The Bricklayer’s Explanation of N10 Reduction in Fuel Price


Yesterday, the Minister of petroleum surprised Nigerians by announcing the reduction of pump fuel price from N97 to N87. The first thing I did was search for a document explaining the rationale behind the policy change, but I didn’t find any. Thought it was rather odd, given the significance of the change. Reminds me of when Gala reduced their meat by half without even announcing it.

The Minister of Petroleum did cite reduction in crude oil price in the international market as the reason for the price cut.  This reduction in fuel price is well known as a subsidy – a word made famous to Nigerians on the 1st of January 2012.

Before We Start, What Exactly Does Subsidy Entail?

For years, successive Nigerian governments paid to subsidize the fuel you buy. So when oil prices were high, you paid lower than actual market price. The government pays full price, so you could buy at a fixed lower price. This means that the price you pay stays the same whether foreign price of oil is high or low. With the fall in oil price, way too many have asked why our price hasn’t fallen. If you’re one of them, go back to the third sentence of this paragraph. Fixed price means it stays the same: in sickness and health…of oil prices. Still need further enlightenment? Feyi does a great job elucidating the byzantine mechanism called subsidy, so check his post out.

Interestingly, oil price has been falling since July and Nigerians have been clamoring for lower prices. Consequently, some agree with the decision, while others disagree. So what exactly are the good and the bad consequences of this action?

The Good:

If you drive a car and your fuel tank takes 60 liters, it means you save N600 when you fill your tank – enough to buy you small suya or fuel your ‘beta-pass’ generator. If you own a company or a fleet of vehicles with 10000 litre demand, you’ll certainly appreciate the N10 bonus, because that’s N100,000 saved…and that’s a lot of suya. Hopefully, you get the point, the richer you are, the more you benefit from this subsidy.

The Bad: 

If you’re a commuter, will it reduce how much you pay for public transport? Nope. If you bought a litre every day, that’s N10 a day saved, which is N3,650. Lagos taxis already charge you more than that to get to the end of your street. So no, don’t expect any taxi man or danfo driver to cut down price for you – especially in Lagos.

As I indicated above, subsidy benefits the rich far more than it benefits the poor.  That’s rather unfair. In a nation with poverty rate of 33%, Government spending should be more focused on the poor than on the rich. Most of the money from subsidy could go to creating social safety nets for the poor. Moreover, this rather unnecessary move of increasing subsidy payment by N10 costs the government – which if you’ve read the previous bricklayer article, you’ll know the government is kinda broke.

It’s why this period of falling oil prices was the perfect time to get rid of the subsidies. The landing price and the expected open market price of fuel dropped to the point that we could take out the subsidies. Without subsidy, we’d have been paying N89.84 per litre, but we’re currently paying N87.84 per litre. So the Government took on a cost of N2.84 per litre for no good reason. According to the Petroleum Product Pricing Regulatory Agency (PPPRA), the government was paying very little for subsidies (90 kobo) and the 2015 Budget didn’t even allocate for the subsidies. That was until 12am yesterday when N10 got taken off your fuel price. Just in case it hasn’t sunk in yet, someone else must pay for the N10 per litre bonus you’re enjoying, i.e. the government. In economics, we say “There’s no such thing as a free lunch”. Well, given that this same government’s kinda broke, your free lunch will likely end up being paid with debt. It’s very much like when your uncle gives you N1000 for sweet, but your mom collects it after she reminds you that she cooked the soup you’ve been eating.

petrol-pump11

Pic courtesy of thejuristlaws.blogspot.com

What Should We Have Done?

We should’ve completely deregulated and gotten rid of whatever subsidy mechanism we had in place. As explained above, with the market price of oil as low as $50, this is the perfect time to do so.  The Economist describes the removal of subsidy during this period as a “once-in-a-generation opportunity” to make a definite policy change; emphasizing that “the most straightforward piece of reform is simply to remove all the subsidies for producing or consuming fossil fuels”. However, in Nigeria, economically expedient decisions appear to take a break during election periods, so the government’s decision isn’t that surprising.

