The Petroleum Subsidy Trap and The Way Forward

Ahmed Adamu, PhD

Lack of refining capacities and Petroleum subsidies have caused Nigeria to lose significant foreign exchange and its ability to fund infrastructural development. 

The Nigerian government's share of crude oil averaged around 900k barrels per day in 2021, and at least 70% of that was exchanged for petroleum products, which means only 30% of our crude oil exports brought back dollars. 

Going by the above, Nigeria received an average of only $20 million per day from oil exports in 2021. On the other hand, Nigeria loses a minimum of $45 million cash to crude oil swaps every day. 

Instead of receiving dollars after selling our crude oil, we receive refined petroleum to fill the local refining capacity deficiencies and meet the outrageous local petrol demand. 

That has caused the flow of foreign exchange into Nigeria to reduce drastically, which caused the deterioration of our foreign exchange reserve, dollar scarcity, Naira devaluation, and hence inflation. That is the cost of not having sufficient local refineries.  

On top of that, the Nigerian government is spending more than N150 billion monthly on petroleum subsidies. These funds would have been for infrastructural development and job creation programs. Nigerian government loses a significant amount of revenue due to petroleum regulation. 

The subsidy also leads to serious supply leakages, where more than 40% of subsidized petroleum is being arbitraged in neighboring countries. Nigeria is creating a business opportunity for rent-seekers to buy the Nigerian subsidized petrol and then sell it at an expensive market to make a profit. This is a big revenue leakage that petroleum subsidy causes. 

Petroleum Subsidy is an "evil necessity" at the moment; Despite the above challenges, the government must continue with petroleum subsidy. There is no doubt that the petroleum subsidy is not sustainable for now, but the question is when and how to remove it? 

In the meantime, Nigerians cannot afford the unsubsidized price of petrol. Without petroleum subsidies, petrol prices will be more susceptible to fluctuations in crude oil prices and exchange rates. Prices at filling stations will fluctuate to any change in the exchange rate and crude oil price. These fluctuations could happen on daily basis. 

The deregulated petrol price will be anything above N300 per liter at the moment; this will cause further inflation because everything links to the petrol price. The resultant inflation will harm the economy more than the subsidy harms the economy at the moment. Now, this is the trap.

Now, to answer when to remove subsidy. The best time to remove petroleum subsidy is when there is a minimum of 500k barrels per day of local refining capacities, when the exchange rate is stable, and when inflation is at a single digit. 

Dangote refinery is still at a "maybe" state; there is no specific time when it is likely to start operating, but if it does, it will help satisfy the first and most important condition. 

Achieving the first condition will enable us to achieve the second condition of exchange rate stability, but that has to be complemented with import substitution strategies. Fulfilling the first and second conditions will automatically make the third condition achievable.

 

But the how-to remove the subsidy is the main question. We have options of targetted subsidy or quota subsidy as phasing out strategies. Let us look at the targeted subsidy strategy first.

Under this regime; any Nigerian that wants to benefit from the petroleum subsidy will have to enroll in the subsidy program, where his biometric data will be collected and linked to his vehicle details. A person will receive an electronic sticker that will be scanned to verify his national identity, biometric data, and vehicle specifications at the point of purchasing the subsidized petrol.

Petrol stations will have to enroll in this subsidy regime, and it is only the affiliated filling stations that will be selling the subsidized petrol. The government should incentivize filling stations to sign up for the subsidy regime. 

Other filling stations that did not join the program will be selling the petrol at the market price. So, you will have two sets of filling stations: the ones that sell at a subsidized price and the others that do not. 

Nigerians that can afford the unsubsidized petrol will conveniently buy from the unaffiliated filling stations. While others will have to consume at the filling stations that signed up for the subsidy program. That is why the government should ensure many filling stations, especially in the rural areas signed up for the program. 

By doing that, the consumption of subsidized petroleum will be limited to only Nigerians and the subsidy spending will reduce drastically. The government may target a certain subsidy payment threshold every month.  Every beneficiary should have a maximum number of allocated liters per month to avoid round-tripping. 

By implementing this, only less than 30 million liters per day will be subsidized, as against the reported 70 million liters, which automatically makes the Nigerian government save up to N90 billion every month and still provide the subsidy to the poor people. 

Another alternative phasing out strategy is the quota subsidy, where a certain number of liters are allocated proportionately to categories of consumers monthly. The consumer categories will include commercial vehicle users, industrial vehicle users, and private vehicle users. 

This will narrow down the subsidy more to the poor and consumer goods production processes. The need for the government to fund palliatives may not arise, as the masses will continue to enjoy the subsidy. 

Finally, the savings from the reduction in subsidy spending may be used for railway construction to interlink the country for easier and cheaper transportation. This will translate into cheaper consumer products. The government should stop giving cash palliatives but implement capital projects that ease businesses. 

The government should be honest and transparent in dealing with petroleum subsidy issues. Delaying the subsidy removal until after the election is purely political, unpatriotic, and patronizing. Punishing Nigerians after using them for electoral votes is treason.  

Ahmed Adamu, PhD

Petroleum Economist

ahmadadamu1@gmail.com 

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How to urgently fix insecurity in Northern Nigeria

- Ahmed Adamu, PhD

 

Since the recent exacerbation of terrorism in northern Nigeria, there have not been serious legal actions to punish the culprits. There should be an emergency court for trying the criminals and immediately convict them.

