Fuel Subsidy Conundrum: Should Nigeria Adopt Mexico’s Formula?

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……….Petrol subsidy payments gulped N1.43 trillion in 2021

The Federal Government has sparked a debate after announcing a reversal on the removal of fuel subsidies. The Finance Minister, Zainab Ahmed, said that the decision arose from “stakeholders meetings” who believe that now is not the right time to remove subsidies as it would inflict economic hardship on citizens and businesses across the country.

Critics have said the constant back and forth with subsidies does not help the nation’s long-term planning as Nigeria will now spend more money that could have been channeled to other sectors like healthcare and education, on funding subsidies to reduce the cost of gasoline.

Subsidy protagonists, on the other hand, say citizens are already grappling with surges in the prices of food and other commodities, making an increase in fuel price ill-timed and certain to exacerbate household problems. Different opinions from different quarters of the economy but when will the subsidy discussion come to an eventful end?

What is the problem?

Nigeria has spent much of its export earnings financing the importation of petroleum products to meet the fuel demands of Nigerians. Unfortunately, no one can say for certain, exactly how much fuel Nigerians consume daily. In one year, the Department of Petroleum resources said the country’s consumption rate was 38.2 million litres per day. A few months later, the NNPC claimed that the figure had jumped to 102 million litres. Many are doubtful of these figures believing them to be inflated to accommodate the maleficence of petroleum products smuggling to neighbouring African countries.

Back to the math, the cost of importing these ‘millions of litres’ is astronomical. It was reported that petrol subsidy payments gulped N1.43 trillion in 2021, shrinking revenue accrued to the federation account to N542 billion. In a particular month, subsidies hit N199 billion and Nigeria recorded zero revenue from oil export. The amount was to be deducted from November revenue due to FAAC in December 2021.

What would be the price of petrol if subsidies were removed?

The upturn in oil prices in the international market has pushed the landing cost of fuel imported to Nigeria to above N282 per litre and there have been different projections on what the pump price of petrol might be if subsidies were removed.

According to Malam Mele Kyari, the chief executive officer of Nigerian National Petroleum Company (NNPC) Limited, the potential price of petrol post-subsidy removal may range from N320 to N340 per litre. The National Executive Council was alleged to have placed it around N302 naira, while some stakeholders say it could hit N350 per litre.

The equation behind fuel price is that the “higher the price of oil in the global market, the higher the fuel price.”

None of these potential figures bode well for Nigerians, hence Labour’s insistence on industrial action if subsidies are removed. The N5,000 transport allowance the Federal government promised to give poor Nigerians is a plaster on a gunshot wound as most Nigerians would still bleed out of their pockets in their daily travels.

Even the middle class would view turning on their car air-conditioners during traffic as luxury.
What would happen to Nigeria’s inflation rate?

The inflation rate would go up about 2-5% if subsidies are removed. Doubling the current price of fuel will certainly increase the cost of business, services, and living in general. The cost of transporting goods to the markets would rise, delivery bikes would charge SMEs more for deliveries, and manufacturers would pass the burden to consumers.

What is the Mexican route and how can Nigeria adopt it?

In what appears to be a need for self-sufficiency in the coming years, the Mexican government is working on a policy that would see them stop exporting oil to the international market and focus on developing and building their refineries and attending to their domestic energy needs.

Petroleos Mexicanos, the Mexican state-owned producer known as Pemex, will reduce crude oil exports to 435,000 barrels a day in 2022 before phasing out export the following year.

The move is part of initiatives by Lopez Obrador to expand Mexico’s domestic production of fuels instead of sending its oil abroad while it imports costly refined products like gasoline and diesel. Mexico currently buys the bulk of the fuel it consumes from U.S. refineries.

Among OPEC countries, Nigeria is the largest importer of petroleum products and the only OPEC member bar Equatorial Guinea that does not export any petroleum product. The damning statistics are the reasons why the nation could do with functioning refineries.

In terms of the exports to imports ratio, the margin for Nigeria statistically is the most negative among the OPEC nations.

At the moment, all of Nigeria’s refineries are offline due to technical and operational problems. Modular refineries have also suffered from a number of factors including rising cases of sabotage attacks on pipelines and oil theft.

If the government prioritizes the funding and fixing of these refineries, it would be a solid win for the economy.

