Fuel: Price Hike
Samuel Akinyele Caulcrick

‘Fuel subsidy, my foot!’ an irate Nigerian commented as he joined other Nigerians to discuss the current impasse between the Federal Government of Nigeria and the country’s labour and trade unions. As part of the reforms embarked upon by the last Obasanjo administration, the perennial issue of subsidy in the oil sector has yet again become contentious. That government had a strong argument that to solve the issue of fuel shortage, downstream petroleum products would need to be out of regulation and therefore, should be sold at commercial rates. According to the government, it is only then that investors would be willing to invest and subsequently provide uninterrupted supply of the essential downstream oil products to Nigerians. It boils down to how the government sees the issue of fuel and how to limit its use particularly as they see as wealth being wasted.

{mosgoogle}Government can no longer continue to subsidise oil products, the government argued, because it seems a colossal waste and government needs that money to be redirected to solve the pressing problems in other sectors of the economy. The Labour Union and its trade counterpart, representing the views of many Nigerians however argued that it is because the four oil refineries were made redundant, amongst other things, which occasioned the importation of the finished product thereby necessitating the unjust increase in petroleum prices. The unions, therefore, urged the government to bring up to date the condition of the dilapidated oil refineries as part of the solution, in order to make the products more affordable to Nigerians. Government had tried to sell those refineries for 4 years, but no investor came forward, mm!

Did the foreign investors know something that the Nigerian leaders do not know? Both government and Labour, for reasons only known to them, cleverly avoided the fundamental cause of the subsidy in the first place. It has always been an ongoing game of cat and mouse. On from the last years of Babangida’s regime, the two sides of the divide have always been discussing the merit or the unmerited need to subsidise oil products for Nigerians. Both sides, however, agree that it affects the lives of most Nigerians – transportation, general cost of living and etc. There is a begging question, though, that nobody wants to ask. Why was oil subsidy never a consideration before the introduction of the Structural Adjustment Programme (SAP)? One could rightly postulate, therefore, that oil subsidy as it were is a by-product of SAP.

It is on record that both sides have often drawn daggers, particularly, anytime the price of the downstream commodities is adjusted – which unfortunately has always been upward. In the years, immediate, before SAP, the Nigerian economy, in general, was almost in a state of comatose. Specifically, it was the Nigerian government’s side of the economy that was nonperforming. The private sector in Nigeria was before and up till the introduction of SAP, competitive and comparable with any in the world. The government was the problem and since one side cannot be separated from the other, Nigeria was in a mess. This was evident in the inability of that government to meet its own financial obligations. Traditional taxation that should have been the main source of government’s earnings was non existent and at best faulty, at the time.

When the World Bank and IMF concluded that the local currency, the naira, was overvalued, they were in effect saying that Nigerians were not being adequately taxed by the Nigerian government. That meant that the government earned less money and therefore, could not pay its bills. Though businesses and individuals were required to deposit the equivalent in naira of the cost of their imports with the Central Bank, government often diverted such deposits to run its affairs. This, however, did not preclude those converted to private use. All in all, it exacerbated the debt problem of the nation. At the time with the then exchange rate of 68 kobo to one American dollar, for every naira in the hand of Nigerians, the government had access to only 15 kobo or less out of one naira. Meanwhile, the remaining 85 kobo belonged to the individual in possession of that naira. The individual in effect did not pay tax.

Without effective taxation, the government was unable to extract enough share of the naira the individual was holding. Consequently, the government became almost insolvent. In an economy like ours, the exchange rate is usually a form of taxation and will always be; for as long as the oil wealth goes directly to the government first before being redistributed to the Nigerian people. Government, at the old exchange rate, was at a disadvantage. All that changed from the first bidding on 28 July 1986 when, immediately, the government cornered more than 67 kobo from every naira an individual had in his possession. Wealth thus flowed from the pockets of the people, not through traditional taxation but through the exchange rate.

The exuberances of Babangida’s regime, however, would miss the point of equilibrium in the wealth transfer between the people and government. That was largely due to the pursuit of private profit and power. Babangida’s style of leadership somewhat had an indelible impact on the people he governed. As wealth moved unfavourably from the Nigerian people to the government treasury through the faulty market engineered exchange rate, a state of non-equilibrium emerged in the Nigerian economy. Babangida, it seemed, then used that manifest non-equilibrium in the economy as a weapon to wield political power. Those he favoured and those willing to dance to his tunes, were giving access to the government’s wealth that the exchange rates were generating only to be mopped up through inflated contracts.