 

There should be a special law that dictates the kinds of punishment for every kind of complicity in banditry and kidnapping. The punishment should be severe and in the public view. It will serve as a deterrent to others who might be tempted to be involved in any kind of terrorism.

 

The government cannot fix this level of insecurity in a short while, that is why the citizens have to come in.  For northern Nigeria, there should be an independent body or forum that will unite the expertise and resources of all active and retired professionals and elites from the region. 

 

The forum will be independent of the government and should have a structure down to the local government levels. It will be managed by highly respected and experienced people in the region. The forum might be named “Arewa Development Forum”.

 

The forum will feed the various state governments individually and as a group with ideas and strategies and help harmonize their approaches toward combating the insecurity.

 

The body will establish “The Arewa Development Trust Fund”, where every working and capable northerner will be contributing a willing amount of money monthly. The funds will be used for compulsory education for all and some basic infrastructural development in the northern rural areas.

 

The extent of the abject poverty in the north is unimaginable. There are still villages where they don’t have schools and no access to electricity. These villages have no road and potable water, and their population is growing.

 

The Arewa Funds will be used to build infrastructure in these kinds of villages. It will be used to build schools and sponsor every child’s education, especially in remote areas. It will be used for free education for every northerner. New teachers will be trained and recruited and paid well from the funds.

 

The Funds should be used to address street children begging and hawking. The Forum will conduct a census of the “Almajiri Child” for a database of their locations and their homes of origin, with a plan to send every child back to their parents.

 

The parents should be incentivized for keeping and supporting their children's education. The Funds can also be used to support modern and mechanized farming, including animal rearing and ranches. It can also be used for capital seed for women's entrepreneurship and businesses.

 

All the international donor agencies and NGOs that want to work in Northern Nigeria should work with the Arewa Development Forum. The idea is to harmonize the resources for efficiency, devoid of duplication.

 

The governments of all the northern states should contribute to the funds. International Organizations and Foundations should be solicited to contribute to the Funds. The idea is to generate and spend at least N2 trillion for only education and basic infrastructure in rural areas of the region.

 

If we can have up to ten million northerners who will be contributing at least N20,000 every month, we will raise N2.4 trillion in a year.

 

On top of this, we can receive donations from the state governments, NGOs and international agencies, and foundations. Nigerians in the southern region might wish to contribute as well.

 

The local government branches of the Forum should maintain education and development statistics and a database of the people under their jurisdiction. The information will help for the appropriate allocation of these resources.

 

There should be a new law that will convict any person or their parent for not acquiring a minimum of secondary school education in the North. The Education must be compelled and made free for all.

 

Banditry and all kinds of terrorism are ideologies. Ideologies are groomed by certain circumstances, and they can travel everywhere. The only thing that prevents it is education.

 

Only education and empowerment can fix insecurity. If we don’t come together to kill this ideology, it will kill us. It is now time to stop expecting too much from the government. We have to rise and do it ourselves.

 

It is not surprising that Northern Nigeria is facing this level of insecurity because despite being the region with the highest population growth rate (with an average woman giving birth to six children), more than half of the girl children aged six and above are not having an education.

 

The region also accounts for 9 million of the 14 million out-of-school children in Nigeria, with the northwest alone having five million of them. Northern Nigeria's poverty rate is put at 86%. Any region that has a high level of poverty and lack of education like this has fulfilled the conditions for insecurity.

 

Traditional rulers have to be actively involved in information and intelligence gathering. They are closer to the people; they could provide relevant information and strategies unique to their territories.

 

War should be declared in the affected areas. A large number of Nigerian armies should be deployed and given the order to clear the terrorists and ensure peace in the region.

 

Ultimatum could be given to some of the terrorists who are willing to lay down their arms unconditionally, beyond this chance should be death. There should be immediate rebuilding and infrastructural development of the areas where these bandits come from so that they will have options of a new life in their towns or face death.

 

Finally, the APC administration must fix insecurity before the 2023 elections, because the APC and President Buhari were voted mostly to fix insecurity. The next administration should not inherit another insecurity challenge.

 

The next administration should focus on addressing other issues. We cannot afford to waste a complete eight-year tenure of an ex-Army General without addressing insecurity in Nigeria.

 

I call on all Nigerians to take responsibility and act, we should stop relying absolutely on the government to fix insecurity.

 

If you do have other ideas on how to fix insecurity or you want to respectfully challenge or support my submissions above or my previous article on the subject matter, you can send me an email. 

 

Ahmed Adamu, PhD

ahmadadamu1@gmail.com

 

How to Fix Insecurity

I have listened to two interviews with some terrorists from Northwest Nigeria, and these are my deduction and suggestions for the insecurity in Nigeria. 

The issues:

The terrorists claimed that security forces are only attacking innocent people, not the armed terrorists.

They claimed that the Nigerian security forces have never attacked them and they cannot dare to attack them.

They said, they sometimes sympathize with their captives and their families, but some of the captives do not deserve sympathy.

They claimed that the vigilantes also engage in crimes and excesses.

They said, some of the armed gangs are willing to repent and reconcile, but some are not willing.

If the government will do justice, they are willing to drop their arms, they are conscious that what they are doing is bad.

They said, one of the conditions for peace is to provide education for their people so that they can equally have opportunities.

The majority of their people are not educated, they said. If a Fulani person is educated, even if he does not have cattle, he can survive.

Now, the reason why they have taken arms is that they were sent out of their farmlands by vigilantes and now they can’t rear their cattle, and they don’t have education, in this situation the gun is the only way out.