Oddly though, the Minister of Finance, Ngozi Okonjo-Iweala, had insisted in December that Nigeria would not reduce the pump price of fuel despite falling oil prices, until the revenue crisis caused by the dwindling oil rates is over. What led to this policy reversal? Perhaps opposition pressure or the fervent prayers of Nigerians that recently dedicated their newly purchased cars.

Many have alleged that the government reduced the price to gain more votes during the upcoming election. Perhaps knowing that Nigerians love a good bargain, it was done to sway some of those on the political fence. If the decision did impress you, then please calm down and wait for the government to explain how it plans to sponsor this N10 bonanza amidst dwindling revenue, austerity measures and a clearly unbalanced budget…that’s still tied to a benchmark of $65. Worst still, you’ve got to wonder what’ll happen to pump price in Nigeria if global oil prices rises.

Taking off the subsidy might be harder than it was to put it. Whoever ends up in Aso Rock Villa after the election will face a psychological barrier called loss aversion – humans measure loss far more than they value commensurate gain. This means that people’ll be angrier about fuel price rise than they were happy about fuel price reduction. Anyways, don’t be surprised if that N10 or more comes back after the elections are over. Just a heads up, so you don’t vex too much.

Remember, until deregulation and dismantlement of subsidy happens, Nigerians should be ready to shoki with subsidy prices. For now, enjoy the N10 because when oil prices rise again or the subsidy becomes unsustainable, you’ll have to silently queue and buy your subsidized fuel.


  • Rynie

    First to comment. Interesting read. You should trademark this “bricklayers explanation” series

  • Reblogged this on eco215 and commented:
    Oddly though, the Minister of Finance, Ngozi Okonjo-Iweala, had insisted in December that Nigeria would not reduce the pump price of fuel despite falling oil prices, until the revenue crisis caused by the dwindling oil rates is over. What led to this policy reversal?

  • Joe

    The problem to this whole thing is to get our refineries functioning optimally. The we can refine locally at a cheap price and sell to the populace at a cheap price too. Its callous for us to be losing hundreds of barrels to oil theft all in the name of exporting abroad.

    Nigeria continues to lose a conservative figure of 400,000 bpd. Some analysts put it at around 700,000 bpd.

    Following a layman’s mathematical approach, 400,000bpd at a conservative price of $100pb (note: a barrel of crude oil was over $115 during the period under review), is a whooping sum of $40 million lost to saboteurs daily. Multiplying these by 7days gives you $280 million weekly and $1.12 billion in a month. What this reflects is that in 2012 alone, Nigeria lost $13.44 billion to crude oil theft. Adding 2013 and 2014 figures will amount to $40.32 billion deposited in the bank account of few thieves. What is more saddening, as we speak, the crude oil resources of this nation is still being stolen.

    With the conservative figure of $40.32 billion frittered in the past three years alone, Nigeria would have built four types of Alhaji Dangote’s $9billion worth 400,000bpd capacity Refinery, Petrochemical and Fertilizer Plant with a change of $4 billion.

    Why can’t we just do the right thing in this country?

    Joe

  • Reblogged this on paulbenameh's Blog.

  • Reblogged this on feignedidentity.

  • Reblogged this on Michael Dugeri.

  • Reblogged this on Free Thoughts and commented:
    If you’ve been “washed” away by this issue, Chuba Ezekwesili lays it to rest.

  • Very well argued. I’m glad I discovered your blog, keep em coming.

  • Tola Odejayi

    I’m not sure that getting rid of the subsidy is as straightforward as it seems.

    While the price of oil is low, it might not be apparent that there is no more subsidy.

    This is because importers will be spending less than N97 a litre to import fuel, so there will be no need for the government to pay a them a refund for any additional cost beyond N97 a litre that they would have spent in importing fuel.

    However, when the price of oil starts to rise, the importers will start to spend more than N97 to import fuel.

    With no refund coming from the government, the price paid for fuel will start to rise.

    When the price rises, the government will have another “Occupy Nigeria” on its hands.

  • On the funny side… Please don’t tell me Mummy Oby Ezeks took your cash gifts on the same premise. Mothers are the same everywhere then. Makes us love them though.

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