The Bricklayer’s Explanation to Why High Prices Persist After Fuel Scarcity

As much as we tend to grumble when transport price rises during fuel scarcity, we see the fuel queues and admit the deservedness of the price hike. However, our grumblings tend to grow louder when we see those who keep prices up after fuel hikes. ‘Oles! Why are their prices still up when fuel scarcity has ended?’, we shout. However, the reason for this is far less exploitative.

The major reason: prices are ‘sticky-downwards’. This refers to the tendency of a price to move up easily but prove quite resistant to moving down. The reasons for this ‘stickiness’ range from imperfect information to business decisions. A good example is your salary. You’re more likely to see a rise in your salary than to see a cut. Actually…I’m not sure how well this applies in Nigeria with a saturated labor market and poor labor practices. Some Nigerians don’t even get their salaries, talk less of a pay cut.

Anyways, we digress. Back to why transportation cost or cost of some goods do not immediately adjust downwards after a period of fuel scarcity.

“Fuel is scarce for no reason and we are really suffering especially us drivers. As you know, drivers are always on the road to carry passengers and because of the scarcity of fuel we couldn’t make the money we used to make before.” – Mohammed the Commercial Driver

A lag exists between the cost of the product and the profit from the product or service. This is worsened when price adjustment downwards is instantaneous. Too much grammar? I’ll illustrate.

As a bus driver, let’s assume I charge N200 a seat and make a profit of N100 when fuel is sold for N85. However, when there’s fuel scarcity, price of fuel goes up and I probably have to buy from the black market at N120. This rise in my cost obviously eats into my profit of N100. I don’t want that to happen, so I increase my price to N250 a seat, so my profit goes back to N100. This goes on for 2 to 3 days.

Then all of a sudden, the major oil marketers receive Christ into their lives and are born-again are paid their subsidy money and the fuel scarcity is gone. Great news, yeah? However, my engine is still running on the fuel I bought for N120 and if I revert back to previous price, I’ll make a loss. So I keep price up until I’ve made my profit off every litre that I bought at the inflated price of N120 per litre.

The same applies to others like the market woman who bought her yams at a higher price than usual or the barber who filled his generator at the inflated price or the…you get the point by now. There’s usually some multiplier effect whenever the pump price of an essential product like oil increases.

This effect is actually strong enough to cause a spike in monthly inflation rates. I asked Dr Yemi Kale, the Statistician General of the Nigerian National Bureau of Statistics (the guys that fastidiously track Nigeria’s inflation rate as well as other macroeconomic metrics) and here’s what he had to say about this effect:

“Fuel scarcity definitely affects inflation figures both directly and indirectly. For e.g. CPI (inflation numbers) tracks actual price paid for fuel and not official N80, so even before scarcity some areas were still paying more than official and it was reflected in CPI. That’s the direct transportation costs or costs of goods that are fuel sensitive. If there is scarcity and a taxi driver has to queue for hours, he will charge more, both because he probably paid more for the fuel and also because he needs to meet some quota a day to survive, so time he spent in queue will also reflect on his prices.”

There you have it – fuel scarcity is enough to stimulate inflation.  The price mark up starts with transportation and ends up in almost every other sector. So when prices don’t instantaneously adjust, someone’s just trying to make their deserved profit. As my Igbo brothers would say, “It’s only business”. However, this doesn’t mean some charlatans won’t attempt to take advantage of the situation and indiscriminately increase price. In fact, a taxi driver once tried to convince me that the N95-N85 subsidy was grounds for him to increase my fare. My advice on this – shine ya eyes, boys are not smiling.

  • Ààrẹ Àgò

    Nice illustration but focused on the “going” and not the “coming”. Let me illustrate.

    Fuel was available and sold at 85naira per “genuine” litre. In which period the profit margin of a genuine driver was 100. Now “coming” is he fills his tank and suddenly every Nigerian started drinking fuel, so it becomes scarce. Fuel price spiked. So the cost of transportation. This genuine driver, aware of the change, immediately adjust charges per seat and makes more money.

    Though profit is likely to be gulped by the rise in subsequent hustle for fuel, in proper business, ideally he makes no losses. So, this margin should normally cover for whatever deficit whenever Nigerians stop gulping fuel.

    This part of the illustration is what bizmen do not like to state. The “going” suits there purpose for more profits.

    In all, nice write-up