The terrorists have different groups, and they live inside the forest. They come out to rob shops and steal food and go back to their hideout. Some people supply them with arms.

 

They take drugs and substances before they undertake any operation.

They recruit new gang members daily. They promise them financial incentives.   

The solutions

There are two approaches to the issue: Curbing and Preventing

Curbing: this involves proactiveness and aggression prior to and after any attack. This involves aggressive use of the arm to prevent, repel or revenge any imminent attack. There should be a military aggression and footage tracing of the terrorists, immediately after any attack.

Excessive use of military force should be deployed in the confirmed hideouts of the terrorists. Deployment of technology, surveillance cameras that detect human movements and voices. Tracking of mobile phone communication and use of auto drones and unmanned fire jets on the suspected areas.

Technological Security controls, surveillance, and highway patrons, as well as heavy security escorts, should be deployed on the highways for public use. The President should be visiting the attacked areas to see the level of damages and sympathize with the families and ginger the security personnel to avenge all attacks. There should be some media broadcast on each attack and the subsequent actions of the security personnel.

Preventing: Population management: This includes effective database management of Nigerians and monitoring of all entry and exit to and from Nigeria, Family education, and population to resources matching policy. 

Our capacity to provide educational, medical, housing, nutrition, and security needs of our population should match with the size of the population so that no one will be lacking the basic needs of living.

If these things are not properly implemented, we will keep producing another disgruntled set of people who will continue to use arms to show their frustrations and ignorance.

Ahmed Adamu, PhD

Reducing Unemployment through Migration

Ahmed Adamu, PhD

There are more than 130 million Nigerians who are either unemployable, unemployed, or underemployed. This situation exacerbates extreme poverty and fuels increasing insecurity.

Despite the continued government borrowing and various interventions to address these menaces, the situation is exacerbating.  A different strategy has to be in place to achieve a different result because it is insanity to keep doing the same thing and expect a different result.

One of the out-of-the-box solutions to unemployment is an organized migration program where Nigeria should plan to send up to 20 million Nigerians to work abroad in ten years.

Irregular migration is growing in Africa, with Nigeria recording the highest number of illegal migrants, mostly young people. Economic hardships are pushing more people to leave Nigeria to migrate illegally in search of better lives.

Hypothetically, three-in-ten Nigerians wish to leave Nigeria in anticipation of a better life abroad. A young Nigerian said he better die in the desert trying to migrate than to stay in Nigeria. And most times, these illegal migrates are exposed to severe threats, violations of human rights, and slavery. And yet, they are willing to pay money to be trafficked abroad.

Nigeria is one of the countries with the highest surpluses of the small and semi-skilled labor force, and new job opportunities always seem too small.

For every decent job opportunity created, at least one hundred people will apply for it. There are no corresponding opportunities to meet the growing number of small skilled laborers in Nigeria. This situation creates an enormous redundant labor force. Then what do we do with them?

The Nigerian government should design a migration program to create opportunities for this redundant labor force. It will enable eligible Nigerians to register to join the migration program. The program will create a pool of capable Nigerians who fulfilled some technical and medical requirements for recruitment in some selected foreign countries.

The government will enter into a bilateral agreement with some developed countries that need a labor force. These countries will also establish a pool of employers in their countries who may wish to choose from the Nigerian stream of prospective employees/laborers.

Each country will specify its labor force requirement, including technical and language skills that will enable Nigerian laborers to fit in and start working immediately upon arrival.

Eligible Nigerians will sign up and indicate three top countries of their choice. They will state their competitive skills and spoken languages. There will be one-year preparatory training for all Nigerians who made it to the pool to enhance their employability abroad.

The training will be specific to the intended country of destination. For example, people that want to go to Japan would need the skills that the Japanese employers need.  And they will have to learn the Japanese language.

The Nigerian government will send the CVs of those that successfully learned these skills to the Japanese employers’ pool for selection. It is the prerogative of the employers to choose who they want to pick.

The Nigerian government will negotiate for the wages of the beneficiaries and ensure their proper placement. The government should be responsible for their flight ticket once for the initial trip to the intended destination.

The program is an employer and employee matching pool, where employers search to find their perfect marching employees. There will be some contract agreements to ensure the employers and the employees fulfill their obligations.

With this organized migration policy, young Nigerians will not be risking their lives to irregularly migrate as they stand better chances to go to their destination with dignity.

I initially posted my speech on this policy on my social media, and subsequently, many Nigerians, including professionals, indicated an interest in this program. It means that there are many more Nigerians who may be interested in this program.

Exports of natural resources are not limited to mineral resources but also human resources. Exporting human resources will improve Nigeria’s balance of payment.

In the last quarter of this year, Nigeria’s value of imports stood at N7 trillion, while non-oil exports stood at N1 trillion. Sending Nigerians to work abroad will increase international remittance. It will also increase the receipts in the components of the balance of payment of Nigeria.

This policy will also help fix the exchange rate crisis in Nigeria since international remittance will increase the supply of the dollar and then appreciate the value of Naira, which will reduce inflation and increase job opportunities.

In 2019, Nigerians working abroad sent in about $26 billion to Nigeria. This kind of remittance is the second-largest source of foreign exchange receipts after oil revenues in Nigeria.

Increasing international remittance will reduce poverty. Nigerians working abroad will be sending money to their relatives back at home, which will help alleviate poverty among households. This kind of opportunity will also reduce the pressure on the available job opportunities in the country.

