Oil subsidy must go: Yes, but…

on   /   in My Layman's View 12:09 am   /   Comments

By Adisa Adeleye
THE President Dr. Goodluck Ebele Jonathan has rightly stated that oil subsidy would go and many right thinking people are bound to support the President in what is believed to be a policy of economic waste.

The Labour Union has expressed its wish to oppose the removal of any subsidy which might affect the living conditions of the people, and thus, bring about sufferings to the masses.  Before the drift into confusion over policy application, it is necessary for the ordinary people to know what is involved.

It should be understood that subsidy on essential commodities that affect the standard of living of ordinary Nigerians should be desirable in a democratic environment.  Any good government would always support subsidy for improving the living standards of the people. However, a policy of import subsidy for a commodity that is copiously produced in a country would suggest economic mismanagement, if not madness.

My full support on complete removal of subsidy on imported petroleum products is based on economic rationalization, or what could be termed economic commonsense.  The question is, is there a subsidy on petrol (gasoline)?  If the landed cost of imported gasoline is N147 and the pump price is N97, then there is a subsidy of N50.  The real question is, should there be any need to import refined petroleum products? Some apologists of government thinking are of the opinion that since domestic refineries have become inadequate to meet home demand of petroleum products, therefore imported products are needed to balance the equation of demand and supply. They have forgotten that total production is greater than total home demand.

The labour union has been adamant in its believe that the policy of constantly raising prices to allow for private investors would only open the gate for spurious investors who have now appeared on the list of favoured petroleum products importers.

It is calculated that no sane investor would want to build a refinery when the cost of building for a limited market could be astronomical owing to high cost of local borrowing, and that the cost of local crude would be fixed at the international market rate.  Thus, the government has got it wrong by thinking that the fears of genuine investors lay in the policy of subsidy.

If the government is really serious about stopping subsidy on oil products, it has to first of all stop importation because there is no justifiable economic reason for it.

However, if the government is bent on giving us an unpleasant New Year present, it is necessary to remember that under the present ruling party, the price of gasoline has risen from N20/litre in 1999, to the present price of N97/litre while that of diesel (AGO) rose from N19/litre to about N150/litre, and kerosene (DPK) has risen from N17/litre to about N150/litre (If available).

Before the impending rise in the prices of gasoline, it is necessary for officials and advisers of the President to weigh the options carefully before taking any action.  Some years ago, many comments have been made on prices of petroleum products and I expressed personal opinions in this column on several occasions.  My views held more than ten years ago are as quoted, “The Obasanjo administration which came in 1999 increased the price of products four times within a period of 4 years.  According to the President, the latest increase was due to unjustified subsidy of N250 billion on petroleum products every year.  He argued that the withdrawal of the subsidy would release the same funds for development in other spheres.

“While it would be futile to argue with the President over the purported subsidy, many including the Labour leaders declared the reasons for any increase untenable in view of the facts contained in the report of the “Special Committee on the Review of Petroleum products, Supply and Distributions”, set up by the federal government itself.

The comprehensive report wisely recommended deregulation of the downstream sector to make way for private investment and to end monopoly”.

“The current problems of the federal government is the inability of its agency, Nigerian National Petroleum Corporation (NNPC) to ensure continuous supply of products because the four local refineries, Port Harcourt1 and 11, Warri andKaduna(owing to lack or poor maintenance) could only produce about 20 percent of home demand.

The NNPC has been importing 80 percent (rather than refining) of products to meet total home demand.  It is assumed that out of 300,000 barrels per day of crude oil`s allocation to the NNPC in 2002, about 93,000 barrels were refined locally, leaving about 207,000 barrels to be sold on the international market and the proceeds used for importation of refined products and other projects” Within the last ten years, volumes of imported products have risen and subsidy figure has almost reached N2 trillion.

Advice to FG

My advice to the Federal Government is this, before any increase in petrol pump price, get up to six months stock ready.  And to convince people (there seems to be a complete lack of trust between government and the people) genuine deregulation of the downstream sector of the oil industry should be seen to have commenced.

Before the civil war, prices of various petroleum products were agreed with government agencies by the local oil companies.  On local products, each company would buy crude oil, refined to its specification at the refinery (owned by government, BP and Shell but managed by BP) and pay agreed processing fees.

The price fixing was based on ex-refinery cost (cost of crude and processing fees) “handling charges” – depot maintenance and equipment, government tax and transportation cost.  The pump price would have included all elements necessary to sustain the profitability of each oil marketing company.

What is expected to be done is to stop importation of single product but allow each marketer to purchase barrels of crude oil and refine to the needs of its market, since a refined barrel of crude oil would yield not only gasoline but other associated products like diesel, fuel oil, Kerosene etc.

Or if the government does not want to release its hold on the downstream sector, its agency NNPC should refine all products at designated refineries and then distribute refined products to the Nigerian market.

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