Finally, Petroleum Subsidy is Gone: The Implications

The final removal of petroleum subsidy in Nigeria is a welcome development. It means the market will determine the fuel price, i.e., willing buyer, willing seller price. It also means that many companies can import petrol and sell it at a price they want to recover their costs and make a profit.

Many suppliers will be posting their market prices. We will see variations in posted prices by companies—no more regulated prices by the government.

The petrol price will fluctuate periodically as crude oil prices and dollar exchange rates change. NNPC Limited and other importers will post their prices whenever there is a change in the variables that affect the cost of their fuel. These could be the distance from which the fuel is imported, its quality, or variation in profit margins.

NNPC Limited posted prices will be the benchmark for the petrol market because it is a fairer and stronger player.

Prices will be coming down in the event of lower crude oil prices. However, there could be collusion by the importers to stick to a higher price even at a low crude oil price. But, higher prices attract more supply, and less demand, leading to excess supply, which brings prices down.

When the Dangote refinery starts operation, the petroleum products importers will then buy from the local refiner, thereby saving the extra costs of distance transportation costs and foreign inflation from the source country. They will be able to reduce their posted prices then.

The marketers will get Dangote's fuel at least N30 less than the imported fuel per liter. They will enjoy Dangote's economy of scale (producing more at cheaper costs) and local production. This cost-saving could be higher due to cheap labor in Nigeria. However, this does not remove the possibility of some marketers sourcing the product cheaper elsewhere.

Marketers that buy from the Dangote refinery will sell first. And if they can meet the local consumption, those that import expensive fuel will be pushed out of the market.

With the sudden increase in fuel price by more than 170% due to the subsidy removal, the economy will shrink in the short run as productivity reduces. There will be less demand for petrol, and overall spending will decrease. Businesses will lay off staff to cope with the increasing cost of doing business, and general welfare will reduce.

However, there will be new inventions as people start looking for alternatives. They will explore alternative transport systems or fuel or adjust their lifestyle. More business opportunities will emerge from this development. People will now begin to organize collaborative transportation means to share or reduce the cost of transportation per head.

There will be efficiency of demand and reduced wastages, and Unnecessary trips will reduce. There will be fewer cars on the road and reduced carbon emissions. The NNPC Limited remittance to the government will increase because the cost of the subsidy is being removed. This enables the government to do more development projects and borrow less.  

Even though the approach by President Tinubu needed to be more systematic, it has minimized the chances of prolonged speculative buying by retailers in the event of scheduling the removal on a designated future date.

However, because of his sudden announcement, there are now excessive supplier surpluses. Retailers of petrol that bought their products at a subsidized price just before the announcement are selling them at higher market prices, causing consumer losses and abnormal profit for the suppliers. That is the immediate effect of such a sudden pronouncement.

For example, a retailer that bought a truck of 45 thousand liters at an ex-depot price of N179 per liter just before the announcement is now selling it at N540 per liter, making a surplus of more than N15 million per truck.

Consumer losses are still inevitable even if a future date of the removal is announced, as retailers will engage in even more speculative buying ahead of the date to hoard as many large inventories as possible, wait for the removal date, and make abnormal profits.

The good news is that many filling stations will open, and long queues will disappear, but consumers will lose. One of the conditions for removing the subsidy is sufficient local refining capacity. With the Dangote refinery, there will be a lower price of about N30 or more per liter compared to the imported one due to the advantage of local production.

The Dangote refinery will reduce Nigeria's import bill because, as of now, imported petroleum products are the biggest bill in Nigeria's import basket. So, the Dangote refinery will reduce the supply of Naira, leading to its appreciation. It will positively affect Nigeria's balance of payment due to the exports of petroleum products by the refinery.

Other countries will also bring their crude oil for refining in Nigeria and pay in dollars, thereby growing the impact of the oil sector on GDP. However, Dangote will buy Nigeria's crude oil in dollars, sell the refined petrol in Naira only to Nigerians, and exchange any desired quantity of the Naira receipts for Dollars at the CBN.

Therefore, from the economic perspective, these two developments favor the economy's growth. They will create new business opportunities and lifestyles. The short run will be challenging, but the long run will be stable.

Ahmed Adamu, PhD
Petroleum Economist,
ahmadadamu1@gmail.com