Someone talked about the brain drain that this policy might lead to, but there will not be a realization of the full benefit if you asked all the capable Nigerians to stay in Nigeria to work. Because if they do, they will be frustrated and perform far below their potentials. So, keeping some of them is wasting them for now.

Other countries like the Philippines, Pakistan, Ethiopia, and Bangladesh are also implementing a similar policy. And it is adding a positive impact on their economy.  There should be other complementary unemployment reduction programs in Nigeria, as this policy alone cannot fix unemployment.

Finally, this program will help increase government tax revenue, as the government can charge taxes for each dollar remitted. The government should use these receipts for building infrastructures that will incentivize new job opportunities.

 

Ahmed Adamu, PhD

Nile University, Abuja

ahmadadamu1@gmail.com

18^th November 2021

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CGM

Watch some of my videos here

Technology is the Next Nigeria’s oil

 

Forum of Commissioners of Finance

   

Dollarization problem in Nigeria

   

Explanation on Petroleum

   

Leadership Training in Ghana

  

Causes and Solutions to Insecurity in Nigeria

   

The Implication of the new Petroleum Industry Act in Nigeria

   

The Right Values

  

Leadership Gap in Africa

  

Petrol Price Hike: The Subsidy Dilemma

 Ahmed Adamu, PhD

It was not a surprise the real price of petrol in Nigeria is now N212 per liter, I have predicted this in the past. In fact, it could still reach N300 per litter depending on the market situation, particularly crude oil price and exchange rate. If there are no sufficient local refining capacities, there are going to be continuous shocks in the petrol prices. 

Nigerians could not cope with the exposure to the volatility of the oil markets, because petrol price is associated with the general price level and there are no cheaper alternative public transportations. Since prices are sticky in the drop, frequent volatilities push and stick prices are higher levels, thereby reducing the purchasing power of people’s income and making more people poorer.

The Nigerian government will not want more increases in petrol prices since we have had series of them from N87 per liter to now supposed N212 per liter in just 6 years. The trap is that the government had already proclaimed removal of the petroleum subsidy, which means undesirably exposing Nigerians to shocks in crude oil and money markets since 100% of the refined petrol is imported solely by the NNPC.  

Though petroleum subsidy removal is generally regarded to be a right policy, the prerequisite conditions have not been fulfilled in the case of Nigeria yet. One of the most essential conditions for removing the subsidy is sufficient local refining capacities so that everything will be processed locally, from extraction to refining, and there will not be involvement of foreign currency in the supply value chain and costs of international transportation will not be involved. 

Already, today’s price hike announcement had already caused long queues in many of the operating filling stations selling at N212 per liter, and other filling stations have closed waiting for the confirmation of the higher price. This untold hardship had already sent a negative ripple effect on the major macroeconomic indicators like Income, Production, Employment, and Price levels. Therefore, the damage has been done. 

Even though the agency responsible for determining the petroleum prices has denied imposing the market reflective price of N212, but the market has already responded, and it is truly the appropriate market price now. But, due to political ramifications, the circular had to be stood down. If that is the case how much will now be spent on the unofficial subsidy?

Even last week, the Senate accused the NNPC of spending hundreds of billions of Naira for the subsidy, the question here is that if the government still pays for the subsidy, then why Nigerians were exposed to the continuous price hike? Was there any significant compensation or development of the sector since the removal of the subsidy? The economies of average Nigerian have worsened off since the subsidy removal. Therefore, the marginal costs of the subsidy removal outweigh its marginal benefits. 

Therefore, the Nigerian government should revert to N145 per liter and reintroduce temporary subsidy until when Dangote’s refinery comes on stream. It is very good news that Dangote agreed to sell his refined petroleum in Naira, thereby uncoupling the continuous dollar inflations from the petroleum supply chain. Even then, the subsidy should be removed in phases. In my previous posts, I recommended various subsidy regimes that could be implemented to phase it out.

Dr. Ahmed Adamu

Petroleum Economist, Nile University, Abuja.

ahmadadamu1@gmail.com

Obstacles and Tips for Entrepreneurs

 Blaming leaders for your poverty and refusing to take your primary responsibility and not willing to start with small ideas are obstacles to successful entrepreneurship. The rewarding skill is not hard work, but innovation. Responsibility is leadership, and it is Entrepreneurship. 

Your University degree is a limiting factor, the greatest limitations to your success are your certificates. Certificates have 3 traps: it makes you feel you arrived, want only white-collar jobs, and limit your scope of work. Delay gratification, suspend present enjoyment for the future.

Obstacles to success, steps, and tips for successful entrepreneurship, life vision, degree trap, and leadership issues were highlighted in my speech during the Katsina Youth Dialogue. Startups and small business owners shared their challenges, and advice was given to them, the complete speech can be watched from this YouTube link:

Should the rich be taxed more?

Ahmed Adamu, PhD

The former Vice President of Nigeria, Alhaji Atiku Abubakar has suggested that the rich should be taxed more as a short-term measure to save Nigeria’s economy from total collapse. Is that the right call? What is causing these continuous recessions in recent years? And what are the way forward?

The frequency and severity of the economic recession in Nigeria are attributed to the failure of the Nigerian government to diversify the economy, cut spending, and apply appropriate tax policies. If the Nigerian economy is diversified, the frequency and depth of the recession would not have been this much. In fact, the real recession in the country is more severe than just the reported recession. Increasing poverty, psychological depression, and insecurity illustrate the deepest recession being experienced in Nigeria.

