Deregulation, pricing and subsidy: An analyst’s perspective

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By Clara Nwachukwu
TO say that deregulation of the downstream petroleum sector is the rave of the moment in Nigeria will be an understatement, as analysts continue to argue back and forth on the merits and demerits of the policy.

But in spite of these arguments, there is a general consensus that in view of current economic realities the subsidy regime is not sustainable, and something needs to be done.

In the light of this, a market analyst, Mr Toju Aminaghan, urged the Federal Government to put in place some palliatives that will “cushion the effect of petroleum prices increases.”

This is not the first time the issue of palliatives is being suggested as a buffer for deregulation. Indeed, the contentious subsidy regime being enjoyed by Nigerians is a fallout suggested palliatives.

In October 2004, the then President Olusegun Obasanjo, established the Independent Coordinating Committee on measures for cushioning the effect of the increase of petroleum products prices sequel to the fuel price hike of September 2004.

The Senator Ibrahim Mantu-led committee, subsequently referred as the Mantu Palliative Committee, had recommended, and a host of others, for the   “establishment of a modulator mechanism to stabilise domestic prices of petroleum products and mitigate the impact of upward movement in crude prices on the domestic products market.”

Accordingly, government established the Petroleum Support Fund, PSF or fuel subsidy, in January 2006, with a take-off vote of N150billion, “to stabilise the domestic prices of petroleum products against volatility in international crude and products prices.”

Removal of the subsidy

Many other analysts have equally called for similar palliatives, this time around to cushion the effect of the removal of the subsidy.

Specifically, Aminaghan, who is a specialist in Energy Economics and currently the Pricing Analyst, Downstream at MRS Oil Nigeria Plc, also called for judicious use of the savings from subsidy removal “to develop other sectors of the economy such as education and health.”

The market analyst in his book titled: Deregulation of the Downstream Petroleum Sector in Nigeria: A Critical Analysis of Petroleum Product Prices and Subsidies, made a series of suggestions on the way forward, even as he identified a plethora of challenges currently confronting subsidy removal.

The book, published in Germany by VDM Verlag Dr. Muller, assessed the issue of subsidy in different countries of the world, particularly the developing countries, and compared notes on administration of the policy with the Nigerian situation.

According to the author, the objective of the book “was to investigate the impact of petroleum subsidies on real per capita Gross Domestic Product, GDP, and identify a framework for an appropriate path for petroleum subsidies in Nigeria.”

Given the fact that per capita real GDP decreases when pump prices increase, the author opined that “subsidies should be phased out or re-designed so as to improve social and living conditions of the Nigerian people.”

He also noted that contrary to intensions, the benefits of the subsidy regime are lost on the majority poor, and benefits the rich more because they consume the largest proportion of the petroleum products through their ownership of strings of vehicles, generating sets and a host of other machinery.

As a result, he called for alternative measures such as investing in programmes that will “enhance economic growth and development so as to lower petroleum prices and increase consumer and producer surplus.”

The 86-page book divided into five chapters and accompanies with bibliography and appendices, quoted copiously from other authors and analysts both locally and internationally to underscore his arguments that freezing subsidies would fast track rapid economic development, while also controlling the incidence of smuggling across the West African borders and align local pump prices to intentional market rates.

Breaking the monopoly

The first chapter or the introduction broke with the arguments in favour of deregulation, aimed at not only breaking the monopoly of the Nigerian National Petroleum Corporation, NNPC, but also instituting a healthy completion by allowing the market forces of demand and supply to dictate pump prices, as opposed to price fixing.

The author progressed further into Chapter two, to review the petroleum pricing policy in Nigeria, noting that prior to the oil boom of the early 1970s, there was no intervention in pricing by government, but subsequently indulged in price fixing laced with subsidy undertones.

Thereafter, he highlighted the economic effects of subsidy in Chapter Three, in which he argued that “petroleum product price subsidies are characterised by fiscal and social costs that are poorly understood,” and stressed the need to achieve economic efficiency in the policy.

In Chapter Four, Aminaghan undertakes an empirical analysis of subsidy on economic growth and petroleum products comsumption, saying that, “energy consumption in Nigeria has been on the increase, this is as a result of the increasing economic activity brought about by revenue from oil exports and high population growth, increase in traffic and inadequate supply of electricity.”

He also argued that the attendant subsidy regime has distorted the market structure and led to products under-pricing with attendant effect on refining capacity and ended with his conclusions and recommendations in Chapter Five.

Before arriving at his conclusions, the author highlighted the critical challenges facing subsidy removal to include lack of credibility and confidence in government; uneven distribution of costs; and persistent bottlenecks in supply and distribution of products and a host of others.

All of these made him to conclude that to make subsidy removal attractive to Nigerians; government must put in place efficient and effective infrastructure particularly the public transportation system – affordable mass transit, railway and marine; improvement in power supply and rural electrification and other social amenities including primary healthcare and massive road construction.

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