive problem as they knew that whatever losses accrued from their risky behavior would be covered by central banks anxious to protect a fragile economic system. A similar accusation could be levied against both MOMAN and the FG. Both potentially have an incentive to adopt a tough negotiating stance and bluff as they are aware the other party must factor in the cost to civilians if they do not back down.

Posturing and Bluffing

The FG has the resources to use such a tactic, and previous administrations have shown the level of recklessness and disdain for the people that would be required for such a tactic. Furthermore, the crisis occurred at a critical time. Such posturing could be advantageous for an outgoing administration anxious about its legacy - back down too quickly and the new government would judge them for giving in to extortion but hold out long enough before acquiescing and look like the reasonable mediator that saved the day. Again, such thinking is not beyond the Nigerian government.

An even more compelling case can be made against the oil marketers. They would be acting well within their rights in chasing their own interests even if ordinary citizens have to suffer the consequences. Yet you must consider whether such behavior is profit maximizing for them. Given the amount at stake it would definitely seem so yet the Executive Secretary of MOMAN, Thomas Olawore reported that they moved to end the strike because of their cost structure. If true, this reduces the likelihood that holding the FG to ransom was a profitable strategy for them. Finance Minister Mrs Okonjo-Iweala accused the group of blackmail and wanting Nigerians to suffer while speaking on whether the issue would be resolved. In doing so, she implicitly invoked the argument laid out here and yet no real conclusions can be drawn from an act that again indicates political posturing.

The Problem of Transparency

Both parties taking credit for the temporary resolution of the situation is indicative of the lack of transparency in how the FG handles this sector. This was worsened by the notable absence of FG officials speaking publicly about the crisis at the time and subsequent reports that the Nigerian National Petroleum Corporation (NNPC) had 1 billion litres of fuel that could last 24 days. To top it off, Okonjo-Iweala explained the discrepancy between the claims of the FG and MOMAN as resulting from exchange rate differentials. At best, this is a baffling excuse as it is difficult to see why such a vital contract would not stipulate the exchange rate that would be used (for example, a fixed rate from the day the agreement is made) and why the FG could not hedge this by taking up the opposite position elsewhere*. More likely, it is a simple decoy to placate disgruntled citizens.

It is a rather somber thought to imagine the people as mere pawns in a game of chicken between the FG and MOMAN. The arguments outlined here are difficult to verify without more transparency in this sector. While the subsidy regime is in place, the contract between the FG and MOMAN needs to be subject to closer scrutiny as this will not only reduce the likelihood of future crises but also reduce the prevalence of fraud in the sector. The gradual movement of the Petroleum Industry Bill (PIB) through the legislative process is a welcome step in the right direction.

*The economics behind hedging of international trade contracts can be explored here.

This article is Part II of a series. Read Part III here 

 

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Kitan Williams

Kitan Williams

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