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Nigeria's leading finance and market intelligence news report.

Petroleum subsidy and Nigeria’s dilemma

Nigeria is in a dilemma as to what to choose between a system that allows market forces to determine the prices of petroleum products and another system where the government regulates the retail prices of petroleum products. The dilemma is such that it may affect the successful implementation of the recently signed Petroleum Industry Act (PIA).

While the former system ensures that the prices of products could rise, fall or remain unchanged, depending on the market dynamics in sync with a free market system, the latter gags producers of goods and services in such a way that uncertainty pervades the market.

Whichever the case, we see a huge price to pay for regulating market prices.

In June 2020, when the federal government removed the subsidy on petroleum products, stakeholders heaved a sigh of relief with commendation trailing that decision. Based on the market prices of crude oil back then, it is now clear that the federal government’s decision which was camouflaged as the removal of subsidy was due to the crash in crude oil prices at the international market as the subsidy was non-existent back then.

Read Also: Nigeria’s wasteful spending on subsidies slows attainment of SDGs – Sanusi

The federal government is also wary of the position of the Nigerian Labour Congress and other pressure groups whose leaders have made their positions known to the government. While it favours the federal and state governments to remove subsidies as this will make more funds available for development, pressure groups will only accede to subsidy removal if there are functional refineries in the country. Otherwise, they believe the removal of subsidies will be catastrophic for the citizenry.

In the 2021 appropriation bill, the crude oil budget benchmark was put at $40 per barrel. Currently, crude oil prices have remained steady at about $80 a barrel. But this is not good news to Nigerians.

It is an aberration for an oil-producing nation not to have a functional refinery whereas other nations, especially the Middle East and Asian countries, are expanding the capacities of their refineries.

As the proceeds trickle in, it goes out through subsidy, leaving the three tiers of government with little or nothing to share for effective governance in their states. In 2019, a whopping N305 billion was expended on subsidies. Two years down the line, subsidy now gulps about N150 billion on a monthly basis in 2021.

For a country like Nigeria in search of a definitive economic growth path, we see the decision to remove subsidy as a watershed, preparing the ground for other necessary reforms that will unleash the potential of the country.

Critical infrastructures are in dire straits; the business environment is in urgent need of reforms, from electricity to rail, so that Nigeria could live up to the expectation as the biggest economy in Africa. With the obvious inherent benefits, why has Nigeria not got the political will to remove this called subsidy?

One of the problems causing unease to the federal government on the subsidy debacle is the absence of functional refineries in the country. The three refineries in the country have remained comatose for years and successive administrations failed to resuscitate them. Not only are the refineries unproductive, but they also incur huge overhead expenses year-in-year-out for producing nothing.

Nigeria now depends solely on the importation of refined petroleum products from buyers of its crude. It is an aberration for an oil-producing nation not to have a functional refinery whereas other nations, especially the Middle East and Asian countries, are expanding the capacities of their refineries.

In the Middle East, the United Arab Emirates (UAE), Saudi Arabia, Oman and Iraq are expected to add about nine million barrels of oil per day through their new refineries that will come on stream before 2023. The Jazan refinery in Saudi Arabia will come into full production in 2022 and will add 400,000 barrels of oil per day to the Saudi economy. Iraq, despite years of wars, will build 100,000 barrels per day in that country.

The new Al-Zour refinery in Kuwait will add 615,000 barrels per day to that country’s refined petroleum products upon completion in 2023. Iran is forging ahead with the 120,000 barrels per day in the South Pars gas field.

Early in 2022, Iraq’s refinery in the Karbala region that has the capacity to refine 140,000 barrels per day will come on stream while a plan has been finalised to build another 70,000 barrels per day refinery in the Qayara region in that country.

These are a few examples from oil-producing countries like Nigeria and we believe they are strong lessons for this giant of Africa.

We are of the opinion that Nigeria must end the subsidy regime to have funds for development. A rancor-free way to implement this decisive reform is by having functional refineries in the country. And Nigerians must be well-sensitised before, during, and after the subsidy removal must have been implemented.

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