If a government cannot provide security, there will not be investment and production, and by extension, there will not be diversification. So, the current administration is to blame for the continuous deepest recession in the country.

Atiku is correct, in the period of economic downturn, it is time for a sacrifice to support the collapsing economy. It is wise to tax the rich more because they can conveniently make that sacrifice, and that will set the pace for the Robin Hood Effect. “Robin Hood effect is when the less well-off gain economically at the expense of the better-off.” In fact, taxing the super-rich serves as a payment for the security of their wealth, because, if the economy continues to crash, people will become angrier and might lead to anarchy and destructions.

In the period of anarchy, the rich will not be safe and their wealth will be destroyed. We have seen a spark of such anarchy in recent days. So, paying more tax to save the economy is an investment and protection for their wealth. This will also serve as a redistribution of income, which will help reduce the inequality gaps in the country.

However, before the rich pay more tax, the government must show some level of commitment and credibility. No one will want to pay more tax to a government that spends money on unnecessary things. The rich will not pay extra tax if taxpayers’ money is being used to pay lavish allowances and excess spending by the government officials.

If anyone must pay extra tax, the government must sacrifice first. The government must cut down these excess allowances and spendings to save more. The government must also stop the excessive borrowings and look inward to see what it can save from the cost of governance. That is when the rich and even the poor will be willing to pay extra taxes, because, then we know it will not be wasted. So, it is time for this administration to cut down the cost of governance to save our economy.

This is time to support the lower class, instead of increasing VAT, removing petroleum subsidy, increasing electricity tariff, and introducing new charges on the common man, it is time for social support. Taxing the rich and cutting the cost of governance will enable the government to sufficiently provide social support and spark some economic activities targeting diversification. The government should fix the insecurity at foremost, otherwise, no investment and no production in an insecure nation.

Therefore, Atiku Abubakar’s call for taxing the rich more is one of the best short-term strategies to stabilize the economy. Even though some people will blame this second recession on Covid-19, but the severity and real negative effect of the recession are terrific in Nigeria and the fact that this is not the first one shows the negligence of the government and its poor economic policies.

It is time to heed the advice of patriotic Nigerians, who are passionate about the development of this country, who are willing to always offer suggestions and advice without caring who or which party takes the credit.

Dr. Ahmed Adamu

Nile University of Nigeria, Abuja

ahmadadamu1@gmail.com

.

Is it appropriate to benchmark Nigeria's Petrol Price to Saudi Arabia’s Petrol Price?

Ahmed Adamu, PhD

President Buhari, in his speech, compared Nigeria's petrol price to other countries’ petrol prices to justify his recent decision to abruptly inflate the petrol price amid economic and social crises in the country. He argues specifically that “it makes no sense for oil to be cheaper in Nigeria than in Saudi Arabia”.  Now, the question is, how appropriate is it to justify increasing the petrol price just so that Nigerians will buy petrol more expensive than Saudi Arabians?

First, Mr. President was supposed to look inward to see the effect of his decision on his people, especially the poor. Generally, petroleum inflation makes the economy of the poor man worst off. A 10% increase in petroleum prices will at least reduce the purchasing power of a poor man’s economy by 30%, accounting for the direct and multiplier effect of the surge.

The recent 11% increase in petroleum prices in Nigeria has made the economy of the Nigerian poor worst off by 30.30% and without any compensation or cushion. In fact, it came at a difficult time, when millions of Nigerians lost their jobs and businesses weakened due to the recent COVID-19 lockdown.

So, becoming oblivious of the consequences of his decision within the country, and focusing on what other countries are doing, Mr. President is being reckless and ill-advised.  Every country is unique, and Nigeria has unparalleled challenges and difficulties to the extent that we cannot begin to compare ourselves to other countries.

The recent increase in VAT and stamp duty, as well as border closure, climate conditions that threaten agricultural productivity, insecurity, and dollar hikes, have all inflicted pains on Nigerians and weakened their economies. Moreover, the increase in the price of petrol. These bad circumstances did not occur exactly in the countries that Mr. President tried to compare Nigeria with. So, Nigeria’s challenging circumstances are different from the mentioned countries. Since our illness is different, our medicine must be different.

It is not equally justifiable to say Nigerians do not deserve to buy petroleum cheaper than what is obtainable in Saudi Arabia. The only condition that Nigerians should buy petrol more expensive or equal to the price in Saudi Arabia is when the Nigerian government provides equal and affordable access to basic life requirements irrespective of income levels.

Despite the weaker infrastructures, Nigerians are the ones responsible for their access to quality education, healthcare, transport, security, water, nutrition, and energy. This is not the case in Saudi Arabia. So, if a Saudi person conveniently pays N168 per liter, it does not justify that a typical Nigerian can afford it conveniently. Saudi Arabia has a better standard of living, better infrastructure, and adequate access to basic life requirements.

The minimum wage in Saudi Arabia is 10 times more than the Nigerian so-called minimum wage. Even after the Nigerian minimum wage was increased, the government increased the cost of living by removing subsidies and increasing taxes. So, the wage increase added no value to the average worker’s income. In fact, it made it worse because of the wage push inflation.

Looking at the values of currencies, it is not economically justifiable to directly compare prices without adjustment and considering the wealth and welfare of nations. For example, what N162 can buy for you Nigeria is exactly what 1.630 SAR can buy for you in Saudi Arabia. This tells you that Saudi Arabia’s currency is 99 times more valuable than the Nigerian currency.

