Fuel Subsidies: the Nigerian case

Nigeria is the major oil and gas producer in Africa, and has spent approximately $8 billion a year on fuel subsidies [1]. The country has been importing gasoline even though they produce oil for exportation because of poor local refining capacity [2]. However, earlier this year President Goodluck Jonathan announced immediate removal of the subsidy, and the result was an almost doubled fuel price for citizens, which led to thousands taking to the streets in chaotic protests [3]. It is interesting to note that rival Muslims and Christians in the country banded together during the protest period [3] to express their immense dissatisfaction against a decision that equally affected them. In response to the unrest, the President restored part of the subsidy but prices were still about 50% higher than before [2]. Authorities in Bolivia and Venezuela have likewise attempted subsidy cuts in the past, with the result being similar: angry protests, violent clashes and even fatalities [1]. In all of these cases, the government quickly reversed its decision in order to pacify the people.

Fuel subsidies remain a contentious issue. Some people welcome the idea for making fuel affordable to the poorer constituents of a population, while others believe it is a short-term remedy with no real benefits to the poor and that the wealthy minority tends to gain. Despite the fact that Nigeria is a major oil and gas producer, the wealth from their abundant resources has not historically been passed on to the citizens. It is estimated that 80% of the oil wealth goes to 1% of the population [1]. Subsidized fuel was one of the few benefits of the oil wealth enjoyed by the Nigerian people. On the other hand, it is true that the subsidies they enjoy have been taken advantage of by smugglers who sell the low cost gasoline at higher prices to nearby countries [2]. Removal of subsidies could reduce wasteful consumption and allow money to be used elsewhere in the country’s development. However, it can also be argued that the administration has a reputation of corruption and the money that would have been used for subsidies may not necessarily go towards developing other areas that benefit the country.

Perhaps the administration’s approach should have been different, and instead of abruptly slashing the subsidy, they could have gradually reduced it with support. Several countries have implemented programs to assist people with the transition by lending support for school fees and health care in light of the price increases [2]. In the case of Nigeria, even though the protests have abated since earlier this year, it was reported last month that the population still feels the strain in their pockets as they have not yet received assistance [2]. The fact that other countries have experienced success with fuel subsidy removal suggests that it is probably not a negative move but that policymakers have a significant role to play in ensuring a smooth transition. There are long-term benefits that could be attained but it should be recognized that fuel price increases affect prices of other commodities. Although it is likely that protests would still occur, a gradual subsidy removal with some form of transitional support might have been more beneficial to the Nigerian population than the abrupt cut that was made. This situation is a learning experience for other nations that have similar intentions for reducing or eliminating their fuel subsidies.

[1] Nossiter, A. (January 16, 2012). “Under Pressure, Nigerian Leader Relents on Gas Price.” The New York Times

http://www.nytimes.com/2012/01/17/world/africa/nigerian-president-rolls-back-price-of-gasoline.html?pagewanted=all

[2] Omisore, B. (March 7, 2012). “Nigeria’s Rocky Effort to Wean Itself from Subsidized Fuel.” National Geographic news

http://news.nationalgeographic.com/news/energy/2012/03/120307-nigeria-tries-to-end-fuel-subsidy/

[3] BBC News Africa (January 13, 2012). “Nigeria fuel subsidy strike: Protests suspended.”

http://www.bbc.co.uk/news/world-africa-16544533

 

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2 Comments

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2 responses to “Fuel Subsidies: the Nigerian case

  1. twilliamson9

    Thank you for your post- you give a great perspective on this story which, sadly, is just a snap shot of what many pore, oil-rich countries face. In my opinion, fuel subsidies such as the ones offered in Nigeria strengthen the “resource curse” that they face. Rather than focusing efforts on building a strong educational system or solid infrastructure, the government is facilitating the import of fuel, weakening the local economy.

    In Peter Maass’s book, “Crude World”, he points out that “The World Bank estimates that 80 percent of Nigeria’s oil wealth has gone to 1 percent of the population.” While it’s easy to assume that higher oil revenues would be a blessing for a pore country, Maass explains that because so much of the money is lost for corruption, there aren’t enough oil revenues left to create the infrastructure needed to create jobs for the locals. Since they can’t afford the infrastructure needed to refine and distribute fuel domestically, the government subsidizes imports- a solution even more temporary than staying afloat from oil revenues.

    Why not use the money being used to subsidized fuel imports to begin building an infrastructure for refining fuels locally? It would require more than $8 billion per year, but if corruption could be curbed there would be sufficient funds from oil revenues. I agree that cutting the subsidies suddenly was not the proper approach; perhaps phasing them out over the course of a year or two would cause less of an upheaval. While it’s not immediately apparent to the protesters, the removal of the subsidies is in their best interest.

  2. ttripson

    I also agree that cutting the subsidies that quickly was not a prudent decision. I don’t see how even incremental slashing of the fuel subsidy would trick the public. They public would still be enraged, since as you pointed out these fuel subsidies are among the only benefits they receive from their country’s massive oil revenues. I think one of the only ways for the Nigerian government to do away with the fuel subsidy is to instead institute a cash dividend/payout scheme for all of its citizens as a portion of state oil revenues. And then as necessary tax the public on this revenue to pay for infrastructure and other public services. This could be modeled on a policy similar to Alaska, but of course would face many obstacles in a poor country with such a high level of corruption.

    While Nigeria is currently a leading global oil producer, it is also ranked 142 out of 169 in poorest countries in the world (UNDP, CIA). Despite oil revenue gains of over $350 billion from colonial independence in 1960 through 2006, as you mentioned Nigerian citizens have seen few positive spillover effects from the resource wealth. To compare two GDP indicators you can see the stark difference. From 1960 to 2010, GDP per capita (constant $2000) rose by 93% while GDP expenditures (constant $2000) in that same time period rose by 554% (Google Public Data Explorer)! Money is being made, but the people are not receiving it, and the country is not as developed as you would imagine with that many decades of oil revenues.

    Because the fuel subsidies are among the only benefits of oil revenues the people see, it is also the policy lever they understandably rally around when they are cut. The people need to see oil revenues in the form of other personal monetary benefits before inefficient fuel subsidies can be cut, with the most beneficial and equitable being personal cash dividends.

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