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The complexities of fuel subsidy removal and forging ahead as a nation

The complexities of fuel subsidy removal and forging ahead as a nation

According to Zainab Ahmed the former minister of finance, budget and national planning under President Buhari’s administration, Nigeria spent approximately N18.39 billion Naira daily on fuel subsidy payments between 2013 – 2022. Fuel subsidies began in the 1970s, following the announcement of the Price Control Act which made it illegal to sell fuel above the regulated pump price.

During President Tinubu’s inauguration speech on the 29th of May 2023, he announced that fuel subsidy has now been removed. This caused an immediate uproar in the local oil and gas market in Nigeria. Fuel scarcity ensued as people started scrambling to the petrol stations to fill up their tanks and oil marketers stopped sales at most stations due to the uncertainties surrounding the new pump price of fuel.

Days after the announcement, the pump price shot up from 190 Naira per litre to about 488 Naira per Litre in Lagos state. The fuel price went as high as 540 Naira per litre in the northern states.

There is a ripple effect of fuel subsidy removal to the entire Nigerian economy. This article will attempt to explain the impact of fuel subsidy removal to the average Nigerian, how the landscape of the oil and gas industry will change and how we can forge ahead while we grapple with our new reality as a nation.

With the removal of fuel subsidy, oil marketers will be forced to manage their end-to-end supply chain in the most efficient way possible to enable prompt product availability and favourable price competition

The post subsidy era has come with a significant increase in the transportation costs and the overall cost of living. People must commute from point A to B. The increasing cost cannot be avoided but can only be managed by budgeting, reducing unnecessary expenditure and effective planning of commute routes to reduce travel time. As a major player in the downstream oil and gas industry, we have already started seeing as high as 80% drop in daily demand of petrol at some of our Nepal Energies retail stations.

This means that people are adjusting to the new pump price and are actively reducing their consumption. For people who own private vehicles, carpooling with others to share transportation costs is now a way of life and this reduces the number of vehicles on the road and carbon emissions to the environment.

Commerce is equally driven by supply and distribution, and commercial vehicles that transport these goods are powered mostly by diesel. On this note, I expect the prices of commodities to stabilize after the initial pandemonium of the fuel subsidy removal.

The subsidy removal has also led to the approval by the federal government to issue private companies import permits. What this means is that local players in the oil and gas industry will be empowered to import fuel into Nigeria and sell at their various retail outlets.

Prior to subsidy removal, the government was the sole importer of fuel and resold this fuel at a subsidized rate to local players who then supplied and distributed the product to their different outlets across the country. By being the sole fuel importer, the government controlled the pump price by sending a periodic circular advising marketers on how much to sell per litre.

There was also a Petroleum Equalization Fund (PEF) for the government to give oil marketers bridging allowances. During subsidy, this allowance was necessary to enable major marketers maintain a uniform price of fuel across different geo-political regions of Nigeria.

With the removal of fuel subsidy, oil marketers will be forced to manage their end-to-end supply chain in the most efficient way possible to enable prompt product availability and favourable price competition to attract price sensitive buyers.

The federal and state governments have a major role to play in terms of alleviating the effects on the fuel subsidy removal. The first is to provide alternative sources of energy. In 2021, the federal government through the minister of State for Petroleum Resources, Timipre Syvia, launched the National Gas Expansion Programme (NGEP).

According to an article on Nairametics, the programme was introduced by the Buhari administration to carry out mass campaigns and action steps towards making Compressed Natural Gas (CNG) the fuel for transportation and Liquefied Petroleum Gas (LPG), the fuel for cooking, captive power and small industrial complexes.

Indigenous vehicle manufacturing companies like Innoson Vehicle Manufacturing, have built mass-produced varieties of CNG buses to take advantage of opportunity for Gas-powered vehicles to be used as cheaper alternative to petrol. Some proactive oil marketers like Mobil Nigeria have also started creating CNG pump islands in their retail outlets to fuel Gas-powered vehicles.

In terms of tackling the rising living cost for Nigerians, some proactive state governments like Edo and Oyo States have announced an increase in minimum wages and also approved a 3-day work week for government workers. This is a welcome development that the private sector can consider and also adapt. At Nepal Energies, we have started paying palliatives to cushion the immediate effects of subsidy removal to our staff while we strategize on more long-term measures.

Read also: Afenifere condemns Tinubu’s policies on subsidy, naira fall, fees hike

According to a report by Price WaterHouse Cooper (PwC), some of the benefits of subsidy removal include:

Reduction of government borrowing and the associated huge deficit

Channelling financial resources towards investment in other critical sectors of the economy

Removal of incentives for smuggling fuel into neighbouring countries to sell at higher prices

Investment flow to the oil and gas downstream sector
Improvement of Nigeria’s sovereign credit rating

The decision for President Tinubu’s administration to remove fuel subsidy was decisive compared to his predecessors who didn’t have the willpower to go through with it due to impending backlash from the Nigerian Labour Congress (NLC), the Trade Union Congress (TUC) and the general public. With the staggering figures used to fund fuel subsidy, Nigeria cannot afford to keep subsidizing fuel.

Although this decision will impact the welfare of the average Nigerian, I remain optimistic that if the government effectively executes the gas expansion plan and the other mitigants mentioned in this article, it will cushion the effects of the post subsidy era.