Subsidy Removal Difficult Without Functioning Refineries

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CEM ANALYSIS | The direction of the global energy market is that of rallying prices being supported by various factors outside the control of the regulatory body. Prices have been on a steady upward trajectory for all energy products; crude oil, gas and coal at least from the third quarter of 2022.

Prices have risen more than 80% from post pandemic levels now selling above US$100 per barrel. Increasing crude oil prices is expectedly impacting gasoline price across the globe even for those countries that have substantial refining capacity.

Countries with weak or non-existent refining capacity such as Nigeria are receiving the backlash of skyrocketing landing cost per liter of the premium motor spirit (petrol), Automobile Gas Oil (diesel) and kerosene. This, surely is having serious impact on energy spending by the Nigerian government in form of the most controversial subsidy.

For instance, Nigeria’s spending on petrol subsidy will hit a whooping sum of N2.55tr by the end of 2022 according to the last figure from the Minister of Finance and Budget Planning, Mrs Zainab Ahmed, an amount that have received both local and international condemnation notably from the International Monetary Fund (IMF)

According to the Washington-based lender, “Implicit fuel subsidies have a significant negative impact on Nigeria’s fiscal position, which is estimated to increase the overall fiscal deficit by around one percentage point of the Gross Domestic Product in 2021.”

However, despite IMF warning and local criticism of the entire subsidy regime, the government will surely go ahead to utilize the supplementary budgetary allocation for that purpose since there is yet a reversal statement from the government over the decision.

The big question is if subsidy payment is not in place right now, could Nigerians have been able to accommodate the current price of fuel? By international calculation, that would be above N400 per liter. The reaction of Nigerians toward the N170 – N200 per liter price induced by the temporal scarcity which was caused by importation of adulterated fuel is a tester to what it will feel like when it is officially selling at a higher price.

Though energy experts such as Engr Israael Abraham, President of the Nigerian Institute of Power Engineers have steadfastly argued that until the subsidy is fully removed, government will not see the reason and urgency to fix our refineries that have remained moribund over the years. This argument is supported by claims in some quarters that some persons are benefiting from the subsidy regime, a reason for the sudden u-turn by the government.

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Those that belong to this school of thought don’t see the real price of fuel as unaffordable by Nigerians or its repercussion on price of commodities as unbearable by consumers. They see it as a catalyst that will spark up series of adjustment that will pave way for full private participation according to the PIA and finally stabilize the energy sector.

However, for Barr Victoria Ibezim-Ohaeri, an Energy Lawyer, until the government fix our refineries, subsidy regime will never stop. “without fixing our refineries, removing subsidy won’t work, let us face facts”; she said

She doesn’t see the possibility of coping with resulting inflation upon subsidy total removal going by the current upward movement of global oil prices. There must be some form of local refining to fall back to, without which the whole economy will be exposed to the vagaries of fluctuating dollar value.

Petroleum dealers with large appetite for huge profiteering will scrape consumers’ hair and slash their throats under the guise of rising dollar value.

Way out

Since government have decided to go on with the huge spending to subsidize petroleum price for Nigerian consumers, they must make sure that they follow through with the contracts awarded to fix the Warri, Port Harcourt and Kaduna refineries according to last year pronouncements.

The federal government had announced in March, 2021 of contract to fix the Port Harcourt Refinery while the contract to overhaul the Warri and Kaduna Refineries was made in August. Though no other information has been heard since that pronouncement, it is hoped work is in progress to deliver in 2023 according to the announcement

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