African Energy Economist: Subsidizing Nigerian inefficiency

Fuel subsidies in Nigeria remain a thorny issue. State support for gasoline and diesel prices, both directly at the pump and through subsidies for fuel imports, places a huge burden on the national finances. A government report calculated that $8 billion out of total federal state expenditure of $22 billion in 2013 was spent on fuel subsidies. Much of that subsidized fuel does not even benefit Nigerians, as it is smuggled across the border into neighboring states where prices are higher.

The lower price of oil this year means that the current bill is likely to be much less, but the government’s ability to continue paying out is also greatly reduced. Nigeria is entering what will be its first recession in 25 years and remains as reliant on hydrocarbon revenues as ever. It has to curtail spending and support economic diversification, so the subsidies surely have to go.

Successive governments have sought to increase fuel prices, often very clumsily, but have been forced to backtrack by national strikes. On some occasions, prices have more than doubled overnight. It is almost as if the government were actually trying to fail. The popular view is that cheap fuel is one of the very few things that the bulk of the population can expect from their government.

Raising prices would also stoke inflation. Many politicians are so keen to secure popular support and depress inflation that they want to increase subsidies. On November 30, the House of Representatives voted for a maximum gasoline price of N70 ($0.29) a liter. Current prices vary, but all are above that level. The Senate and president need to agree before the measure is implemented, but the vote highlights political sentiment in the country.

In the long term, a massive cultural change is needed. The population needs to have some expectation that the state can manage its finances for their benefit. In addition, the view needs to change that wealth can only be secured by tapping the oil industry, whether by working in the sector, working in government or in the countless forms of petro-crime that permeate Nigerian society.

More immediately, the government can also help to address the fuel import situation. Nigeria has four state-owned refineries that have either been out of use or operating at reduced capacity for the past 15 years. At the same time, vast amounts of money are made by importing refined petroleum products, including through scams such as round tripping, which involves physically importing the same consignment of fuel more than once. As a result, there are vested interests in keeping the refineries out of action.

Plans for refinery privatization and the construction of new plants are regularly drawn up and then dropped. Apart from anything else, potential investors are put off by the subsidy regime. As so often, including along the coast in Ghana and Cote d’Ivoire, refineries have historically operated at a loss. Refiners won’t invest unless they have some confidence that they can generate a reasonable return.