Reforms in taxation have since been put on shelf. Frankly speaking, the exchange rates more than doubled what the best taxation would have raked in for government. Government was in the possession of the petrodollar and were willing to sell to the highest bidder. Those who had made wealth unproductively through government patronage would dictate the pace. Effectively they did not work, as we know it, for the spoil of government they had acquired and were at liberty to buy at any rate. All seemed well until the natural reaction of man took hold. The rich and Babangida’s created nouveau riche soon took steps to safeguard their acquired wealth, which was under threat by the distorted market forces. They flew out their wealth to safe havens (capital flight) in order to prevent the erosion of their wealth.

The irresponsible bidding for foreign currency occasioned by the desperation of those willing to flight-capital favoured the government initially, but that soon waned when naira that the government was amassing through the sale of petrodollar started chasing less and less wealth. The reason - the wealth had been taken outside the country’s borders through a one-way valve of no return and naira value plummeted. It was not only the government that felt it, ordinary citizens also suffered. It first became evident in the life of ordinary Nigerians, who soon found out that the naira, the only representation of their wealth, had lost so much value and could only buy counterfeit and used goods. Babangida responded unwisely and issued directives that Nigerians could now bring in used goods to maintain or improve their standard of living. That, however, had its consequences.

Among the items that were desperately needed by the people was the means of moving from one place to the other – transportation. The government, in one of his failings, had neglected mass transportation and also the middle class, who was now unable to afford new vehicles, started patronising used vehicles like none before. The less privileged, nonetheless, needed to be looked after too. Government’s deregulation of most aspects of people’s lives, including transportation, meant that the small scale investor in transportation could only provide small buses (danfo), which at best was not fuel efficient and as mass transit was uneconomical. At this point the volume of fuel consumption in Nigeria went up astronomically. Government found out that what used to be readily available was now insufficient. At a fixed price, petroleum products then appeared subsidised more so when unscrupulous Nigerians resorted to smuggling fuel to outside Nigeria ’s borders. Those were taking advantage of the gap in pricing between Nigeria and its neighbours.

Like I tried to explain above, the exchange rate is nothing but taxation by the Nigerian government and has no external bearing. The reason - being that oil which accounts for over 80% of Nigeria ’s GDP is already sold in American dollars and not in naira. Any exchange rate, therefore, is solely between the Federal Government of Nigeria and its people for the country’s oil wealth distribution. The ruse, however, is that the government and its economists explained it differently and they have been adamant that it has an external influence. No, it does not and that is to a large extent. A wise man, they say, should know his limitation. That does not appear to apply to the mediocre running the economy of Nigeria . These people may have the best paper qualifications in economics, but they sure do not have the mental capacity to handle so many variables in the economy at the same time. There are just too many variables in the present Nigerian economy.

In an emerging economy, it is almost impossible to have too many variables, like we have done in Nigeria by the deregulation of almost everything, and make it work. That is why the emerging economies that are doing well, fix for a start their exchange rate to the dollar - the dollar are the medium of world commerce. The naira used to be fixed to the U.S. dollar before SAP. The Nigerian economy at the time of fixed exchange rate, somewhat made it less easy to flight-capital and the economy faired better. Those who favoured variable exchange rate wanted to make money and they have made a bundle. They should now reconsider their economic theory. Fixing the exchange rate, for example, is a simple exercise that allows you to move around the other indices of the economy, such as tax and interest rates without complications.

To mop up excess money in any area of an economy, for instance, is usually trough taxation. The government would need to increase tax in any sector that generates excessive wealth to balance the economy. The onus is on any government to prevent non-equilibrium in its economy. Apart from being psychologically right, equilibrium is the wheel that the economy rides on. For the issue of the refineries, it was IBB’s fault. It, NEPA, Nigeria Airways and many other essential sectors that relied on foreign components that were not available in Nigeria should have been placed outside of SAP. At best, they should have been continuously recapitalized from the gains of SAP. Babangida also prevented all of these companies from charging commercial rates for their services for the first two years of SAP and these were the periods when government had stopped to grandfather them.

Having said all that, the arguments that the combined labour union and trade union have always advanced, to me, are hollow when compared to what government had always put forward. Without any doubt, there are urgent needs for reforms. These started with SAP. Reforms have not worked, solely because of the insincerity of purpose by the major stakeholders in the economy. My argument have traced the cause of the apparent fuel subsidy to SAP and in due course, traced to the movement of wealth outside of Nigeria (capital flight). These are facts the stakeholders are reluctant to discuss. Unfortunately, those that exported the wealth of Nigeria were not the masses, but it would be the masses that will bear the brunt of withdrawal of the so called subsidy.

