Petroleum Subsidy Impact

Posted November 15th, 2011 by Stephen Ogunyiola

Oil Subsidy ImpactAs the saying goes, “A healthy nation is a wealthy nation.” The future of any country’s survival, and that of its corporate institutions, depends largely on how healthy or otherwise responsive government is to the yearnings of it citizens.

Subsidies are one of the palliative measures countries around the world put in place to stabilize the effect of local prices of crude on its masses. Globally around $300 billion (N35.3 trillion) is being spent on energy subsidies annually. It often comes as a mechanism in the form of money mapped out by governments to shield its citizens from the vagaries of the international scene. The idea of a fuel subsidy is usually introduced into budgetary guidelines of nations to protect the poor from paying the true price of petroleum products as obtainable in the international market. The volatile nature of the crude oil at the international market is usually factored in by both human and natural disasters. When such occur, they trigger off crises, with attendant increase in the prices of crude oil, thereby forcing governments to scamper for a safe landing, as inflation begins to create tension between government and it’s citizens.

When such is the case, the demands for fuel and other petroleum products increase causing huge budget deficits as governments are forced to import refined oil products at high prices before selling at a loss to consumers in order to protect the masses of the people. This is premised on the concept that the poor simply cannot afford to pay higher prices for fuel, which is perceived as a recipe for social unrest. It is also pertinent to note that excessive spending on subsidies undermines spending in other areas, notably education and health, as well as crowding out investment. Regulated markets with subsidized prices therefore offer an easy target for unscrupulous traders, keen to take advantage of the price disparities available between countries.

It is very important to note that not all nations gave in to this. To some, it is a sort of relief, while to others, it is not necessary, but rather should be allowed to prevail upon people to discourage their consumption level of petroleum products. This idea of subsidies is polarized as such that developed economics are of the view that subsidy should be removed and that the money should be channeled towards other development projects for the people. Their reasons were that the poor that are meant to benefit are not benefiting rather, the rich are the people still eating fat from the subsidy. Their views were that most countries that subsidized fuel caused demand to stagnate, while demand is still rising steeply, threatening to outstrip the growth in global supplies, fearing the global effect of subsidy. However, concern in the global oil market these days may be how much longer countries can keep paying the high cost of subsidizing petroleum products for their consumers. If enough countries start passing the true cost of oil through their citizens, it will invariably help to bring the oil market into better balance and lowering prices.

Subsidy Effect On Transportation Cost In Nigeria
The proposed withdrawal of the Nigerian petroleum fuel subsidy will no doubt create difficulties for ordinary Nigerians. If we interpret the meaning of a subsidy correctly, once a subsidy is withdrawn, the result is that prices of goods and services will go up. The situation is made even worse because at present, none of the refineries in the country are functioning well.  The effect of this withdrawal will no doubt lead to an increase in the price of so many things, including transportation – and the ordinary people will bear the brunt of this increase. I have to believe the proposed withdrawal of petroleum subsidy would no doubt create difficulties for ordinary Nigerians, if nothing was put in place to reduce its effect on the cost of living, because the subsidy serves to cushion volatility in cost of products,  and would make the prices of goods increase.

Also this may not be the most auspicious time to bring up a harsh economic policy as the country has barely recovered from the post election crisis and labor unrest that followed the agitation for the payment of the new minimum wage (N18,000 – that is about $113.9 per government worker monthly).

If the Nigerian government enacts the controversial policy of fuel subsidy withdrawal, the country could erupt into crisis again, and this could be one crisis too many within a short time for a government that is barely la few months in office. The only way to stem the tension and anxiety among Nigerians over the policy is to give a reassurance that withdrawal of the fuel subsidy will not lead to a high increase in the pump price of fuel.

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  1. […] The 2011 report of the International Energy Agency (IEA) reveals that globally, energy sources are not diversified. Coal and oil represent together about 60 percent of the world energy supply, 80 percent if we add natural gas. Alternatives or renewables – hydro energy, geothermal energy, and wind energy – represent together less than 3,1 percent of the world energy supply (IEA report 2011). At the same time, non-OECD countries, with China and India leading the way, are demanding more energy resources, representing almost 93 percent of increase in demand in energy in 2010 according to the IEA World Economic Outlook 2010. The same report also estimates that oil peak should be reached around 2020, making the situation more problematic. Additional explosiveness is added by the fact that transforming coal, a very likely substitute for oil after the peak, into energy is very unfriendly to the environment, at least with technology available today. Soucre: Perpetualminds […]

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