Fuel subsidy is the government’s intervention or effort in paying the difference between the pump price at petrol stations and the actual cost of fuel importation.
It means selling petrol to the end user lower than the cost of importing and giving direct financial support to oil marketers by the government. This is because, with subsidy, the government takes upon itself the responsibility of paying a fraction of the cost of PMS- Premium Motor Spirit- also known as Petrol, thereby easing the burden of paying the full cost by its citizens, especially lower-income earners.
For instance, if the global market cost of PMS is 500 naira, the government comes to an agreement with petrol marketers to pay 300 naira while its citizens pay what is left, which is 200 naira. This was to relieve the burden of buying fuel at its actual cost on its citizens to benefit the lower-income groups. Subsidising meant that the government decided how much oil marketers sold products to the people.
Fuel subsidy has been on since the 1970s, and ever since then the fraction paid by the government has been on the rise and this increase has led to the issue of subsidy removal.
What is subsidy removal?
Between 2006-2018, Nigeria spent over 10 trillion naira on petroleum subsidies, that is about 21.7 billion dollars, and since the 70s, different administrations have tried to remove subsidies, from former President Ibrahim Babaginda in 1986 to former President Goodluck Ebele Jonathan in 2012, but each administration encountered challenges, like the protests and backlash that the Jonathan administration met concerning the issue.
Even at some point during former President Buhari’s tenure, the issue was raised and withdrawn until towards the end of his administration when it was disclosed that provision for subsidy was made only for the first half of the year 2023 and as such fuel subsidy will end with the Buhari administration, and to further confirm this, President Bola Tinubu during his inaugural speech announced that fuel subsidy removal will commence on the 1st of July 2023.
So, what is subsidy removal? It is a situation whereby the aid on the cost of fuel given by the government is withdrawn and the people are to pay for PMS according to the actual market price, that is no more fraction payment by the people.
So, if the cost of fuel in the global market is 600 naira and marketers sell at 650 naira, then the citizens will have to buy 650 naira.
Reasons for Subsidy Removal
With trillions of naira and billions of dollars spent on fuel subsidies, Nigeria’s debt as of 31 March 2022 was about 41.60 trillion naira, little wonder why subsidy removal became a hot topic among the nation’s leaders.
Removing subsidies would give opportunities for other sectors of the economy to become a priority. It will also allow private sector participation in the importation of petroleum products as provided in the Petroleum Industrial Act (2021) which was signed into law by former President Muhammadu Buhari, which allows for total deregulation of the petroleum downstream sector (the refining, processing, purifying, marketing and distribution of products derived from crude oil and natural gas) to drive investment and growth.
Benefits of Subsidy Removal
Some key points of the benefits of subsidy removal include;
- The ready availability of PMS at all times for Nigerians as there will be no diversions by marketers because the country will be saturated with petrol, so that means bye-bye to fuel hoarding by Emeka, the fuel attendant, long queues, and black-market sellers.
- With private sector participation in the importation of petroleum products, the market will be free and Nigerians empowered.
- It will bring about competition in the industry and market forces will drive down the price in the long run.
- The funds spent on subsidies will be channelled into other sectors that lack development, like infrastructure, education, health care, and others.
Fuel Subsidy and PMS Price Hike
Following the announcement by His Excellency, President Bola Ahmed Tinubu in his inaugural speech on 29th May 2023 that fuel subsidy has been removed, Nigerians went into panic buying which then led to a hike in the price for fuel over-night from 350 naira to 511 naira in some locations.
Although the President mentioned that the subsidy removal was to take effect from the 1st of July 2023, the Chief Executive Officer of Nigerian National Petroleum Company Limited- NNPC Ltd, Mr Mele Kolo Kyari, also confirmed that there is enough fuel to serve Nigerians until 30th, June 2023 and urged Nigerians to not panic buy, but Nigerians being unsure of the days ahead went into a fuel-buying frenzy causing long queues and a hike in transportation fares as well.
Now that subsidy has been removed, fuel prices will be aftermarket realities, meaning that fuel prices will be dependent on the cost of importation, and transportation to fuel stations, which will adversely influence fuel prices and the cost of living for the people. In the coming months, fuel prices will fluctuate until the market stabilises.
As of now NNPC Ltd is the only major importer of petroleum products but with the subsidy removal and provision for private independent marketers to also import petroleum products, fuel prices are likely to see a decline as the market normalises.
While the country waits for market stability, the increase in fuel prices automatically affects the increase in transportation, foodstuffs, and eventually the cost of living.
Truly, the nation is about to embark on a sensitive journey in this new dispensation. Subsidy removal spells growth and progress for the country, but the road leading to this destination will be quite challenging.
Maybe if the government had put in place provisions to cushion and prepare Nigerians for the journey ahead, rather than ‘putting the cart before the horse’, the panic state the citizens have been subjected to for the past 72 hours would have been alleviated or avoided totally.
I hope that with the provisions put in place by the Petroleum Industrial Act (2021) signed into law by former President Muhammed Buhari and the Dangote Refinery, which will kick off production in July, the country will reach its economic boom and social stability sooner rather than later