Towards a deregulated downstream sector of the economy

on   /   in My Layman's View 12:38 am   /   Comments

By Adisa Adeleye

IT is happy news that the dispute on the ‘removal of subsidy‘ between the Federal Government and the organized Labour and Civil Society has ended somehow after the President‘s address to the nation and the reduction of pump price of petrol from N141 to N97. Although Labour said that the new price of N97 was a unilateral action by the government, it was magnanimous enough to call off the strike and the mass protests.

The week_long strike of workers and the subsequent protests followed immediately the unilateral action of the Federal Government in removing what is termed ‘fuel subsidy‘. That removal resulted in increase in the pump price of gasoline from N65 per litre to N141 per litre in Lagos. That more than 100% increase in the pump price of gasoline has led to more than 100% increase in the cost of transportation and other items in Lagos and many other parts of the country.

Although the last five-day strike and demonstrations by workers and others caused a lot of inconveniences. The episode brought home vividly the evidence of great distrust between the government and the governed.

It has also portrayed a situation where ordinary people would not want to be taken for granted again on policies that would affect their living condition. The disagreement has left the realm of subsidy removal to embrace other sectors of governance, including accountability.

There is no doubt that a policy of subsidy removal on gasoline is a progressive one if it actually exists and well explained to the people. All what is necessary is for government officials to explain the element of subsidy in the present price structure and articulate its effect on the economy. Many Nigerians are unaware of the cost of the litre of gasoline produced at home as against the imported landing cost of such product.

Also, people are ignorant of the exact percentage of imports to total domestic consumption at any given time. Many would question the rationale of importing refined products into a country which is a large producer of crude oil. Why not refine your crude abroad, if it is absolutely necessary and enjoy the production of products associated with barrels of crude oil?

The problem is whether there was subsidy on the pump price of N65 per litre of petrol before the increase to N141 per litre.

To me, if the imported cost of a litre of petrol is N140, and the domestic pump price is N65, then there is an element of (N140 – N65) subsidy of N75. In that case, government is right in its assertion of subsidy removal. However, that would not be the true story.

The landing cost of N140 or any figure would arise under an exchange rate of N155+ to 1US$. If the exchange rate had been fixed at N2 to 1 US$, the imported cost of a litre of petrol would have been less than N2. At N2 per litre, there would have been nothing like subsidy. Thus, for an import dependent nation, the exchange rate management is a fundamental issue. Common sense economics would dictate when it is necessary to apply a multiple system of exchange rate in order to solve some economic problems.

In the justification to increase the price of gasoline, the question of deregulation surreptuously crept in. There is no reason why a policy of increasing revenue from oil product should be confused with deregulation which is a policy of transferring the operations (manufacturing, storage and distribution) into the hands of the private sector. As it should be expected, government involvement in the field of deregulation would be to ensure good standard of operation, security, tax and the provision of infrastructures.

The aim of the government and that of organized Labour would be to ensure that prices fixed by oil marketers are reasonable and affordable especially, in a country with abundant crude oil. The duty of the government is not to engage the Labour in fixing prices which is the responsibility of the stake holders. One would expect that this process would engage the attention of the government in the next three months in order to solve once and for all, the nagging problems of subsidy.

It should be possible under full deregulation for any responsible government agency to allow each marketer to buy domestic crude (not at the world price) but at a figure slightly above the real cost of local production with some agreed margin and allows such marketer to refine its purchased crude to its specification at the local refinery or any nearby refinery of its choice. Thus, the ex refinery cost of a product could be determined, leaving room for other additional costs like transportation, storage, distribution and tax, etc; this would be the real cost of the products.

The giving of license for the importation of a single product, e.g. gasoline does not make economic sense. The cost of gasoline should be determined in the context of other products like kerosene, diesel fuels and other products associated with the refining of any single barrel of crude oil.

If all facts are considered including the real cost of producing a litre of gasoline at the local refinery and the additional import cost under a favorable exchange rate, it can be concluded that there would be no need for any subsidy. What the government has done is to increase its revenue through increase of pump price of gasoline. The argument of subsidy removal or deregulation is not genuine or misleading.

After the bitter experience of last week involving strike and demonstrations, the government should now spell out in details, its policy on deregulation of the downstream sector of the oil industry and prepare to hand over the operation of the downstream sector to the private sector where it should belong. As indicated in the previous articles, the efficient running of the refineries and additions to existing number should be left in private hands with, of course, incentives to attract new investment.

The question of corruption and the existence of Cabals will no longer be a problem in a deregulated downstream sector of the economy. The question now is what would happens to the supply of products to the market if importation by marketers ceases because they are afraid of being called ‘cabals‘, at a point when home production is insufficient? We pray we don’t experience long queues at Petrol Stations again. Sms only 07059197616

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