How Subsidy Removal on Diesel causes Scarcity and High Price of Petrol in Nigeria.

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By Ahmed Adamu, PhD

The removal of subsidy on Diesel coupled with the increase in the international oil price led to the increase in the price of Diesel by 180% in just a year. This caused some banks to close early because they cannot afford the higher diesel prices. Other businesses and commercial centers also shortened the duration of their services. This slows down the economy. The cost of transporting goods and petrol has more than doubled, as a result, hence the unprecedented inflation, which was 17% as of April 2022.

Removing subsidy on Diesel have more effect on inflation because heavy transportation of goods and fuels are done using trucks that use Diesel. Commercial and industrial centers are more affected by Diesel inflation than petrol inflation.

The cost of doing business and producer transportation is largely affected by the Diesel price increase. To avoid increasing the cost of production, countries like Brazil delayed removing the subsidy on Diesel until after the successful removal of the subsidy on jet fuel, gasoline, and LPG.

Petrol, known as PMS in Nigeria, directly affects the cost of mostly human transportation. Despite subsidizing the PMS price, inflation is still going high and fuel scarcity is becoming worse because diesel prices are increased.

Now, what is the link between diesel price hikes and fuel scarcity?

In the Nigerian PMS pricing template, marketers of the fuel are paid for the bridging cost to ensure price equalization across the country, now that the marketers are paying more for every distance because of diesel price increases, they are demanding more to pay for their inflated transportation costs.

However, the government wants to stick to the existing N165/liter pricing template, which allows for a lower bridging cost. Marketers are now left with the option to either stop operations or sell at a more expensive location to recoup their transportation costs.

Locations like Abuja where officials can easily trace any violation of the pricing regime suffer the most. Marketers avoid Abuja because they are forced to sell at a lower price than they wanted. They would rather take it to other locations that have little or no supervision and sell it at their desired prices. Higher prices always fix excess demand, that’s why queues are less outside Abuja.

On the other hand, the government is shying away from adjusting the pricing template because it will mean paying more for the bridging purpose, which is a form of additional subsidy. Already, the government planned to spend N3 trillion on subsidy this year, and additional bridging costs are going to add to the subsidy burden.

The Nigerian government has only six months since the passage of the PIA to stop all kinds of fuel subsidies. This means subsidies cannot exceed June 2022.

President Buhari has no plan on how to convince Nigerians or deal with the subsidy removal. He is now scared of the public resistance and the implication of that for his party in the forthcoming election. That is why President Buhari must send a bill for the amendment of the PIA to enable him elongate petroleum subsidy, otherwise, petroleum subsidy is illegal from the end of June.

With the landing cost of about N600 per liter, removing the subsidy will make the government save N29 billion every day, and will help clear all the queues at the filling stations. However, the pump price will be above N600 per liter.

Is Buhari’s administration ready for this reality? Keeping subsidies or removing subsidies; both options have painful consequences, the best thing to do is to go for what is best for Nigerians for a longer period even if it hurts more now.

With the price of oil being $126 per barrel as of June 2022, the highest oil price in more than a decade, Nigeria stands for no gain. The only oil-exporting country that does not benefit from the high oil price. Because higher oil prices mean higher subsidy payments, where a 1% increase in oil prices leads to a 1.58% increase in subsidy spending.

Sometimes, the Nigerian government would prefer low oil prices to avoid higher subsidy bills. In just 20 years, the Nigerian government has paid over N14 trillion on petroleum subsidies. Imagine the opportunity cost of that huge amount. That amount would have been enough to build refineries, but we are still left with no working refining capacities.

Our refineries are big liabilities, as Nigerians’ money is used to keep them alive even without refining a single liter. Now, that NNPC is commercialized, refineries are open for grabs, but even NNPC limited is afraid to take the refineries because of their liabilities. So, if the government cannot handle the refineries, they must be sold, because billions of Naira are lost to the refineries that are not working.

One thing that will take Nigeria off the hook is full deregulation, President Buhari should stick to the PIA calendar for the subsidy removal and the refineries should be privatized too. However, there are certain steps, conditions, investments, and lifestyle reforms that must be in place for subsidy removal to be seamless.

Ahmed Adamu
Petroleum Economist
ahmadadamu1@gmail.com
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