Yesterday, the Minister of petroleum surprised Nigerians by announcing the reduction of pump fuel price from N97 to N87. The first thing I did was search for a document explaining the rationale behind the policy change, but I didn’t find any. Thought it was rather odd, given the significance of the change. Reminds me of when Gala reduced their meat by half without even announcing it.

The Minister of Petroleum did cite reduction in crude oil price in the international market as the reason for the price cut.  This reduction in fuel price is well known as a subsidy – a word made famous to Nigerians on the 1^st of January 2012.

Before We Start, What Exactly Does Subsidy Entail?

For years, successive Nigerian governments paid to subsidize the fuel you buy. So when oil prices were high, you paid lower than actual market price. The government pays full price, so you could buy at a fixed lower price. This means that the price you pay stays the same whether foreign price of oil is high or low. With the fall in oil price, way too many have asked why our price hasn’t fallen. If you’re one of them, go back to the third sentence of this paragraph. Fixed price means it stays the same: in sickness and health…of oil prices. Still need further enlightenment? Feyi does a great job elucidating the byzantine mechanism called subsidy, so check his post out.

Interestingly, oil price has been falling since July and Nigerians have been clamoring for lower prices. Consequently, some agree with the decision, while others disagree. So what exactly are the good and the bad consequences of this action?

The Good:

If you drive a car and your fuel tank takes 60 liters, it means you save N600 when you fill your tank – enough to buy you small suya or fuel your ‘beta-pass’ generator. If you own a company or a fleet of vehicles with 10000 litre demand, you’ll certainly appreciate the N10 bonus, because that’s N100,000 saved…and that’s a lot of suya. Hopefully, you get the point, the richer you are, the more you benefit from this subsidy.

The Bad: 

If you’re a commuter, will it reduce how much you pay for public transport? Nope. If you bought a litre every day, that’s N10 a day saved, which is N3,650. Lagos taxis already charge you more than that to get to the end of your street. So no, don’t expect any taxi man or danfo driver to cut down price for you – especially in Lagos.

As I indicated above, subsidy benefits the rich far more than it benefits the poor.  That’s rather unfair. In a nation with poverty rate of 33%, Government spending should be more focused on the poor than on the rich. Most of the money from subsidy could go to creating social safety nets for the poor. Moreover, this rather unnecessary move of increasing subsidy payment by N10 costs the government – which if you’ve read the previous bricklayer article, you’ll know the government is kinda broke.

It’s why this period of falling oil prices was the perfect time to get rid of the subsidies. The landing price and the expected open market price of fuel dropped to the point that we could take out the subsidies. Without subsidy, we’d have been paying N89.84 per litre, but we’re currently paying N87.84 per litre. So the Government took on a cost of N2.84 per litre for no good reason. According to the Petroleum Product Pricing Regulatory Agency (PPPRA), the government was paying very little for subsidies (90 kobo) and the 2015 Budget didn’t even allocate for the subsidies. That was until 12am yesterday when N10 got taken off your fuel price. Just in case it hasn’t sunk in yet, someone else must pay for the N10 per litre bonus you’re enjoying, i.e. the government. In economics, we say “There’s no such thing as a free lunch”. Well, given that this same government’s kinda broke, your free lunch will likely end up being paid with debt. It’s very much like when your uncle gives you N1000 for sweet, but your mom collects it after she reminds you that she cooked the soup you’ve been eating.

Pic courtesy of thejuristlaws.blogspot.com

What Should We Have Done?

We should’ve completely deregulated and gotten rid of whatever subsidy mechanism we had in place. As explained above, with the market price of oil as low as $50, this is the perfect time to do so.  The Economist describes the removal of subsidy during this period as a “once-in-a-generation opportunity” to make a definite policy change; emphasizing that “the most straightforward piece of reform is simply to remove all the subsidies for producing or consuming fossil fuels”. However, in Nigeria, economically expedient decisions appear to take a break during election periods, so the government’s decision isn’t that surprising.

Oddly though, the Minister of Finance, Ngozi Okonjo-Iweala, had insisted in December that Nigeria would not reduce the pump price of fuel despite falling oil prices, until the revenue crisis caused by the dwindling oil rates is over. What led to this policy reversal? Perhaps opposition pressure or the fervent prayers of Nigerians that recently dedicated their newly purchased cars.

Many have alleged that the government reduced the price to gain more votes during the upcoming election. Perhaps knowing that Nigerians love a good bargain, it was done to sway some of those on the political fence. If the decision did impress you, then please calm down and wait for the government to explain how it plans to sponsor this N10 bonanza amidst dwindling revenue, austerity measures and a clearly unbalanced budget…that’s still tied to a benchmark of $65. Worst still, you’ve got to wonder what’ll happen to pump price in Nigeria if global oil prices rises.

Taking off the subsidy might be harder than it was to put it. Whoever ends up in Aso Rock Villa after the election will face a psychological barrier called loss aversion – humans measure loss far more than they value commensurate gain. This means that people’ll be angrier about fuel price rise than they were happy about fuel price reduction. Anyways, don’t be surprised if that N10 or more comes back after the elections are over. Just a heads up, so you don’t vex too much.

Remember, until deregulation and dismantlement of subsidy happens, Nigerians should be ready to shoki with subsidy prices. For now, enjoy the N10 because when oil prices rise again or the subsidy becomes unsustainable, you’ll have to silently queue and buy your subsidized fuel.