Last Wednesday, BusinessDay reported that weak oil prices present Nigeria a rare opportunity to totally eliminate the fuel subsidy that had been fuelling corruption and brazen impunity in the country. The report further stated that at the international oil price of $78 per barrel, fuel would cost about N116 per litre, using the template authorised by the Petroleum Pricing and Regulatory Agency (PPRA). In other words, the fuel subsidy element, when the international oil market is $78 per barrel is about N20 per litre. This figure is certainly far below the price paid by consumers in rural areas across the country, including urban dwellers outside most state capitals. Indeed, the regulated pump price obtains mainly in Lagos and Abuja only. Petrol station owners frequently sell at the black market at cut-throat prices.
The report that oil price had by Thursday dropped to $72 pb or below the revised 2015 budget crude benchmark price of $73 pb may sound alarming in some quarters but it is good news to policy makers in Nigeria because at that price the subsidy element falls below N20 per litre. This means, it is becoming more compelling by the day to eliminate what government calls fuel subsidy reported to have gulped about N2billion in one year at the peak of the fuel subsidy scam.
The truth is that government is talking about fuel subsidy today because the PPRA used import parity pricing to compute the landing cost and local distribution cost of the petrol we consume in Nigeria. Furthermore, this choice of parity pricing is dictated that Nigeria has allowed her four refineries to become a drain pie operating at an abysmally low average of 10 percent of installed capacity of 4450,000 barrels of crude per day due to neglected turn around maintenance schedules and corruption. What many do not realise is that there would be nothing like fuel subsidy if we were refining the whiten products we consume locally. Besides, the way NNPC operates compounds our woes. The point is that NNPC exports the crude allocation for domestic consumption and uses the proceeds to import white products.
READ ALSO: Japan is pouring money into hydrogen fuel research to counter LNG
Top Nigerian economists have known for decades that what government officials, particularly in NNPC, call subsidy arises from lack of conceptual clarity over what economists know as “subsidy”, “surcharge” and “consumer surplus”.
To its credit, that Nigerian Labour Congress (NLC) has never accepted the government claim; many economists argue, is that the idea is meant to confuse the people. A concerned economist in government during the tenure of Olusegun Obasanjo explained it thus:
“A subsidy exists if the market price of a product or service is lower than the marginal cost. The difference between the price and the marginal cost is the extent of the subsidy. Thus, when a farmer pays less than the marginal cost of fertilizer, he is said to be enjoying a subsidy equal to the difference between the marginal cost and the price he pays.
“On the other hand, the opportunity cost is the alternative forgone for taking a particular action or decision. Opportunity cost cuts both ways. Thus, if government sells a barrel of crude to the Nigerian National Petroleum Corporation (NNPC) at $22.00 per barrel instead of the international market price of $30.00, the latter is the opportunity cost of the former and the loss (if we need to split the hair) is the difference between the two prices. Similarly, if Government sells one barrel of crude oil at US$30.00 instead of
U.S$22.00 to the NNPC the opportunity cost results in a loss of the economic stimulus that the lower price would have triggered in the domestic economy.
“We take decisions everyday and therefore incur opportunity costs but opportunity cost is not recoverable because you cannot eat your cake and have it. As long as the U.S$22.00 is not below the marginal cost of producing a barrel of crude oil no subsidy exists.
“As is very well known, the quantity of a commodity bought is a function of the price. At high prices there would be consumers who nevertheless are able and willing to buy. However, there will be more buyers at lower price. Therefore, when the supply situation improves and the price of the commodity falls and when those who were able and willing to buy at the higher price now buy at the low price, they are said to have enjoyed a consumer surplus equal to the difference between the higher and the lower prices. This difference in the prices is not a subsidy. It is a surplus. The point to note is that at “any” price there will always be those willing to buy but there will always be more consumers willing to buy at a lower price than at a higher price. This explains why there are no queues at the parallel market.
“If a country has comparative advantage and therefore is internationally competitive in the production of a particular commodity, but that country ‘chooses’ for whatever reason to rely heavily on importation, the product price would necessarily be largely determined by the import price. The difference between this import price and the lower price of the product, which could otherwise have been produced at home, is a surcharge- a penalty for neglect – not subsidy!”
Weneso Orogun
