- Since January, petrol price has been inconsistent;
- While the government “technically” removed petrol subsidy, unavailability of a new template questions the practicality of such subsidy removal;
- Multiple evidence suggests that petroleum subsidy is not economically sustainable in Nigeria;
- There is a need for the federal government (FG) to liberalise the petroleum pricing framework effectively, while protecting her citizens.
Genesis of the conversation
The price of Premium Motor Spirit has been inconsistent since the start of 2020. To be fair though, it was fairly stable for the first quarter, averaging around ₦145.37 per litre across the country. Reports also show favourable drops in its price along April and June, accounting for ₦130.84 and ₦128.88 per barrel. By July, however, the price had jumped again by over 11 per cent, reporting a national average price of ₦143.63 per barrel.
To further understand these fluctuations in prices, we look to the Petroleum Products Pricing Regulatory Agency (PPPRA). With effect from March 19th, PPPRA announced a reduction in the pump price of petrol from ₦145 per litre to ₦125 per litre. The agency further announced another reduction by the end of March. This shifted the price to a range between ₦123.50 and ₦125 per litre. By June, PPPRA announced yet a new price band ranging between ₦121.50 and ₦123.50.
Interestingly, the petrol cap price removal in June turned out to be a cul-de-sac in Nigeria’s history of petroleum subsidy. With the development, marketers were to have the freedom to fix and adjust the price of the commodity under simple economic and production cost laws. The provision that the PPPRA would continue in its regulatory function and regulate the range of prices suggested citizen’s protection from extreme increments in price. In addition, the new arrangement hinted that the series of advocacy on petrol subsidy removal had eventually yielded results.
Yet in a rather surprising twist, PPPRA readjusted the retail price of petrol to vary between ₦140.80 and ₦143.80 per litre starting from July. The price regulatory agency remarked their decision to be from reviewing the prevailing market fundamentals in June, further factoring in marketer’s realistic operating costs. This price readjustment by PPPRA, however, stirs some questions. Like, can there be a price “fixer” in a truly deregulated market?
Subsidy or no Subsidy?
The question to ask is even simpler—is Nigeria still subsidising the use of petrol? As simple as this question seems, its answer is neither direct nor straight forward. Alex Otti, a foremost Nigerian development economist, noted that there are signals that suggest an attempt by the government to remove petroleum subsidy. In one instance, the Economist noted how the FG removed the initial ₦457 billion budgetary provision for petrol subsidy in the revised 2020 budget. The rationale is straightforward, you can’t provide what you didn’t budget for.
Ademola Adigun, a senior oil and gas expert, had similar opinions. In an interview with DATAPHYTE’s correspondent, he remarked on the ongoing controversy around petrol subsidy in the country. Answer whether petrol subsidy exists was a mixed bag in his opinion; it did, and it didn’t. Explaining further he said, “… there is no subsidy on petrol… because the landing cost of the commodity is less than the retail cost.” Thus, “there is no need of subsidisation”. He further highlighted the COVID-19 pandemic and the oil trade war as precursors for the oil price adjustments.
Still, the oil and gas expert hinted at the impracticality of claims of petrol subsidy removal. For one, there’s the government’s failure to liberalise the petroleum pricing framework in the country. Both the Petroleum Equalisation Fund Management Board and PPPRA have continued with their original mandates. PPPRA is still a price fixing agency. Again, the FG is yet to decide and set mechanisms requisite for fuel subsidy removal. Besides, if this were the case, we’d have a published template, giving credence to claims on subsidy removal. Or at the very least, it would describe the modality of the supposed subsidy removal.
The future of PMS Prices in Nigeria
The easiest description of the future of petrol prices is the word “uncertain”. For example, early in August, there were suggestions that PPPRA readjusting petrol prices could see it rise to ₦155 per litre. In fact, by July, PMS sold for ₦145 per litre in Adamawa and Imo. It also did not sell for less than ₦143 per litre in July in the other states and the FCT, per the petrol price watch for July 2020.
For now, PMS price is subject to market volatility. Rises in landing and production cost may continue to increase pump price. As an “unsubsidised” product, consumers bear the full cost of the product. So for now, the low level oil prices and landing cost don’t tell the full story. Like, what happens when the global oil framework readjusts? One word, chaos! The FG may have to choose between resuming petrol subsidy or allowing citizens to pay the true cost of the product. Recall that the government’s proposition of subsidy removal and consequent higher petrol prices in 2012 and 2017 generated some public disapproval.
The opportunity cost from petrol subsidy
Save the possibility of public disapproval, complete subsidy removal is the viable option. An earlier report by DATAPHYTE showed that Nigeria spent no less than ₦10 trillion on petrol subsidy between 2006 and 2018. In 2019, FG spent about 10 per cent (₦1 trillion) on subsidising the consumption product. Noteworthy- this happened when the country operated a budget deficit of ₦1.92 trillion. Besides, the tremendous investment in petrol subsidy is also unthinkable when considered alongside with the stagnated economic growth and increasing unemployment in the country.
But a rather interesting argument for outright removal of petrol subsidy stems from its failure to satisfy the true purpose it should serve. While some often consider the initiative as pro-poor, in actual terms, it compounds the burdens of the poor. Described by Alex Otti in 2018, “more pathetic is the fact that with the structure of subsidies in the country, the actual benefits go to the top instead of the bottom. The baboons are still having a field day at the expense of the labouring monkeys, it would seem”! In fact, a World Bank report in 2013 showed that about 57% of the gain from subsidies goes to the top 20% while only 3.8 per cent goes to the bottom 20 per cent.
Besides the fact that petrol subsidy is not economically sustainable, it has not sufficiently reduced the problems with the supply of the product. Price hikes, black-market trade, price freezing to name a few is still prevalent in some parts of the country, subsidies present. Not to mention, the enormous opportunity cost of subsidy missed. For instance, the ₦10 trillion FG spent on petrol subsidy between 2006 and 2018 could have funded about 1.5 million community health centres, built and equipped 2,400 units of 1,000-bed hospitals, and even added 500,000 new housing units to Nigeria’s housing stock! As a bonus, the government could have commissioned additional 27,000MW of solar-powered electricity to the national grid with the fund invested on subsidy in those 13 years.
Looking ahead
One cannot overemphasise the need to liberalise the price of petroleum in the country. Like other consumption items, FG should allow petrol to operate under market trends and the laws of demand and supply. There is also a need to deregulate the oil sector entirely to protect citizens.
According to Ademola Adigun, the question we should ask now is “how to liberalise the market and protect the citizens”. Perhaps a good way to go is to develop a template that allows free market trade; it should also have some form of regulation to protect citizens from extreme prices. The template should publish figures in the direct naira value rather than in dollars. By the new template, PPPRA could be transitioned into a downstream regulator or even cease to exist. Confirming Adigun’s position, Otti stated in his recent article that “Nigeria must begin to accept the well-tested principle that the best mechanism to allocate resources is the market forces”.
Other than establishing a new framework, there is also the need to dismantle pro-petrol subsidy institutions. This will eliminate the influence of these institutions in determining and fixing prices. Also, it will reduce the landing cost of petrol by removing the charges accruable to these institutions. Also important is transparency. The government also owes it to the citizens to provide public knowledge about the oil pricing framework. More so, FG should afford the public access to templates in this regard. Overall, efforts should be made to promote more accountability in this sector.