Some Nigerians want fuel subsidy. It will come at a cost

So a few people think government should subsidize the price of petrol. I do not agree but let's assume this is the right thing to do. Shall we play with some figures? Good.

The current price is N145 per litre. Let's assume the government decides that people should pay N110 per litre. That means govt is subsidizing our fuel consumption at N35 per litre.

Now, the general consensus is that Nigerians consume 40 million litres of fuel every day. Let's assume this figure is too high and the actual figure is something like 35 million litres every day.

Let's also assume there are 365 days in a year.

What this means, my people, is that Nigeria will be subsidizing fuel consumption with N447 billion per year. This is assuming that crude oil price or exchange rate doesn't go up. If any of this goes up, the amount of subsidy also goes up.

Where will this money come from?

In the 2016 budget, Nigeria budgeted N268 billion for over 206 roads, N99 billion for power supply infrastructure and N66 billion for housing. That's a total of N433 billion. Are we then saying instead of spending money on roads, power and housing, we should spend money on fuel subsidy (and it may not be enough still).

Last year, the Nigerian federal government spent N19 billion on road in total. This year the government wants to spend N268 billion on roads. This amount is not even enough but at least it's something. That's partly why they did not budget for subsidy in 2016 - they want to spend money on real infrastructure. But it seems Nigerians prefer subsidized fuel instead of good roads and better power supply.

The time has come for us as a people to determine what we really want. We cannot continue to eat our cake and have it.

"Do not be deceived. God cannot be mocked. Whatever you sow, that is what you will reap" - Galatians 6:7

Selah

Making sense of the new petrol price regime in Nigeria

The first thing to know and accept is that the former price of premium motor spirit, or petrol (PMS) at N86.50 makes absolutely no sense within the prevailing crude oil price and exchange rates. The second thing is that what we have now is not deregulation but "price modulation". The third thing is that the government did not really remove subsidy per se – the 2016 budget does not even contain provision for subsidy.

Fine? So we can move on now.

A bit of history

In 2012, when the President Goodluck Jonathan government removed subsidy on PMS and announced a complete deregulation regime, Nigerians protested. I did too. While most of our reasons for rejecting the deregulation were valid (demand for prosecution of subsidy thieves, reduction of massive wastes in government, fight against widespread corruption etc), in retrospect Nigerians were wrong and the government was right – we should have accepted deregulation. However, the money saved by the government against subsidy payment would most likely have been stolen by the government anyway as we now know how corrupt that government was. Nevertheless, deregulation would likely have solved a lot of existing problems in the industry including new investments in refineries and distribution infrastructure. But it is never late to correct a misstep, is it?

Why deregulation?

Under deregulation, the government has almost zero input on the pricing and distribution of petroleum products. Anybody can produce or import petroleum products at whatever costs and sell at whatever prices. Government protects consumers by encouraging competition in the industry which ensures prices cannot be determined by one individual (think of MTN, Airtel, Etisalat and Glo and how competition has forced prices down). Here in the US, that’s what happens. For example, around my house there are three fuel stations within about 400 metres of one another. In fact two of them are right opposite each other. At no time do these fuel stations sell at the same price. The funny thing is that the one I prefer buying fuel at (called Royal Farm) is the one that usually has the most expensive price. I prefer there because their pump appears to dispense fuel faster. They also have a free tyre pumping machine and I get to buy stuff at their super market. Now the church where I worship is about 8 minutes away and there is another Royal Farms station there. The price at this station is always different from the price at the Royal Farms near me. Also, when I first arrived here fuel price was about $2.20 per gallon (1 gallon = 3.785 litres). As crude oil price crashed, fuel price also reduced. In early February when crude oil price was around $32 per barrel, I bought fuel at $1.54 per gallon. Now crude oil price has gone up to around $45 per barrel and fuel price has followed suit - at the weekend I paid $2.15 per gallon. This is how deregulation works.

Now back to Nigeria

So have we deregulated now?

No (and that is why the government announced a price peg – under deregulation the government cannot fix any price). What we have now is price modulation. Why did the government not just deregulate completely and focus its energy on something different? No one knows for sure, but I have two working theories. One, Nigerians hate the word “deregulation”. Labour unions will likely embark on strike and it might even lead to civil unrest. Two, and this is very important, you cannot trust the average Nigerian businessman. As stated earlier, what deregulation typically does is to ensure competition which eventually forces down prices. But Nigerian producers are a different, special breed. Who is to say these people will not collude to maintain high prices? A very good example is cement. Ordinarily, Dangote Cement has achieved high efficiency in production and this should translate into much lower prices than their competitors (which will force these competitors to improve efficiency and therefore lower their own prices too). But what do we have? They sell their cements at basically the same prices. The result is that Dangote Cement’s gross profit margin and net profit margin are the highest of any cement producer anywhere in the world!

Price modulation what?

Price modulation in this sense is official changes in price of PMS due to changes in the variables. For example, if crude oil price increases (or decreases) significantly, there is also an increase (or decrease) in the price of PMS. This is also the case where there is a significant change in other components of fuel price e.g transport cost, storage cost etc. As you can see, this is what should happen in a normal business – you increase your price whenever your cost increases. The fundamental difference here is that it is the government doing this increase or decrease, not the private sector (of course you would expect that the private sector will be involved in some ways). The gist also is that the government is using a more realistic exchange rate to determine the landing cost of fuel since we import our fuel (i.e closer to N320 per dollar instead of the previously used N199/$ which the oil marketers don’t even get). This point is very important as the current scarcity is largely due to lack of forex at the official exchange rate which is what the former price of N86.5 was based on. Another thing the government announced is that there is no longer import restrictions – anyone can import fuel and sell at any price (before now, you needed a licence and an import quota from the NNPC). However, the Nigerian government says it will be doing this price modulation every quarter unless something extraordinary happens to these indices before the end of the quarter. This is where there might be problem. Three months is too long to react to changes in input costs. We also need to look at how India and Kenya, two countries that also use price modulation on petroleum products, do their own.

Where do we go from here?

What price modulation does is to ensure these oil marketers do not take advantage of Nigerians and charge prices there are way beyond their cost. Also, there is still a bit of competition here since oil marketers are allowed to sell their products at any price so long it is not above the peg of N145. So if I am own a fuel station A and the fuel station B beside me is selling at N145, I can decide to sell at say N143 and ensure more cars come to my station to buy fuel, even though it means there might be queue. Of course this other station B will be forced to react and lower his own price too, so far it is not below their own cost. That is how competition works – everyone tries to take the other seller’s customers using price.

All said, I would still have preferred a full deregulation, even with the risk of excess profits that Nigerian producers are wont to charge. You have to have some measure of faith that the market system will eventually self-correct. However, it appears the Nigerian government could not take this risk with these marketers at this delicate time.

Nigerians are probably paying the price for years of successive governments not maintaining our refineries and/or building new ones to cater for our burgeoning population. It is therefore imperative that the government takes immediate steps to privatize our refineries (one of the reasons the late President Yaradua was a faiure) and give approvals for new ones to be built. The Dangote refinery scheduled to be completed in 2018 cannot come any quicker. New ones are needed. There is no reason why Nigeria should not be exporting refined petroleum products.

Until then, we have to live with this. It is painful but unavoidable, unless we want to embark on a journey to Venezuela. God forbid.