There is also need to minimise waste as occasioned by so many unnecessary vehicles on the road, but those also are as a result of government failing to provide economically efficient mass transit. As part of the ongoing debate, why would NLC and TUC not demand, from the Central Bank and government, the list of the names of those that had taken money out of Nigeria with nothing brought back. Apart from exporting the gains of Nigeria ’s economy to other lands, they have denied the government of needed tax on such wealth. Even in the West, where their capitalists are allowed to outsource by investing in other countries, they must remit the profit home to be taxed. If the Nigerian government could go after the root (cause), which are those that have evaded paying tax on their wealth outside Nigeria , only then would it have the moral authority to charge whatever commercial rates on fuel products.

The more fuel we burn, the more it costs the nation. How much we use, therefore, will directly affect the agreeable price of fuel products. So many okadas plying our cities cannot be an efficient use of the fuel component in our national wealth. No responsible government would allow such waste without doing something about it. If both sides understand these, they should be able to come to a reasonable compromise. Nigeria probably would never recover its wealth that has been exported, but to put a stop to this perennial issue of the price of petrol, we have to put a stop to illegal wealth movement out of the country. No nation can accumulate wealth if it allows such gaping hole in its economy. President Yar’adua the other day addressed over 400 stakeholders on how to move the economy forward. He must be dreaming, because he is probably the only one in that gathering that does not have money outside Nigeria .

In conclusion, it would be about understanding. Nigerians would have to understand that the journey the naira took from 68 kobo to its present artificial figure of 128 naira to the dollar is largely the indication of how much the economy has lost to wealth transfer to other lands. They have to understand that the real value of the naira is the cause of the apparent subsidy in government’s thinking. Nigerians will need to know that the fuel, irrespective of how much it is sold, is part of our national wealth. Fuel once burnt, is gone forever and therefore, will have to be used productively. Getting stuck in traffic unnecessarily because of indiscipline of drivers is a waste of such national wealth. Not providing mass transit for the masses is a waste of national wealth as the little buses and cars aggregately burn more. Allowing individuals to export their acquired wealth to foreign lands is also a waste of national wealth.

Samuel Akinyele Caulcrick, the author of The Devil Must Be Laughing.

ISBN: 1-4241-2196-5.

Robot  # 1 | 23.06.2007 09:31

The irresponsible bidding for foreign currency occasioned by the desperation of those willing to ...Read the full article.

