The deregulation of Nigeria’s oil and gas sector is a transformative policy shift. The government’s goal is to tackle inefficiencies, attract investment, and create a market-driven operation where fuel prices are determined by market forces.
However, this reform has significant implications for Nigeria’s economy, especially regarding fuel prices, public finances, and citizen well-being.
“Whether through stabilisation funds or tax adjustments, Nigeria can develop a model balancing market liberalisation with consumer protection.”
Lessons from Kenya and South Africa show how strategic price modulation can ease the transition and protect vulnerable populations from economic shocks.
Why deregulation?
Nigeria, Africa’s largest oil producer, has long been mired in government-regulated fuel prices and costly subsidies.
These subsidies, intended to make fuel affordable, have financially burdened the country. By 2022, Nigeria’s petroleum subsidy costs had soared by 1,452 percent, climbing from N257.36 billion in 2006 to N4 trillion.
The Petroleum Products Pricing Regulatory Agency (PPPRA) reports that from 2006 to 2015, Nigeria spent N8.94 trillion subsidising petrol. In 2022 alone, the subsidy bill surpassed half of what it cost to subsidise petrol over the previous ten years.
These funds came from deficit budgets or were directly debited from national revenues, resulting in significant opportunity costs for infrastructure development.
Such immense expenditure drained resources that could have been allocated to critical areas like education, healthcare, and infrastructure. Subsidies also distorted the energy market, discouraging private sector involvement in refining and distribution, and fostered corruption through fuel import scams.
In light of these inefficiencies, the government pursued deregulation, aiming to eliminate subsidies and allow market forces to set prices. The immediate impact of deregulation has been painful, with fuel prices rising sharply and putting additional pressure on Nigerians, who heavily rely on petrol for transportation and power generation.
Impact on fuel prices
Fuel prices surged after subsidies were removed. Before deregulation, petrol prices were capped, shielding consumers from global oil market fluctuations. Now, prices are tied to international crude oil costs and exchange rates, causing immediate strain on households and businesses.
The cost of living has risen sharply, with fuel prices driving up transportation costs and electricity generation.
According to the National Bureau of Statistics (NBS), inflation spiked from 32.15 percent to 32.7 percent in September. Public frustration has been loud, reminiscent of the 2012 “Occupy Nigeria” protests. Many see subsidy removal as an added burden on those already economically strained.
However, proponents of deregulation argue it’s necessary for long-term stability. Oil and gas expert Ademola Adigun emphasises that “deregulation of NNPC’s fuel importation monopoly and price stability are key to solving Nigeria’s fuel scarcity issues.”
The government hopes that market competition will attract private investors, improve refining capacity, and eventually lower fuel prices.
Kenya’s price modulation strategy
Managing consumer impact, especially during global oil price spikes, is one challenge of deregulation. Kenya, which deregulated its oil and gas sector in 2010, offers a model for price modulation to mitigate these effects. The Energy and Petroleum Regulatory Authority (EPRA) in Kenya sets monthly maximum fuel prices based on global oil prices and exchange rates, while considering market stability.
To cushion the impact of international price volatility, Kenya established a stabilisation fund. This fund absorbs excess costs during high global prices, preventing sharp consumer price increases.
During low oil prices, the government saves funds for future stabilisation efforts, ensuring a more predictable price environment for consumers. Kenya’s strategy represents a middle ground between full deregulation and subsidy-based systems, balancing consumer protection with fiscal control.
Read also: Deregulation: How new oil law checks consumer exploitation
South Africa’s fuel pricing formula
South Africa provides another interesting case study. Operating a regulated fuel price system, prices are adjusted monthly based on a cost recovery formula. The Basic Fuel Price (BFP) in South Africa is derived from international oil prices, exchange rates, and factors like shipping costs and refinery margins.
Additional levies, such as taxes for road infrastructure and energy development, are included in the final price.
Unlike Nigeria’s former subsidy system, South Africa’s model ensures that fuel prices reflect real market costs. However, the government adjusts prices through the tax structure to balance government revenue and consumer protection.
By basing prices on cost-recovery principles, South Africa maintains a relatively stable fuel pricing environment while ensuring funding for development projects.
Challenges and opportunities for Nigeria
Deregulation in Nigeria poses challenges beyond price volatility. The government must shield its most vulnerable citizens from rising fuel costs. Kenya and South Africa’s experiences show how price modulation mechanisms can provide relief.
Whether through stabilisation funds or tax adjustments, Nigeria can develop a model balancing market liberalisation with consumer protection.
Another opportunity lies in developing domestic refining capacity. Despite being a major crude oil producer, Nigeria imports most of its refined petroleum products, exposing it to international market dynamics. The opening of the Dangote Refinery, the world’s largest single-train refinery, could alter this dynamic significantly. Reducing the need for fuel imports and increasing local supply, domestic refineries could stabilise prices long-term.
Deregulating Nigeria’s oil and gas sector is a critical step toward a sustainable and efficient energy market. However, the transition brings challenges, including public opposition and economic hardship.
Learning from Kenya’s price modulation strategy and South Africa’s cost-recovery pricing model, Nigeria can explore ways to soften the impact of deregulation while fostering private sector investment and domestic refining capacity.
By carefully managing the reform process, Nigeria can create a more competitive and dynamic oil and gas sector, ensuring long-term benefits for both the economy and its citizens.
Oluwatobi Ojabello, senior economic analyst at BusinessDay, holds a BSc and an MSc in Economics as well as a PhD (in view) in Economics (Covenant, Ota).
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