It means that if you hold a certain currency, you will get 99 times more value in Saudi Arabia than in Nigeria. So, this explains how bad our currency is and how much inflation we have in Nigeria. So, if the value of our currency is 99 times less valuable due to Naira devaluation and inflation, then we are not comparable to Saudi Arabia. Prices should not be raised without increasing the value of the Naira. Nigerians should not be punished for the government's failure to protect the Naira.

Saudi Arabia can sell cheaper due to the strength of their currency and comparative advantage when it comes to petroleum, and they have better wealth and welfare than Nigeria. So, it makes sense for oil to be cheaper in Nigeria than in Saudi Arabia, because we have a lower level of wealth and welfare.

The increase in petroleum price in Nigeria has a greater inflation multiplier than in Saudi Arabia, as such oil should be cheaper in Nigeria to save further costlier inflation.

The only justification Mr. President could give for his second-time petroleum subsidy removal was just to liberalize the market. However, the timing and process of going about that are critical. It is not recommended to liberalize the market yet, looking at the difficult time we found ourselves: increasing inflation, health crisis, insecurity, zero refining capacity, etc.

Certain conditions must be fulfilled before removing the petroleum subsidy in a country like Nigeria. If necessary, the removal must be in gradual phases. Alternative subsidies like targeted or quota subsidy regimes could be considered.

Mr. President should by now be advised to begin taking responsibility for his actions and shun blaming the past seeking an excuse. Criticism is good, without it there would not be focus and improvement. So, our leaders must be willing to listen and reflect on the criticisms labeled against them and be willing to change their decisions upon new realization and exposure to the truth. Finally, I hope Mr. President and at the same time, the Petroleum Minister will revert to N145 per liter to enable the economy to bounce back at least in the short run.

Ahmed Adamu, Ph.D., Senior Lecturer, and Petroleum Economics, Nile University of Nigeria, Abuja. ahmadadamu1@gmail.com

 

The Transformation Nigeria Needs

Ahmed Adamu, PhD

13 minutes read.

Hitting the snake-tail would not stop it from biting. The compounding economic and social challenges keep on biting Nigerians, and we have not yet identified the roots of these issues. Untold poverty, growing inequality, acute hardships, and alarming insecurity and deprivations have been threatening the fundamental human rights of living freely and safely in Nigeria. We are already on the verge of anarchy, and it seems too little too late to do something about it, but there is a window opportunity to hit the snake on the head. I will show you how.

When the right-minded young people struggle so hard to earn a living but get nothing in return, frustration and desperation are being bred. When you have a society where passion and hard work do not pay, you will face despondency. When people realize that hard work does not work, they will switch to easy and bad ways. When money rules and when scarce resources are subjected to steep competition due to overgrowing population, desperation and insecurity proliferate.

  

I recently traveled for a friend’s wedding, and along the way I saw some eagerly young hawkers, selling petty things ranging from bottled water, groundnut to bread. Daily, these young folks are scorched by the sun and beaten by the rain, yet they endure. I noticed how some of them were distracted and lost into the admiration of the luxury and exotic cars that pass them by. They wish and imagine themselves living that conspicuously comfort life. This temptation makes them anxious, and on top of that their unpaid hard work makes them frustrated. When you have anxiety and frustration, you will have desperation.

Once people are desperate, they do desperate things. Would you wonder if some unscrupulous individuals approach some of these desperate young people and present them with a bad opportunity to earn some money and they accepted it? Of course, you will not. Some of them may willingly do anything as long as they will get money to live those comfortable lives they admire. Because every comfort is a function of money.

When people are exposed to persistent hardships, their mental reasoning abilities fade away, and they lose their self-value. When people live a miserable life continuously, they lose hope and give up, and this makes them not even value their own lives talk less of other people’s lives. They will feel it is better for them to leave the world anyhow than to continuously be living that woeful life.

The biggest source of these kinds of frustration and desperation are from young people who are not educated and not doing anything to earn a living. These are the dangerous and quickest source of these bad desperation, and they are the roots of all these ills. Young people that fall into this category are growing rapidly. That is why insecurity keeps growing by the day. Even yesterday one of our neighbors was kidnapped right across our estate inside Abuja, I overheard the gunshots.

The middle-class population is also facing their own frustration due to the growing responsibilities, expensive living, and dwindling income. The upper-class population is also desperate to maintain their status and protect their children from falling into those hardships. So, everyone is desperate, and this makes people willing to do anything to get the money.

Money has become the ultimate goal in Nigeria, who becomes what and who gets what is influenced by money. If you want your child to get a quality education, that depends on how much is your income. If you want to get quality healthcare, potable water, security, a means of transportation, or mortgage, that depends on your income. If you have money, you get everything, and if you do not have the money you get nothing. Even your survival is dependent on your money.

If what you get and your access to basic living standards are absolutely dependent on your money, then the money rules and everyone will do anything to get the money since everyone is their own government, they have to provide almost everything for themselves.

Insecurity, corruption, and all other vices proliferate because of too much pressure on the money. We can fix insecurity and corruption only by destroying the current system where everything is centered around money.

If there is no system that will enable people to have equal access to basic healthcare, quality education, nutrition, housing, and security irrespective of their income level, then there will never be security. The biggest and most important transformation Nigeria can achieve is by creating a system that can provide equal access to the basic life requirements without consideration of income levels of the people. There should be a system where what you get and what is accessible to you is dependent on how much you want it and how much you work for it only.