nf5kmw1  # 2 | 23.06.2007 12:19

"President Yar’adua Reduces Fuel To N7 Per litre, Nigeria's Economy Grows by 12%” How did he do it? He listened to a different approach because the approach of the last 8 years was a failure!!! They say imitation is a form of flattery. If so, Nigeria needs to look to Venezuela to reform its fuel sector. Due to the policies of Venezuelan oil company PDVSA, the Venezuela are able to enjoy $0.19 per gallon or N6.12. The Venezuelan oil company, PDVSA, had decided that it was not the the crude oil export business but in the global petroleum and chemical business. So they invested in refining and retail business in Venezuela and almost all their export markets. These market include Europe, Caribbean, South America, Caribbean, Canada and United States. "PDVSA is among the leading corporations in the refining business, with a petroleum processing capacity of 3,285,000 barrels a day (1,285,000 barrels a day in Venezuela and 2 million barrels a day outside the country) through 24 refineries: six complexes in Venezuela, one in the Caribbean, eight in the United States and nine in Europe. I would advice the New President to seek counsel of the architects of PDVSA and also look to what Mr. Putin in Russia is doing to the oil industry." I would recommend three strategic steps to revolutionize our oil sector. 1.NNPC should be come a government/public firm with part of it shares allocated for Nigerians. This will provide the company with a new direction and ownership need for the global challenges. By the way we have the money in form of excess funds. 2.NNPC should go on a buying spree with the aid of government funds to buy (outright or major) shares in refineries in Africa, China and United States. This will provide us with immediate source of refined products, opportunities to train our people and hard currency. Best of all this does not need the 18 to 24 months to build a refinery. This will also provide us a stop gag measure until we build more refineries. It is all about add value and we need to start doing that. 3.Start building 4 refineries and retail outlets to take care of the local demand as estimated for 2010. This will help put to rest the fuel challenges that we face as a Nation. Background and answers For most of the people who are “privatization supporters”, the believe that private companies only will solve our oil needs at point in time is being unrealistic. After 8 years, 240% increase in price (N11 to N65), 17 licenses granted, zero refineries working and total dependent import. We must say that the Energy policy has been a failure. In most places the people responsible for this failures and continuing to push this failed approach would have been fired at year 2. Why did they fail? I will give you some reasons. 1.Lack of a Nigerian centric approach. Simply put lack of vision. 2.Corruption and not state owned inefficiencies are responsible for our ills. Most of the companies that are interested in Nigerian assets are government owned companies. Which means that state own or controlled companies are profitable and efficient. PDSVA in Venezuela is an example that currently owns 24 refineries worldwide and sells petrol at N7 per litre. 3.It takes lots of money to play and tonnes to compete in a global oil and gas industry. To illustrate this point the market value of Exxon Mobil is $474.12 billion, while the Chairman, NSP Refineries and Energy Services, Prof. Anya .O. Anya one of the companies granted license was not able to put together a mere $200million financing for a refinery. . And for those who want to charge western prices for petrol they should be willing to pay western market salaries. So we can afford to buy the petrol. The argument of paying for subsides is a non starter, because the multiplier effect on the economy when cost of energy is low is tremendous. Energy is like no other commodity. It accounts for a large part of cost of goods and therefore gives local companies the ability to compete with global companies. This will lead to a reduction in imports of different products while increasing exports for our products. This double “barrel effect” will more than compensate for the so called “opportunity cost”. And we should remember when we establish refineries at home and aboard we will not only eliminate need for hard currency but will gain more foreign currency. For all those who keep on hoping on “opportunity cost” they should stop listening to some foreign interest that are not interested in our well being. If they were these same countries and institutions will first stop stronger nations subsidies before attacking the poorer nations subsides. They keep calling for us to stop subsidizes continue subsidize their own people. Lots of countries provide subsides on several products. USA for example spent $20 billion in farm subsides in 2006 making it difficult for us to sell farm products to them. USA spent $6 billion on oil and gas subsides. Also we must remember that most of these countries subsides are actually go to affecting the cost of goods like wheat because the cost of wheat is high. Unlike petrol where the cost of extraction and refinery has not change a lot since crude oil was $17.48 per barrel therefore the real subside would have not change if the government had fix and built more refineries in Nigeria in the last 8 years. The so called subsiding is not the same. We are not subsiding cost of product but the high price of crude(and mismanagement of our energy policies zero refineries compared to Venezuela's 24) which today is around $59.25 or 238% from 1999. Last but not the least, the oil that we consume local are also not part of our OPEC quotas so we do not have any “opportunity cost”. I believe that there is need for the government to step into this issue because this is a matter of national security. A country that cannot provide fuel for its society, with the abundant supply of crude oil, will never improve We need to wake up and take take of ourselves. We have been bless with natural and human resources and it is time to use them. God Bless Nigeria!!!!!!!!!

Mikky jaga  # 3 | 23.06.2007 12:28

When Babangida was about to embark on his SAP, he asked Nigerians to debate the suitability of such programme. Nigerians responded and the overwhelming majority of the commentators agreed that SAP would do Nigeria more harm than good. Babangida declared no victor, no vanquished, but later turned around to say there was no alternative to SAP. That was the beginning of our economic woes. Nigeria allowed her currency to be devalued without sense or reason. The cliche that time was that it would discourage imports while making exports cheaper. We conveniently forgot we had no other commodity that we export apart from our oil which would become cheaper because of devaluation, and we import all that we need including toothpicks. Nigerians' life have been consistently devalued ever since. That was also what gave rise to the mass export of our skilled manpower which has become cheaper and affordable outside the country. Thus began the mass chase for the almighty dollar. Babangida also started the oil politics. The initial reason was that Nigeria's oil was cheaper than Coke. When that argument could no longer hold water, it then became that of subsidy. Ever since, the subsidy story has never ended apart from occasional reference to smuggling to neighbouring countries to justify fuel price increases. Obasanjo took the politics of fuel price increases to a new level by using oil as a means of settling the people that rigged him to power. And since these people are insatiable, prices of fuel just have to be on permanent rise to satisfy these crooks that had taken Nigeria government hostage. Forget any economic theory being bandied about. Nigeria's problem is created by economic theories different from the normal ones being taught in schools and colleges. The current price increase was a parting gift to Obasanjo's friends, but it has now become an albatross on the neck of his successor. The godfathers must be appeased by all means, even if the country has to burn. That also explains why Yar'Adua could not totally reverse the fuel price increase. Nigerians have not seen the end of fuel price increase yet. The coronation of Yar Adua will ensure that. Fuel price will continue to increase until the godfathers are swept away from Nigeria's government like it is being done in Anambra now. If labour can sustain its present resistance to any type of fuel increase, it will be the beginning of the revolution that Nigerians have been yearning for. But, can they, will they? Time will tell.