The Subsidy Question: Fuel Will Sell For N40 A Litre

The original arrangement was that as soon as the crude oil came out from the ground, Nigeria would sell 90 percent at the spot market, in hard currency. The remaining 10 percent was meant to be refined for local consumption.” -Josef

In their daily lives, Nigerians must cope with this open ambivalence – they have oil but they can’t see oil; they have petroleum, but they have no petrol; they pay for light but they get darkness. There is no better way to explain what we mean here than by telling our usual story of the so-called subsidy on petroleum products in its most elemental form.

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Nigeria is said to be the sixth largest producer of oil in the world. But with mismanagement, what was originally supposed to be a blessing from God has virtually turned a curse. At every point, we are either fighting because of the poor allocation of this resource, or we are crying that some dubious elements have stolen the total proceeds.

The original arrangement was that as soon as the crude oil came out from the ground, Nigeria would sell 90 percent at the spot market, in hard currency. The remaining 10 percent was meant to be refined for local consumption.

At various times, Nigeria had built four refineries – two in Port-Harcourt and one each in Warri and Kaduna, intended to refine different products. These refineries were run aground; and they are now old and practically comatose.

Because of our lack of refineries, foreign concerns that had refineries began to pick up, at rock-bottom prices, the 10 percent crude reserved for local consumption. They would refine the products in their countries and export the refined products to us at their own prices. By the time the product returns to Nigeria after its triangular journey, the price has hit the ceiling and it is no longer within the reach of many. This is where government steps in to bring in what it calls subsidy.

Under this scheme, a country like the Netherlands, which does not have a single drop of oil, is in the Organisation of Petroleum Exporting Countries, OPEC, as a net exporter of oil.

The subsidy regime in Nigeria reminds us of two issues – first, subsidy would have been absolutely unnecessary if we were doing our own refining in Nigeria. Secondly, the subsidy regime has been fraught with fraud and dishonesty.

Between 2006 and 2014, Nigeria paid over N7.5 trillion as subsidy claims. Yet, we are still where we are – the subsidised products are not available and where they are available, they sell for prices much higher than the unsubsidised products. Put differently, we have been subsidizing fraud.

The subsidy game has been a political one and has not been played on the rings of economic data; and rather than being fact-driven, it has been emotion-driven and politically played by those who use it as a political tool.

Subsidy in itself is not a bad idea. In fact, it is defined in economics as money paid by government or an organisation to reduce the cost of producing goods so that their prices can be kept low. It seeks to reduce the market price of an item below the cost of production. Government intervenes to support desirable activities to keep the prices of staple low; maintain the income of producers of critical or strategic products; induce investment while reducing unemployment.

Everywhere, subsidy is supposed to be a cushion to enhance the welfare and well-being of the people. It is an acceptable practice the world-over.

This writer was in Germany in the winter of 1973, when the price of oil increased astronomically because of some major adjustments by OPEC. Many companies would have just gone under but government quickly intervened with a serious subsidy package. Among other things, industry workers – including those of us arbiters who were “pulling gburu” – were made to work two days a week (eight days a month) for full month’s pay. That’s subsidy.

If all American farmers were to be allowed to produce at their optimum levels, food would be surplus and totally useless everywhere. The American government has had the practice over the years of paying some selected farmers to stay at home, not producing anything during the year. That’s subsidy.

In these places, the subsidy scheme is well managed and it gets to the target population – the poor. But in Nigeria, the exact opposite is the case: the real beneficiaries are not the poor but the middlemen and the rent seekers, contrary to the argument usually advanced and which has been at the heart of subsidy’s continuation, that it is pro-poor.

As long as there are long queues in our filling stations, we are merely compounding the problems of the poor. When people queue and sleep at petrol stations like refugees, besides the human degradation involved, you have also effectively reduced from their sources of livelihood because the time spent at the stations are wasted. Funds for infrastructural and human capital development are frittered away on dubious subsidy claims and payments to about 40 corporate citizens of Nigeria, to the utter neglect of the rest of us.

Truly, petrol can sell for N40 a litre but things must get worse before they get better. Subsidy is strangulating us! We must take the tough decision NOW – tighten our belts and let subsidy go!

Those middlemen in the current supply chain must go. Subsidy removal must be approached through what we call “the blind man and his yam”. If you have to pill the blind man’s yam, you must keep whistling while you do so as a sign that you are not introducing the yam into your own mouth.

Similarly, any substantial subsidy removal must be immediately accompanied with the rehabilitation and upgrading of the refineries so the people can see what you are doing with their money. Once we meet our local needs, importation will stop. When importation stops, subsidy ends. The darkest part of the night is just before dawn.

Let’s give ourselves one year to work on the refineries during which period, as a way of choosing the lesser of two evils, we shall allow only the to import petroleum products directly so that we can know exactly what we are consuming.

Written by Josef Omorotiomwan



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