Since the announcement by the president-elect of Fuel Subsidy removal in Nigeria, the petroleum market has been a crazy place. With some marketers selling for as high as ₦650 to ₦700 and others not going below ₦500 to ₦550, one can only imagine how the common man is surviving. Cost of commodities and transportation are at their peak. Social unrest and inflation are a norm now. A lot of Nigerians have called out the filling stations for selling at ridiculous prices and even threaten to destroy them.
In this article we will explain what subsidies are, how the work, its impacts, advantages and disadvantages of its removal and more. Then end with an analysis of whether and how the filling stations are greedy.
What is Subsidy
According to investopedia, subsidy is a benefit granted to a person, company, or institution known, and it is typically provided by the government. It may be immediate (like cash rewards) or indirect (like tax benefits). The purpose of the subsidy is often to alleviate some sort of hardship, and it is frequently thought to be in the public’s best interest to provide it in order to further a social good or economic policy.
POINTS TO NOTE
- A government payment made directly or indirectly to people or businesses is known as a subsidy. Typically, this payment takes the form of a cash payment or a targeted tax break.
- According to economic theory, subsidies can be used to counteract market imperfections and externalities and boost economic efficiency.
- However, those who object to subsidies point out that there are issues with determining the best subsidies, overcoming hidden costs, and avoiding political incentives from making subsidies more costly than helpful.
How does Subsidy work?
A subsidy is typically some type of payment made to the recipient person or business, either directly or indirectly. Because they reduce a burden that was previously placed on the recipient or because they support a particular action, subsidies are typically regarded as a special sort of financial help.
What is Fuel Subsidy
The standard definition of a Fuel Subsidy is when the government makes an effort to cover the price differential between the price of fuel at the pump and the actual cost of importing the product.
In order to lessen the burden on its citizens, particularly those from lower socioeconomic classes, the government pays the difference, allowing fuel to be sold at a lower price. To sum up, a fuel subsidy is a government transfer of money used to keep the cost of petroleum products low.
What is Fuel Subsidy in Nigeria?
Over time the Nigerian government has been subsidizing the pump price of petroleum products in the country. They prioritize mostly on PMS as it is the most consumed petroleum product. Nigeria spends nearly twice as much on fuel subsidies as it does on health care, which is approximately USD 3.9 billion. The opportunity costs of such spending on other development goals are high, the distribution of resources to state governments is reduced, the majority of the subsidy goes to Nigerians who are already well off, and cheaper gasoline encourages more pollution, congestion, and climate change.
Despite this, the majority of Nigerians reject cutting subsidies. People who think the government is dishonest or incapable of implementing compensation schemes seem to be vehemently opposed to reform.
How much does Nigeria spend to Subsidize Fuel?
The exact amount the government pays per litre varies but for PMS the Minister of petroleum said that the government pays approximately ₦202 per liter. Which can sum up to ₦400bn per month in subsidies for just PMS.
Meaning of Subsidy Removal
What is Subsidy Removal?
Subsidy removal is the withdrawal of financial assistance by the government to lower the price of a particular commodity. Thereby leaving the market to determine the final selling price of that commodity.
What is Fuel Subsidy Removal?
When a Fuel subsidy is removed, the government simply stops covering the difference between the price at the pump and the real cost of importing fuel. It technically refers to the complete deregulation of the downstream industry to make way for a thriving market where other interested investors can compete.
When was Subsidy Removal in Nigeria
As of the time of writing this article, the fuel subsidy in Nigeria is not clearly removed. The president-elect only announced that he will remove it during his inauguration. This sent the retail petroleum sector into a frenzy.
What does Subsidy Removal imply
Subsidy removal will expose the consumer to the direct price of importation of petroleum and also leaves the price of petroleum product to be determined by the retailers.
Advantages and Disadvantages of Fuel Subsidy in Nigeria
The primary advantage of fuel subsidy was that it made the price of petroleum products a bit affordable for the common man. This also reflected in the price of other consumer goods that required the subsidized petroleum products either in their manufacturing or transportation.
