IMPACT OF FUEL SUBSIDY REMOVAL IN NIGERIA
INTRODUCTION
For decades, Nigeria's gasoline subsidy has been a major policy and economic concern. The government has a long history of subsidizing petroleum products, notably gasoline (petrol) and kerosene, in order to keep consumer costs artificially low.[i] In Nigeria, fuel subsidies entail the government compensating gasoline importers and marketers for the difference between the real cost of imported petroleum products and the lower, subsidized retail price at which they are sold.[ii] Subsidy payments are offered to bridge the gap and guarantee that customers can afford to buy petrol.
FUEL SUSBISDY IN NIGERIA
Fuel subsidies are a form of government intervention that lowers the cost of fuel by providing direct financial support to oil firms, hence subsidizing the product to consumers.[iii] Nigeria is one of Africa's greatest crude oil producers, and its economy is strongly reliant on this resource. Furthermore, oil accounts for a large portion of Nigeria's GDP and employs a large number of her citizens.[iv]
Fuel subsidies have been in place since October 2000, due to supply shortages at the country's four refineries.[v] The Nigerian government established a committee to investigate all elements of petroleum product price and distribution. The committee proposed forming a Petroleum Products Pricing Regulatory Committee (PPPCRC), which ultimately evolved into the Petroleum Products Pricing Regulatory Agency (PPPRA).[vi] PPPRA has a price modulation method that allows petroleum product prices to be adjusted to reflect changes in world oil prices. When international oil prices are high, the government of Nigeria may raise the regulated price of petroleum products in order to avoid shortages and guarantee that independent petroleum marketers can operate economically.[vii] When global oil prices are low, the government may reduce the regulated price of petroleum goods to reflect market circumstances and pass the savings on to consumers.
Although fuel subsidies have made petroleum products more readily available to individuals, they have also imposed certain detrimental effects on the economy. For one, they have exacerbated corruption and mismanagement as a result of insufficient supervisory measures, with certain people and businesses abusing the system to earn unlawful gains.[viii] Furthermore, the government spends a substantial amount of money on fuel subsidies, which contributes to growing national debt. Subsidies can sometimes cost more than the cash collected from the sale of crude oil, Nigeria's principal export.[ix]
Furthermore, because of pricing differentials between Nigeria and neighbouring nations, in addition to inefficiencies in the distribution and supply chain, petroleum products are frequently smuggled out of the country, resulting in periodic shortages and long queues at gas stations.[x] Finally, subsidised pricing promotes overconsumption of petroleum products, resulting in increasing air pollution and greenhouse gas emissions, while inhibiting investment in domestic refining and other energy sources.[xi] Given these concerns with gasoline subsidy schemes, it is evident that fixing the scheme requires a thorough reform effort, if Nigeria is to achieve sustainable growth from petroleum-generated revenues.
To begin, the government should contemplate total deregulation of the petroleum sector, allowing market forces to set pricing.[xii] This would lower the government's burden of providing subsidies, promote competition, and attract more private investment into the industry. Furthermore, the government should encourage investment in alternative energy sources like solar and hydro.[xiii] This would assist to diversify the country's energy mix, reduce reliance on fossil fuels, and reduce the economic effect of shifting global oil prices. In addition, the government might support refinery investment to increase domestic refining capacity and minimize dependency on imports.[xiv]
While all nations must eventually phase out all fossil fuel subsidies in order to satisfy their human rights commitments in the context of the climate catastrophe, they must not do so in a way that undermines the capacity of low-income individuals and households to exercise their right to an acceptable quality of life.[xv] As a result, it is critical that subsidies be replaced via social cushioning and protection measures. The authorities must now answer to long-standing requests from civil society and legislators to examine the gasoline market chain and hold responsible all individuals involved in smuggling, stockpiling, and 'subsidy scams' – regardless of rank or status.[xvi] Nigerian authorities must act quickly to defend the rights of those most impacted by the loss of gasoline subsidies, and prioritize tackling widespread hunger, increased unemployment, and a fast declining standard of living.[xvii]
CONSIDERATIONS
Addressing the issue of petroleum subsidies in Nigeria is poised have substantial consequences for Nigerians, including potentially increased gasoline costs, inflation and increased hardship.[xviii] Nigeria, like many other countries, has struggled to balance fuel subsidies with economic realities. There have been talks and arguments in recent years about the impact of the withdrawal of fuel subsidies on numerous industries, including the electricity industry. The following are some of the implications, both positive and negative, of the elimination of fuel subsidies on electricity prices and the power sector in Nigeria[xix]:
Fuel Subsidies and Electricity Generation: The elimination of fuel subsidies has the potential to have a direct influence on power generation in Nigeria. The electricity sector is primarily reliant on gas-fired power facilities that run on natural gas. Natural gas prices are set to rise if fuel subsidies are phased out. Higher operational expenses for power producing businesses may result, potentially impacting energy pricing, which will most likely be passed on to customers. There is therefore a need for cost reflective tariffs in the power sector.
