Petrol: Subsidy And Pump Prices in Nigeria

The oil and gas industry has been a significant source of service to the Nigerian economy since 1956. Agriculture was the major source of Nigeria’s revenue through the exportation of cash crops such as rubber, hide and skin, groundnut, oil and palm kernels, cocoa, and coffee before the discovery of petroleum in Oloibiri, in the Niger Delta region. Since the discovery, the petroleum industry has been the country’s major source of revenue as it became the backbone on which the national budget rests.

The oil industry served well as it contributes to Nigeria’s gross domestic product and government revenue, boosts foreign exchange revenue, and creates employment opportunities for Nigerians.

Fuel Subsidy and The Looming Problem

Subsidies on imported petroleum products were considered an important instrument to provide stable and secure prices to families and small businesses, thereby keeping living low. But these subsidies increased sporadically over the years as demand grew exponentially, along with increased volatility in world petroleum.

Though the subsidy was to help 85% of citizens living on less than US$2 per day, these citizens gain little directly, as they do not consume much gasoline. In short, the fuel subsidy didn’t work well at achieving the intended objectives.

In 2003, the Federal government, confronted with a fiscal deficit, high external debt, an unfavorable balance of payment, and inability to sustain the enormous cost of subsidy payment, announced her intention to deregulate the petroleum downstream sector industry. Since then, deregulation of the downstream oil and gas industry has become a controversial issue in Nigeria. 

Deregulation is the process of complete removal of government regulations or control on industry, especially regarding pricing and products. The Nigerian Institute for Social and Economic Research estimates that the budget for fuel subsidy in 2019 was sufficient to have enrolled the entire population of Nigeria in the National Health Insurance Scheme.

The Federal Government lamented that the cost of subsidizing fuel importation, estimated to be as high as $2.6 billion annually, that is 1 trillion in Naira, has become too difficult to sustain. The deregulation of the downstream sector would attract investors into the oil and gas sector and provoke competition, resulting in a reduction in the prices of petroleum products. Fuel subsidies since 2006 have taken up over N10 trillion of resources.

The Federal government, on June 4, 2020, advanced with the full deregulation of the downstream petroleum sector by the removal of the existing cap on fuel prices. This means that marketers can now import the product and sell at prevailing market prices, without the usual band set by the concerned regulatory agencies.

The Petroleum Product Pricing Regulatory Agency (PPPRA) noted that petroleum prices would be determined entirely by market forces.

The price of petrol was as low as N65 during the regime of the late president, President Yar’Adua and it doubled when President Goodluck looked into removing fuel subsidy. After deregulation process in June, the petrol pump price has been increased up to three times. It was increased from N123 to N143 in July, and N150 in August.

According to the Minister of State for Petroleum Resources, Timipre Sylva, the deregulation will free up a lot of money. At least from the beginning, it will save the country up to a trillion, and more every year.

Sylva mentioned they have taken off the budgetary provision for the subsidy, which is about N500 billion in the budget, the excess forex price, the special rate given to NNPC, which also came at a cost taken off. All this money will be freed up for development.