On the other hand, the primary disadvantage of subsidy was that it drained money from the federal government. Money that could have been used for other purposes.
Advantages of Fuel Subsidy Removal in Nigeria
- It would ensure that the private sector participates in the importation of petroleum products, opening the market, giving many Nigerians more power, and enabling the government to concentrate on other important economic sectors.
- As a result of Nigeria’s oil surplus and the absence of marketer diversion, it will guarantee that all Nigerians always have access to gasoline.
- It will reduce the oil industry’s sabotage and participants’ hunger for bigger earnings, which will help the economy.
- It will guarantee that market forces and industrial rivalry, as shown in the telecoms sector, will eventually drive down the price of gasoline for Nigerians.
- It will permanently stop lines at gas stations nationwide, releasing the nation from the constant aches and sufferings caused by gasoline shortages, which force Nigerians to wait in gas lines for an entire day.
Disadvantages of Fuel Subsidy Removal in Nigeria
On the other hand, eliminating the fuel subsidy would raise the cost of petroleum-based goods. This can then cause inflation and lower consumer purchasing power. This might affect the price of goods and services and have an adverse impact on the entire economy.
In addition, people may feel that the government is uncaring about their needs, which could spark social unrest and riots. Additionally, there is a chance that cutting off the subsidies could increase gasoline smuggling and other criminal activity.
Effects of Removal of Fuel Subsidy
The removal of fuel subsidy has both negative and positive effects which includes:
- Social unrest
- Inflation
- Increase in transportation cost
- Market diversity
- Zero petroleum sabotage
- Revenue sustainability for the government
The Business of Petroleum in Nigeria
Why is Fuel Expensive in Nigeria?
Currently the price of petroleum products have been in a frenzy in Nigeria due to the declaration of the president-elect to remove subsidy. This has left every petroleum marketer on their own when it comes to the price of their products. Even the government owned Establishments like NNPC have also doubled their pump price.
Why are Filling Stations so Greedy?
Without knowing how subsidy works, a lot of people blame and attack the management of filling stations for the seemingly outrageous prices they are selling their petroleum products, especially petrol(PMS). But looking at the business aspect with knowledge of how subsidies work and the unstable price of crude oil, one can see that these marketers only increased their pump prices out of fear because they have no solid idea of how much they will have to buy new petroleum products. So they increase their prices to the highest point possible to avoid losses.
Let’s take an example. You are a marketer for a particular product. The product costs you ₦100 after importation and transportation. The government gives you a subsidy of ₦50 per item making your selling price to be ₦50. When the government declares that they will remove the subsidy, automatically you have to return back to the normal landing cost of N100 because still selling at ₦50 will result in a ₦50 loss for you. But the general public is not really aware of this, so they blame and accuse you of extortion for doubling your price because the are already used to the ₦50 you were selling previously. This is exactly what is going on now.
Although this analogy is correct, it doesn’t support those that raise their own prices to astronomical rates and those who still have old products. The main aim is to just give you a glimpse of how it works.
In Conclusion, are all filling stations greedy? No. Some have reasonable prices that we just have to get used to and hope the government uses the new freed revenue for our benefit.
Why did Filling Stations Raise their Fuel Price so High?
The reasonable filling stations raised their prices to adjust to the removal of fuel subsidy while some greedy entities are trying to capitalize on it to extort money from nigerians. Although we can’t categorically tell if the department of petroleum resources (DPR) can do anything to control these greedy marketers, we still hope the do.
Conclusion
In conclusion, the removal of fuel subsidies is a welcomed development. Although the way it was announced was haphazard and uncultured. Just as the telecommunications industry we hope that the competition in the market will drive the price down to a more stable and affordable price for the common man. All we have to do is endure for a short period of time.
Thanks for reading. Feel free to comment the pump price of fuel in your area or your thoughts. You can also check out more trending stories on our blog through our Current Trends Page.
