Nigeria presently is concerned about removal of subsidy on petroleum prices. This issue in its inchoate state should be predicated on national policy on energy security and supply in the quest for rapid economic growth and industrialization, as well as meet social development of the country.
Expectedly, the consumption of energy products is projected to increase rapidly in the next few years.
The new Administration must help Nigeria to move beyond what has become a pedestrian debate on whether or not to remove subsidy on fuel, (gasoline and kerosene). It is high time to develop a National Fuel Policy leading to a legislation that will establish the principles and philosophy of fuel economy, taking into consideration energy resources availability in the country, and their utilization to meet the quest for rapid economic growth and industrialization, as well as social development of the country. This Policy will also capture the level of current capacities to exploit the energy resources and the investments for infrastructures and facilities required to exploit and deploy human capacity and technical know-how in a most efficient and effective manner.
Meanwhile, in the current debate on oil subsidy removal, we are yet to advert our minds to the principles and Policy to guide fuel price movement or adjustment over the short to long term which are inextricably linked to sustainable economic and social development of the country. Such Policy, within the context of changes that will inevitably occur, will be expected to provide the key to solving the problems of fuel prices in the country. This suggests the importance of identifying the major variables that will normally precipitate fuel price changes capable of creating or causing concern and hardship to various segments of the society in varying degrees. The role of government and the obligations of the fuel providers, the marketers, refineries, government intermediary and regulatory agencies would be spelt out and properly monitored. This in turn will serve as a template for other energy products supply chain, such as gas and electricity, and so on.
No matter the approach currently adopted by the government on fuel oil subsidy removal, there will be winners and losers. If ever government no longer fixes prices as being advocated under price deregulation regime, government will still need to intervene from time to time with a view to correcting any imbalances in the supply/demand of the products and pricing mechanism, and also guide the market to assist consumers especially the underprivileged in the society. The operation of energy market even in a mature economy, just like every other market, is characterized with imperfection, throwing up gains and losses in its train.
It is important to establish Fuel Price Index -FPI (an official government component of the Retail Price Index). This is expected to be established not only for petroleum products, but also for gas and electricity. The various stakeholders will unavoidably need the FPI by virtue of its inevitable changes or adjustment of fuel prices from time to time in response to the dynamics of the oil business and the economy. The administration of deregulation regime will require monitoring of fuel price increases necessitated by increases in production, refining, and transportation and other handling costs.
There will always be continuous engagement by stakeholders in order to do justice to various contending interests with regard to fuel supply to the economy. Whoever is responsible for providing guidelines for management of prices will not authorize appropriate prices that will be valid for all times. Many Nigerians have often complained about frequent increases in the price of fuel over certain periods. This is inevitable in a dynamic market situation. Edo State Governor, Adam Oshiomole during the Newspapers Association Subsidy Debate in Lagos some years ago commented wisely “…we must be sure of what we want to achieve; we must have the courage to do what we want to do. I do not want my colleagues in the Labour to be shocked by the views I am going to express. “Yar’Adua never increased price; he only reduced it. And of course, Jonathan has left it where he met it. The truth of the matter is that beside petroleum price, which other price has remained what it was five years ago? Can we therefore conclude as rational human beings that there are certain forces that could have guaranteed stable N65 per litre, and yet every other price can change except petroleum?”
When there is a fuel price rise as a result of increases in international oil price, to that extent, this will be out of control of the government or in fact the marketers. However, problem could arise if every price increase variable is always passed to consumers. World market forces may cause price rise but what translates as fuel price increases may not be totally justified due to significant increase in some stakeholders’ margins along the supply chain. This means there is a complex web of factors involved in the whole fuel price regime when you do not own the refining process capacities or direct supply of the products to the market. There is the greed for super-normal profit margin by the marketers notwithstanding competition that the deregulated price regime is supposed to promote.
The gains to government on subsidy removal could be two-fold: removing the burden of so much money budgeted as subsidy fund, reported to be over N1trillion, and also getting VAT to be paid by marketers on every litre sold on the deregulated fuel prices, which represents additional income to the government. Is this another windfall? This is deserving of calculations to know precisely how it changes the figures of total government revenue. Deregulation of the downstream is expected to engender competition among marketers which can provide some constraint on prices. Marketers on the same road or highway route can easily set different prices to outwit one another and thereby give fuel consumers the freedom to play the game of choice. Much as fuel marketers can make informed judgments about each other’s strategies, undoubtedly the consumers stand to benefit reasonably well. It is however possible that the marketers can still enter into collusion and thereby distort competition. It will be necessary for the regulatory agency to be watchful that the marketers are not making unwarranted profits at the expense of the consumers. If they do, it will be appropriate for government to impose windfall profits tax.
