A closer look at fuel subsidy

One thing is certain, however: fuel subsidy over the year has bred a crop of businessmen who have been feeding fat on government money without adding any real value to the economy. It would be recalled that some years back, government issued licenses to private operators to build refineries. But almost eight years down the […]

One thing is certain, however: fuel subsidy over the year has bred a crop of businessmen who have been feeding fat on government money without adding any real value to the economy. It would be recalled that some years back, government issued licenses to private operators to build refineries. But almost eight years down the road none of those refineries has been built. Some of the beneficiaries of the private refinery licenses that I have spoken to explained that they could not get their banks to give them loans to fund the refinery projects as they were told that the projects were not bankable. This simply means that the banks do not see the private refineries as viable enough to bring profit. No bank will commit its money to a project that is not guaranteed to yield enough returns to offset the initial capital invested and make a decent profit for the investors.

Why would a bank see a refinery project as not bankable in a country that consumes between 35 million to 40 million litres of premium motor spirit (petrol) a day? The answer lies in the fact that the market is regulated. This means that the market is controlled in such a way that a refiner does not have the freedom to decide how much he can sell a litre of his products such that he can come off with a reasonable profit because government has pegged the price of the products. So if it costs a refiner N70 to produce a litre of petrol, he is forced to sell at N65. Even if the government undertakes to pay him the balance of N5, he still will not make any profit. If the government decides to pay him N10 to enable him make a N5 profit per litre, common sense would tell a businessman that the profit is not guaranteed because government can decide to owe him or change the policy tomorrow and put his business in jeopardy. This, in a nutshell, is one of the many ways fuel subsidy has adversely affected the Nigerian economy.

Now, regarding the question some people raise about the possibility of the rise in the pump price of petroleum products when subsidy is removed, there is no doubt that prices of products will increase but it will only be for a while. As soon as investors know that the market is deregulated and the petroleum refining business is no longer subject to the vagaries of subsidy and policy somersaults, they will begin to invest in refineries. Once the refineries come on stream, the pump prices of petroleum products will begin to fall as a result of competition. Here is how it works: If refinery X gets its feedstock (crude oil) for $120 per barrel, and refinery Y is able to source its own for $115, it puts the later at an advantage cost wise. It refinery Y has with a more efficient technology, it could get more litres of products out of its feedstock than refinery X. They will therefore not sell their products at the same price thereby breeding competition in the market. As more and more refineries come on stream and the competition gets keener, prices will be forced down and the Nigerian consumer will become king of the market.

Many have asked why the price of diesel which has since been deregulated has not come down if indeed deregulation can ultimately lead to a fall in the pump prices of products. We must understand that refineries are usually built to refine a range of products and not one product. So if one of the products is deregulated as we have in diesel, it does not attract the full benefits of total deregulation as investors are not likely to rush in to build refineries for diesel alone. But suffice it to say that the deregulation of diesel has begun to yield investments in the sector with the commissioning of a 120,000 litres per day diesel refinery by the Niger Delta Petroleum Resources Ltd in Ahoada, Rivers State, recently.

From the foregoing, the benefit of fuel subsidy removal to the economy go way beyond the ultimate goal of getting market forces to bring down the pump prices of products to the immediate gain of attracting investments in the downstream sub-sector of the oil and gas industry and creating jobs for the teaming youth. Right from the construction stage to commissioning of the private refineries thousands of jobs will be created. Then imagine what the billions of naira currently spent in importing products will do to the Nigerian economy when we stop importing and start refining products locally. And who says we cannot grow to the point where we will stop exporting raw crude oil and start adding value to all our crude oil production before exporting thereby creating more jobs and making more money?

I believe we all need to take a closer look at the issue of fuel subsidy removal devoid of all the sentiments and emotions that have blinded us to its merits. If we want to develop, we must be ready to come out of our comfort zones and make some sacrifices. We cannot continue to yearn for omelettes without doing the needful by breaking eggs.

Adeniyi, a public affairs analyst, wrote from Ibadan