There must be a visionary transformation in health, education, transportation, security, food, and housing sectors, which will set a minimal provision for every Nigerian irrespective of their income levels. People do not have to resort to crowdsourcing of funds to pay for the hospital bill, people should not have to remove their children from the best schools just because they cannot pay for the fees, students should not drop out because they cannot pay the tuition, your life should not be threatened just because you cannot pay for your personal security, etc.

Amid scarce resources and a rapidly growing population, how can we achieve that? It is impossible to serve everyone when our resources and provisions are not enough. The population of Nigeria is so big that we need to spend extremely much to provide all the above-mentioned basic life requirements to everyone irrespective of their income levels.

Therefore, to achieve that, we must embark on population management. What is population management? It is the process of providing before adding population. Before we add 1 million population, we must first provide the resources that will give them those basic accesses. If our resources are enough to cater for an additional 10 million population, then we can grow by that exact amount, if it is not, we should not. So, population growth should be determined by the available resources.

For example, if currently, we have 10 million spaces in our primary schools and 15 million children are born today, this means that in the next six years we must add 5 million more spaces in primary schools. And that’s how we keep tracking and providing to accommodate this expansion in every sector. If we do not have the resources and we are not planning to get the resources to provide for the additional population, then we should not welcome them.

So, the government must look into the future and see what it can provide and the resources available to it, that is what determines the targeted population expansion. Our resources should determine our expansion. The government should then set a targeted population expansion for each period, and that target should be apportioned according to income classes and locations. We cannot afford to add population that we cannot take care of, because that is what adds to the desperation and put more pressure on the limited resources, thereby reducing its quality and adequacy, and causing insecurity.

For example, if your neighborhood hospital is designed for 1000 people and your community added 1000 more people, it means you need an extra hospital. If you could foresee that population growth and built the hospital ahead, then you are managing your population. Population management may not strictly means limiting the population, it suggests that you only grow based on your capacity. If your capacity is enough to cater for the population growth, you can then grow, but if your capacity is limited, you should limit the population growth.

Another element of population management is tracing the economic and well-being status of every member of the population to assess the development of their economies. With the right population management, those vulnerable young folks that are hawking on the street could be traced and supported and rescued from that danger. With the right population management, there will not be unnecessary competition and pressure on limited resources, and there will be stability and security.

All these transformations are possible only if we can change our belief about our ability as a people, if we keep thinking that these things are not possible in Nigeria, then we will never make it. In my subsequent articles, I will outline the details on how to go about these policies and how to achieve these equal accesses in every sector irrespective of income levels. 

There is nothing we cannot achieve with the right vision, belief, tenacity, and right leaders. Real transformation is possible. But we must be willing to sacrifice today for tomorrow, we may not live to see the benefit of these transformations, but we owe a debt to the future generation.

We must come together and stop looking at our problems as regional or ethnic problems but as Nigerian problems. If a southerner is killed, it should matter to every Nigerian, and it should not be a southern problem, it should be a Nigerian problem. We must stop regionalizing or ethnicizing our problems, all problems are Nigerian problems. We have to set the fundamental values first and embark on fundamental transformations to hit the snake on the head.

Dr. Ahmed Adamu

Petroleum Economist, Nile University, Abuja.

ahmadadamu1@gmail.com

Why Nigeria can still produce oil despite making a loss for each barrel produced

Ahmed Adamu, PhD

It costs Nigeria $15 and $30 to produce one barrel of oil in onshore and offshore (deep water) production sites respectively. If the oil is sold below any of these levels, does that mean the respective production site will go out of business? The answer is no. Even if the oil price is below the production cost, you will still produce, despite the loss. 

For example, as I write this article Nigerian Bonny Light oil is selling at $18.70 per barrel, which means the offshore production will be making a loss of $11 per barrel, and the onshore sites will be making a $3.70 margin per barrel. Though 55% of the Nigerian oil production fields are onshore, the expensive offshore fields produce more quantity per well. However, for offshore production to be profitable, oil prices must be high above $30. This means that for more than a month now, the Nigerian offshore production has not been profitable, but we still have to keep producing anyway. 

Except for a few days last month, the oil price has not been below the onshore production cost. The lowest Nigerian oil was sold during this coronavirus crisis was approximately $15 per barrel. The question is why Nigeria would produce oil despite the loss. 

In oil production, the exploration and development costs are the fixed costs, while the cost of production or oil lifting is the variable cost. The cost of a barrel is the average of the fixed and variable costs. So, even if the price is less than the total cost of the barrel, production can go ahead, because the oil industry is capital intensive and has a low variable cost. So, the bygone rules suggest that production can continue as long as the price is paying back the variable cost i.e. the lifting cost. The expensive fixed costs are assumed to be recovered later when prices become higher.

The variable or lifting cost of the Nigerian barrel of oil is $3.5 and $5 for onshore and offshore respectively as reported by NAPIMS. So, the rule is that, as long as the oil price is above $5 per barrel, Nigeria can produce irrespective of the loss relative to the total costs. Nigeria will go out of business if the barrel of oil sells below $3. It is best to shut down production at this low oil price ($3) if it can be reopened. The onshore oil wells are more flexible, they can be shut down and reopened quickly depending on the market, unlike the offshore wells that are not so flexible. 

