Fuel scarcity and the return of subsidy

Emmanuel Nwachukwu

Nigerians are yet again facing the misery of fuel scarcity for the umpteenth time. It is unfortunate that the Nigerian National Petroleum Corporation’s Group Managing Director, Maikanti Baru, continues to blame the so-called saboteurs and hoarders for the fuel crisis instead of taking responsibility for the corporation’s failures.  This misleading narrative was sadly repeated by the President in his New Year address to the nation.  Since private operators stopped importing refined petroleum products into the country, the NNPC has struggled to close the supply gap left by independent importers due to capacity and logistical challenges. This is the real reason for the fuel scarcity in the country.  The hoarding of petrol was just incidental and a consequence of the shortage of supply.  Nigerians must now brace themselves for long periods of sporadic fuel scarcity until we address the thorny issue of price regulation of petrol.   This is at the root of the problem of fuel scarcity that has plagued Nigeria for decades.

Nigerians often wonder why we don’t have our own refineries here in Nigeria instead of relying on more expensive imports of refined petroleum products.  The simple reason is that no one would invest billions of dollars building refineries if there is a risk they may not be able to recover their costs due to price control policies.

In a free market, government may be able to control price but they cannot force anyone to supply a product at a loss to themselves.   Removing price regulation would free up the market to competition and bring an end to fuel shortages in Nigeria.   Although prices may rise in the short term, they will eventually fall with competition as private operators begin to invest in building refineries in Nigeria.  The government itself will save billions of naira on bureaucracy and the huge cost of enforcing price control regulations across the 36 states of the federation.

With the landing cost of refined products now well above the control price of N145, and rising, because of the surge in crude oil prices, the NNPC has begun effectively to subsidise petrol at the pump, be it through the backdoor.  We cannot continue to bury our heads in the sand on the issue of subsidy, as if it does not exist.  The government must address this issue honestly, without sentiment and in the best interest of Nigeria.  It will be irresponsible not to.  Even Saudi Arabia with all her wealth is gradually phasing out subsidies as part of the Kingdom’s drive to bolster state finances.

The cost to Nigeria of subsidising petrol this year could be in excess of N1.5tn, if oil prices continue to rise.   This is more than the combined budgets for Education, Health, Agriculture, Works, Power and Housing!

The reason often advanced by supporters of fuel subsidy is that “Nigerians have suffered enough”.   On the contrary, Nigerians are suffering precisely because of a policy that allowed over a quarter of the entire federal budget, on average annually, to be spent on one line of expenditure, to the detriment of other critical sectors of the economy.

At the height of the oil boom in 2011, Nigeria was believed to have squandered as much as $14bn in hard currency on petrol subsidies – over half the entire federal budget for that year, spent on just one line of expenditure! Truckloads of Nigerian petrol were smuggled abroad and sold at market price while Nigerians suffered from fuel scarcity.   In the 10 years up to 2016, Nigeria was believed to have expended nearly N10tn on fuel subsidy to the detriment of the entire economy.  The policy that was supposed to help the people became a huge albatross on Nigeria’s economic development, depriving the nation of the much needed funds for job creation and infrastructure development.  N10tn would have resurrected the entire railway network without the need to borrow from China Exim Bank, creating millions of direct and indirect jobs.  It would have built and equipped thousands of hospitals, saving millions of lives.  The money would have constructed thousands of kilometres of roads, creating millions of direct and indirect jobs.   Instead, we chose to give it all as recurrent expenditure to a few oil marketers.

The truth is that the subsidisation of petrol distorts the market and has resulted in inefficiencies and substantial loss of revenue to the government through corruption.  The policy has contributed to the collapse of local refineries by making them unprofitable for private sector investment.  Fuel subsidies have been responsible for sporadic fuel shortages at fuel stations as corrupt marketers, after receiving subsidies, have then proceeded to sell the subsidised fuel to neighbouring countries at higher prices.

Price control of any product always inevitably leads to scarcity.  In Venezuela today, people queue up for hours to buy bread, milk, meat and other basic necessities, because of the government’s attempt to control prices.  For decades, expensive and unsustainable subsidies on fuel have curtailed growth in developing countries.  Most countries like Malaysia that once had this policy have since abandoned it, releasing resources for investment in vital job creating infrastructure.

If you have cancer or any serious medical condition in Nigeria today, the prognosis for you, humanly speaking, is dire.  This is the reality for over 90 per cent of Nigerians who cannot travel to India or the West for treatment.   Sadly, thousands of our fellow citizens are dying every single day in hospitals across the land from treatable illnesses because of the lack of drugs and basic medical equipment.  The poor are bearing the brunt of past fuel subsidy policies that have impacted on investment in critical sectors of the economy.  Like most successful economies, the poor would benefit more through targeted measures to reduce the cost of travel.

Nigeria is believed to consume about 30m litres of petrol a day, but at the height of the last oil boom the government was subsidising over 40m litres of imports of the product a day, in effect, subsidising petrol cost for neighbouring countries. Freeing up the market to competition will save the country huge costs of subsidising petrol for the rest of West Africa.  The competition that will result with full price deregulation would enable private operators to build refineries here in Nigeria and export refined products to Africa and the world at large, increasing foreign exchange earnings for the country.

It is time to put sentiments to one side and bury the lie that subsidy helps the poor.  The subsidisation of petrol instead is making the nation poorer.  The poor will be better served if the trillions of naira spent on fuel subsidy were invested in schools, hospitals, power and other public infrastructure instead of making dollar millionaires of oil marketers, the NNPC officials and petrol price regulatory agency officials.  Until as a people we address the issue of price regulation of petrol, there will continue to be incessant fuel scarcity in Nigeria.

Nwachukwu, an international business analyst based in London, UK, wrote in via emmanuel@pssolutions-ltd.com

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