By Sonny Atumah

For some years now the discussion had been on whether petroleum products subsidy would remain or not in Nigeria. Knowledgeable persons in the industry have made useful contributions based on their understanding of the concept. Issues of subsidies could be viewed either from the producer or the consumer side. We may also examine subsidy in the context of what it is actually meant for and who benefits.

Black market thrives as fuel scarcity hits Lagos. Photo: Bunmi Azeez

As we discuss subsidy let us reminisce on the type of subsidy and how we got here for us to make economic progress and achieve sustainable development.  It must be underscored that type of fossil fuel subsidy is import oriented. What Nigeria has been grappling with is from the import of petroleum products that ordinarily we could refine in our four refineries that were killed for about two decades now.

Many past managers of the Nigerian National Petroleum Corporation (NNPC) have all preached downstream deregulation without clear-cut direction. Other National Oil Companies are massively investing in downstream process plants locally and overseas to add value to their natural resource, but ours had canvassed downstream deregulation of products importation.

On July 20, 2015 President Muhammadu Buhari aligned himself with our campaign that petroleum products subsidy removal was not the issue but the management of our petroleum resources. According to the President, ‘’I have received many literature on the need to remove subsidies, but much of it has no depth.’’

He said that lack of security, sabotage, vandalism, corruption and mismanagement, not necessarily subsidies, are the most serious problems of Nigeria’s oil sector.The President said ‘’ When you touch the price of petroleum products, that has the effects of triggering price rises on transportation, food and rents. That is for those who earn salaries, but there are many who are jobless and would be affected by it’’.

One month after on August 20, the new Group Managing Director (GMD) of the Nigerian National Petroleum Corporation (NNPC), Dr. Emmanuel Ibe Kachikwu in a paper to the National Association of Energy Correspondents conference in Lagos said that the country’s fuel subsidy was an unsustainable drain on the economy, calling for the deregulation of the oil and gas sector.

According to him deregulation will also provide a fair deal for Nigerians from abundant petroleum resources, through fair product prices for consumers, full cost recovery, and reasonable margins for operators. To him implementation of the policy will entrench efficiency in product usage, product availability and effective competition among investors, hence ending product shortage.

Much as one believes that the GMDwears the shoes and knows where it pinches,one may advise himto tarry a while and galvanize robust opinions to avoid a pitfall. In this column last week one showered Kachikwu with encomiums and encouraged him on the actions taken so far, but the subsidy issue he raised now is one that must be examined holistically and critically too before a plunge excepting if it is a fait accompli.

What actually is subsidy? Subsidy is economic benefit (such as tax allowance, or duty rebate), or financial aid (such as cash grant or soft loan), provided by government to support a desirable activity (such as exports) to keep prices of staples low, maintain the income of producers of critical or strategic products, maintain employment levels or induce investment or reduce unemployment.

Oil Change International defines fossil fuel subsidies as ‘’any government action that lowers the cost of fossil fuel energy production, raises the price received by energy producers or lowers the price paid by energy consumers.’’ Basic characteristics of subsidies are the socio-economic welfare and wellbeing of the people.

After the First World War (WW1) there was a reduction in demand for American farm produce by European countries which had depended on America for food. To maintain the farm-product- prices and make farming an important component of their economy, they introduced parity which we now know as subsidy. Up till now America is still discussing whether subsidy should go or remain. Subsidies in the United States range from tax credit to free parking, registration, special lane use or cash.

The issue of fossil fuel subsidies has been a global phenomenon that it costs world’s governments $5 trillion annually, according to the IMF recent report published by ClimateWire.

Billions of dollars are spent yearly on petroleum subsidies in America. The situation is not different whether in the occidental or oriental countries. From the International Monetary Fund’s report, the world’s largest energy subsidisers are also its largest energy consumers led by China and the United States, India, the European Union, Russia and Japan.

Many governments in the industrialised nations do not operate nationally owned oil companies but grant their publicly owned petroleum companies subsidies. The reason is that oil is of very strategic importance to a nation’s security. These subsidies are also granted by governments not to drive companies overseas.

The fear is that home countries will become even more dependent than they already are on foreign nations for oil. For those governments their oil companies are protected via subsidies at home. Ultimate subsidies beneficiaries are the people.

The United States government has been subsidizing the oil and gas industry through tax code for almost a century. It is reported that during this period, the oil and gas industry has grown into one of the largest industry in the world.

The United States government for instance provides large subsidies to publicly owned oil and gas companies a tax rate, well below the standard corporate rate of 35 percent. ExxonMobil, ConocoPhillips and Chevron, the three largest U.S-based oil and gas companies are the super majors that enjoy this generous tax subsidy.

The Weatherization Assistance Programme otherwise known as the Low Income Home Energy Assistance Program (LIHEAP) initiated by President Jimmy Carter in 1977 has reduced heating bills for more than 5.5 million low income American families by 31 percent.

President Obama’s proposal to slash LIHEAP funds in 2012 was vehemently resisted even by his Democratic Party members. Current U.S Secretary of State, John Kerry, then as a serving Senator wrote a letter to Obama which read in part: ‘’we simply cannot afford to cut LIHEAP funding during one of the most brutal winters in history. Families across Massachusetts, and the country, depend on these monies to heat their homes and survive the season’’.

 

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