In Mexico, the export reduction will come as Pemex increases its domestic crude processing, which will reach 1.51 million barrels a day in 2022 and 2 million daily barrels in 2023. The Mexican driller will channel all of its production into its six refineries, including a facility under construction in the south-eastern state of Tabasco and another one being bought near Houston, Texas.

Is this practical?

Although it sounds complicated, it is practical. Take the LPG case for example. In the past several months, the price of Liquefied Petroleum Gas (LPG), popularly referred to as cooking gas, had been on a steady increase, making the commodity unaffordable for millions of Nigerians, some of who consequently resorted to firewood and charcoal as alternatives.

To stem this undesirable tide, the Nigerian Liquefied Natural Gas (NLNG) Limited recently announced the suspension of export of LPG while approving 100 percent domestic supply of the product. The decision to stop exporting gas would help forests and the Nigerian ecosystem.

What would happen to Nigeria’s revenue if it tows the Mexican route?

Nigeria made over $2.3 billion from crude oil in the whole of 2021. Just in the third quarter of 2021, Saudi Arabia made $30.4 billion. Nigeria needs to devise new ways of decreasing its reliance on its paltry revenue. In October last year, the country made zero revenue from oil as NNPC deducted all the income for subsidies. It makes no economic sense for 150 million Nigerians to continue depending on this revenue source.

The Mexican route would see Nigerian policymakers focus more on other sources of revenue; selling refined products to neighbouring countries, for example. The transition to the post-oil Nigerian economy will also begin. In Venezuela, oil sanctions facing the nation have forced the government to focus on shrimp production which has brought hundreds of millions of dollars into the Venezuelan economy.

But are subsidies that bad?

At the climate change conference (COP26) in Glasgow last year, there was a consensual agreement to phase out inefficient fossil fuel subsidies. The move was made to discourage people from relying on fossil fuels because of their negative effects on the environment. But the idea behind subsidies is to protect the consumer, hence the two-sided debate.

In January 2022, Japan formally gave its oil refiners a direct subsidy of 3 cents per litre of gasoline, so they can keep their margins and not raise retail prices. Gasoline prices are strong from the United States to Asia as increased mobility lifts consumption and crude oil at these high prices adds inflationary pressures to economies.

The average price for gasoline in Japan is 170 yen, the highest in 13 years. Gasoline prices in the United States are the highest in almost a decade.

The United States in a coalition with China, Japan, India, and the United Kingdom released oil from their strategic petroleum reserves in an attempt to bring prices down but the effect is yet to be seen.

The International Monetary Fund, one of Nigeria’s benefactors, has called for the removal of subsidies as the money used for it should go to other essential sectors.

So, when is the best time, and what is the best way to remove subsidies?

Many people say there is “no best time to remove subsidies.” Others have said subsidies should be removed and Nigerians would naturally adjust.

However, because of the science of subsidies and the direct correlation between oil prices and petrol prices, I believe the best time to remove subsidies is when oil prices are low. The Nigerian government attempted this when prices were low in 2020, however they returned it for obvious reasons. Subsidies should be phased out proportionately with low oil prices and standard of living.

Now that subsidies are back, how much would they cost?

The finance minister has said that funding subsidies would require an additional 3 trillion naira as the government seeks to amend the 2022 budget. With all things considered, the federal government recently soft-pedalled on its initial plan to remove subsidy on petrol, setting aside its much-trumpeted Petroleum Industry Act (PIA) to continue paying about N4.6 trillion provided crude oil price hovers around $85 per barrel.

Where is Dangote Refinery in all of this?

The Dangote Refinery is Nigeria’s biggest bet to start producing its own fuel and it will reportedly become operational in the third quarter of 2022. After so much delay, it appears it is about to finally kickoff. Dangote has picked up on a very risky venture as the Nigerian economy now rests on his shoulders. Pricing is now sacrosanct.

Would he fix prices in line with people’s expectations or in line with global realities in the oil refinery business? Refining margins are a hit and miss and for this venture to be profitable all things have to be equal, but in the oil business, all things can never be equal.

To conclude on the consequences of subsidies removal, I will allude to a popular party activity. In a game of musical chairs, someone will eventually lose their seat. Would it be Nigeria with the complications of the Petroleum Industry Act, IMF pressure, and other unfunded sectors of the economy, or would it be Nigerians who would have to continue delaying their fate with high petroleum prices and potential inflation?

Delay is not denial; someone will have to give.

By Opeoluwa Dapo-Thomas

Nairametrics 

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