Cost Reflective Tariffs: The elimination of fuel subsidies can be viewed as a step toward introducing cost-reflective pricing in the electricity industry. Subsidies frequently lead to artificially low electricity costs, deterring investment and impeding the development of a strong power industry. By eliminating fuel subsidies, the government hopes to create a market-driven pricing structure that represents the actual cost of energy generation.
Impact on Consumers: The elimination of gasoline subsidies may have immediate consequences for consumers. If electricity prices rise owing to rising fuel costs, consumers may see an increase in their energy bills. This can have a particularly negative impact on low-income households, who rely substantially on economical power for their daily requirements. Mitigation strategies, such as targeted subsidies or social assistance programs, may be required to reduce the load on vulnerable people.
Incentivizing Renewable Energy: The elimination of fuel subsidies can encourage the development and deployment of renewable energy sources. Renewable energy becomes more competitive when the price of fossil fuels rises. The rising cost of fossil fuels may drive investment in renewable energy infrastructure, resulting in a more diverse and sustainable energy mix in the long term.
Power Sector Reform: Fuel subsidies are being phased out as part of larger power sector reforms in Nigeria. These measures are intended to boost the sector's efficiency, dependability, and financial sustainability. This will foster a climate favourable to encouraging private sector investment and improving overall sector performance by matching electricity prices with the real cost(s) of production, transmission, and distribution.
CONCLUSION
The elimination of fuel subsidies in Nigeria has the potential to have a considerable influence on electricity pricing and the power sector. While it may cause short-term difficulties, such as higher electricity rates for consumers, it may also promote the development of a more efficient and sustainable power industry. Effective implementation, in addition to complementing measures to alleviate the impact on vulnerable people, would be critical to ensuring a seamless transition and long-term benefits for Nigeria's power industry.
[i] Emmanuel Onyeuche, The Impacts of Fuel Subsidy Removal on Electricity Pricing and the Power Sector in Nigeria (Electricity Hub June 8 2023) < https://theelectricityhub.com/the-impacts-of-fuel-subsidy-removal-on-electricity-pricing-and-the-power-sector-in-nigeria/ >
[ii] Ibid
[iii] Ibid
[iv] Ibid
[v] Ibid
[vi] Ibid
[vii] Ibid
[viii] Ibid
[ix] Assessing the Impact of Fuel Subsidy Removal in Nigeria on the Poor in the COVID-19 Era < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3830477 > accessed 9 June 2023
[x] Ibid
[xi] Ibid
[xii] Ibid
[xiii] Ibid
[xiv] Ibid
[xv] Nigeria: Removal of fuel subsidy must not exacerbate poverty ( The Cable June 1 2023) < https://www.amnesty.org/en/latest/news/2023/06/nigeria-remove-fuel-subsidy-exacerbate-po/ > accessed 9 June 2023.
[xvi] Ibid
[xvii] Ibid
[xviii] Ibid
[xix] Emmanuel Onyeuche, The Impacts of Fuel Subsidy Removal on Electricity Pricing and the Power Sector in Nigeria (Electricity Hub June 8 2023) < https://theelectricityhub.com/the-impacts-of-fuel-subsidy-removal-on-electricity-pricing-and-the-power-sector-in-nigeria/ >