ECONOMY - 11 JAN 2018

Paying for Cheap Petrol

Paying for Cheap Petrol
Subsidies and petrol prices remain at the forefront of the Nigerian economic landscape.

In February 2017, I wrote an article hailing the end of fuel subsidies in oil exporters like Nigeria.

If recent events in the country and the open secret of fuel subsidies today now make me look like a fool, then let me redeem myself: even at the time, I correctly opined that the “end of subsidies” were a feature of low global oil prices at the time and any rally in oil prices (or depreciation of the exchange rate) would put pressure on the landing cost of petrol and force the Federal Government (FG) to either reconsider subsidies or increase pump prices again.

Specifically, I suggested that the FG had “…three broad options here: a) bite the bullet and allow petrol prices increase b) reintroduce a partial petroleum subsidy, perhaps through NNPC c) formalise a foreign exchange subsidy whereby importers get dollars at a discounted rate.”

So, looking back, the article was pretty prescient. Today, regardless of what some would have you believe, Nigeria has a de facto fuel subsidy, one funded by the NNPC. Ergo, option B.

But if I could see the problem from so far away – and it is one that has been discussed at length even after the 2016 fuel price hike – why does Nigeria still drag its feet on the matter of fuel prices?  

 

The age of cheap oil

Famously, Nigerians have access to some of the cheapest petrol in the world, largely thanks to the regulated structure of the market that dictates that retailers cannot sell fuel above a certain limit – currently ₦145 per litre. It is a structure that rests at the root of some of the largest corruption scandals in the country’s history, leaves the nation vulnerable to regular fuel queues and shortages and discourages investment in the downstream petroleum industry. Moreover, a fairer and more effective way of “giving back to the people” would be cash transfers, not cheap petrol.

So why does Nigeria persist with the current structure and refuse to raise prices or deregulate the market?

Well, the obvious response is that the economic effects of raising prices now would be very harmful, particularly in 2018. Higher fuel prices would pass through to higher inflation, affecting the prices of goods and services and eroding the spending power of the average Nigerian. We experienced this as recently as 2016 when the hike in petrol prices from ₦86.50 to ₦145 helped fuel a surge in prices in goods and services in the country. And last year, a spike in diesel and other deregulated petroleum products increased the cost of transporting food and fed high food inflation. Meanwhile, if the government were to make the bold decision of allowing petrol prices to be freely determined by market forces, the ensuing volatility of prices may have severe impacts on businesses and individuals.

All these would be hard to digest at any given time and become nearly impossible to consider in a pre-election year.

 

It’s free if I don’t know I pay for it

If we the people seem to be the beneficiaries of cheap petrol, we must remember that there is no such thing as a free lunch. Although NNPC currently absorbs the financial cost of selling petrol below-market price, this negative impact on government finances has a real impact on economic activity and human welfare.

Put simply, there is an opportunity cost of the funds implicitly dedicated to funding cheap petrol – for example, they could be used as part of a more effective ₦5000 social welfare scheme.

At this point, Nigerians may scoff. After all, with such little trust in government spending, many would rather the government keeps providing cheap petrol, rather than risk trusting them with the necessary funding of schools, healthcare centers, roads, and so on. Moreover, opportunity costs are abstract to many people and difficult to estimate. They may win the logical argument but are unlikely to compel people to hit the streets in protest.

Furthermore, the most visceral cost of the current petroleum pricing regime – sporadic scarcities – are forgotten a few months down the line. Once the dust settles and the petrol starts flowing cheaply again, we tend to forget how we are really paying for it somewhere down the line.  When we consider this along with the political reality of 2018, it becomes hard to see how things will change anytime soon.

 

Back here again

So, we are back here again. And we have the same three options as before. Now, petroleum marketers have called for a move from B to C – a formal foreign exchange subsidy. For Nigerians, the effect is the same, and as mentioned in the previous article, any “subsidy program will be scrutinised and criticised, and strengthen the view that the country is going backwards.” To move forward, the elephant in the room must be addressed and fuel prices must become more market-driven. Any other proposed solution would be a subsidy in all but name and would provide cause for a follow-up to this article.

Knowing Nigeria, you can bet I'll be back. 

 

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Kitan Williams

Kitan Williams

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