There are many ways by which oil marketers can manipulate the market to stifle competition; simple example is the announcement of price changes, whether large or small. When price changes or rises are made with very little notice, marketers can engage in anti-competitive behaviour such as hoarding that can prove detrimental to the interest of consumers.
Under a free market system or price deregulation, it is expected that fuel prices could rise without notice or warning as a result of changes in fuel market fundamentals. The effect of such a rise will permeate the various sections of the society and sectors of the economy. We may ask, how will the poor masses cope with such rises if government is never involved in providing a buffer or subsidy to prevent the full impact of such a rise? This calls for a strategic National Fuel Policy and plans, formulated well in advance to handle such a scenario to prevent the full effect that may prove deleterious to the vulnerable segment of the society. The extreme variability that does occur with unpredictable and unforeseen price changes may produce severe hardship that could degenerate to a political upheaval in the country. Price reduction could easily be managed as against price increases that marketers may manipulates to prevent flexible price movement which competition is expected to promote.
The government may not be able to solve the problem of high fuel price until Nigeria refines its crude oil in sufficient volume to satisfy our national demand for fuel. How do you tackle the problem of fuel supply that affects the vulnerable group In our society? Nigerians will now constantly worry if the price of crude oil rises in the world market for whatever reason, because such increase will translate to increase in the price of imported fuel.
The Labour Union and Civil Society organizations have over the past decade used the impact of subsidy removal on the ‘ordinary’ Nigerians as a basis for vigorious resistance to subsidy removal or appropriate pricing of petroleum products in the country. As much as compelling their arguments and reasoning may be in keeping the price of energy low in order to alleviate many problems associated with poverty, to what extent has the low price of fuel enhanced the standard of living of the poor masses, and the provision of social services such as quality education, healthcare and reduction of unemployment.
There are other dimensions about the unavailability of energy products, particularly the lack of which can adversely affect the poor masses in the society. What is the percentage of oil consumed that actually go into public transportation used by the masses. We must objectively determine what category of people we are using the low fuel price to protect. Undoubtedly, it is the middle and upper classes in the society that consume the bulk of the subsidized fuel that is bleeding the treasury of the government.
If subsidy is removed to save us from killing ourselves, we may be able to use or reorganize national public transportation system to solve our economic and social problems. Given the fact that presently, we do not have enough reliable domestic refining capacity to meet our total product requirement, we have to tame our consumption habit to reduce wasteful usage of oil addiction prevalent in many developed countries. Under free market determined prices, the crude oil prices could spike to a level that translates to high product prices resulting in high product import bills inimical to the national economy. The roller coaster movement in crude oil prices over the past years can always recur to hike the prices of imported fuel to Nigeria.
Apart from diesel fuel used to generate electricity by industrial and household consumers, and kerosene used for lighting and domestic cooking, transportation accounts for the bulk of fuel used in this country for commercial transportation, and fleets of vehicles by the middle and upper classes in the society. If Nigerian crude oil is refined to meet national demand, the economy will never be threatened by the fear of oil price shocks emanating from oil supply threat anywhere in the world supply system normally experienced by international market system.
Since we do not produce our own vehicles whereby we can introduce fuel-efficient vehicles, the most realistic option will be to evolve an economic oil product consumption pattern, while at the same time provide some other viable transportation options that will be reasonably affordable and secure. What comes to mind in this regard is transportation by means of rail and water, and other mass transit system that provides alternative to individuals putting cars on the roads and highways.
The new Administration must seize this occasion to develop a coherent multi-modal system of transportation for the nation that will integrate all modes of transportation into a strategic Fuel Policy and a legislation with provisions for appropriate long-term funding solutions. Thus, the combined approach will cater for every segment of the society, particularly the vulnerable group in our society.
Dr. Diran Fawibe is the
Chairman/CEO of International Energy Services Ltd. with headquarters in Lagos
Source: ThisDay Live