Nigeria having one of the best oils in the world and having quick access to seaports may not face that appalling low oil price. The good news is that, as the world is gradually reopening from this week, the oil price is likely to go high, and I will predict, the oil price will surpass the $30 Nigerian benchmark. So, the oil will still be the savior of the Nigerian economy because no other sector of the Nigerian economy is contributing even just 5% of the export revenue. With the acute recession underway, the fiscal receipts will be low too.

Even after the coronavirus, the oil will continue to dominate the global energy mix for some years due to its suitability and versatility. The biggest threat to oil is the evolution of the electric transportation system. More than 60% of the oil demand is for transportation purposes, and if you replace that with more environmentally friendly transportation options, the oil prices will likely peak at $15 per barrel. This will then make countries like Nigeria to suffer huge economic costs, like weaker Naira, inflation, low GDP, a possible recession, etc. and leading to shut down of many oi production sites. 

It is very easy to sit back and produce oil as far low as $5 per barrel in the short run, but in the long run, it is a trap and disaster. So, there should be a strategy for the next energy shift. We can either produce electric transport systems or produce batteries or at least produce more electricity for sufficient domestic demand and export purposes. Electricity will then be the next oil, and we should plan to export it too. The question is, with which fuel are we going to generate the electricity? The wind? Solar? Hydro? Gas? Or Coal?

Among fossil fuels, only Natural gas seems to be favorable due to its thermal efficiency and relative cleanness. The good news is that Nigeria has the largest gas reserves in Africa. Very soon, gas prices will get uncoupled from the oil price, and it will become the next major fuel, I reckon. 

Dr. Ahmed Adamu

Petroleum Economist, Nile University, Abuja.

ahmadadamu1@gmail.com

First-Ever Negative oil price: Why

By Ahmed Adamu, PhD

(20th April 2020, 23:00)

As I write this article, the famous American crude oil called West Texas Intermediate (WTI) is sold at -$13 per barrel, which means, suppliers of oil have to give $13 to whoever is willing to take one of their barrels of oil produced. This means, the oil is free today, and you will get an incentive for taking the oil.  The suppliers are desperate to let go of the oil they produce to avoid storage costs.

The reason behind this unprecedented decline in the price of that oil is just simply a storage crisis. The buyers of WTI oil are required to take physical delivery of their oil at a location called Cushing in Oklahoma, unfortunately, this location has saturated its storage capacity, and buyers don’t want to take delivery of oil without a place to store it before getting a final buyer. And tomorrow, Tuesday is the expiration of the May Futures contracts.

A futures contract is an agreement where buyers and sellers agree to deliver oil at a futuristic price. Buyers and sellers establish a price that oil will trade at not today, but on some coming date at a particular speculated price.  So, the futures market for the oil that’s supposed to be delivered in May is closing tomorrow.  So buyers don’t want to take delivery of May supplies because there is no space to store them. That’s why they are ditching their contracts, and no one is willing to keep their contract, hence the negative price. 

However, this is only affecting American oil, not Nigerian oil, Nigerian oil as we speak now is sold at $22 per barrel, it is even high by 4% today. Other oils like that of global benchmark oil, the Brent, are not facing that pressure too. It is sold at $26 per barrel. 

Most people would have expected an increase in oil price, but the oil price is still not above the Nigerian adjusted benchmark of $30 per barrel. This is because the world is already having a lot of oil supplied, more than it needs and the demand is nowhere to be found due to the coronavirus lockdown. 

Despite the recent OPEC’s commitment to reduce world oil production by 10%, the oil price is dwindling, this is because we already have excess inventory, and we have to allow time for the market to clear before this reduction takes effects. In the normal demand period, this takes one to two months, but in this abnormal period, the market response may take up to four months, things being the same. So, the only immediate hope is for demand to surge when countries agree to open their economies in the presence of the deadly virus.

Dr. Ahmed Adamu

Petroleum Economist, Nile University, Abuja.

ahmadadamu1@gmail.com

How to Open Nigerian Economy in the Presence of Coronavirus

Ahmed Adamu, PhD

We do not have to wait until the end of coronavirus before we open our economy, if there is one thing coronavirus is leading us to is a new way of life, not the end of life. Now, it is time to design a new lifestyle and open the economy despite the presence of the virus, here is why and how.

Closing a weak economy can lead to its ultimate death. The lockdown due to the coronavirus is tantamount to the absolute death of African economies that are largely comprised of small and informal enterprises. The economic repercussion of the lockdowns could be costlier than the virus itself. Locking down the economy will mean loss of income, jobs, and productivity, leading to extreme poverty, unemployment, and inflation. These economic issues can cause anarchy that might cost more lives and resources. The challenge is, how do we save these lives and resources in the presence of the deadly coronavirus.

We have started experiencing increasing desperation, hunger, insecurity, and poverty in just a few weeks of the lockdown, now ask yourself, what will happen if you lock down a hungry and idle person for a longer time? First, as they say, a hungry man is an angry and desperate man, and an Idle mind is a devil workshop. So, when these negativities come together, we should expect the worst. The good news is that the social and economic costs of the lockdowns are avoidable.

If we are to wait until the virus is gone before we open our economy, then we will not even have the economy to open. In fact, even if we have the remains of the economy, we will need to spend so much money to revive it, do we have the money for that? I guess no. The daily losses of these lockdowns, both human and financial are far more than that of the virus. That is why I recommend that these lockdowns should not last a month.

It is okay at the beginning of a pandemic like this one to lock down countries and states to buy time to study, prepare, plan, and adapt to the virus. So, one month should be enough for that. Any lockdown beyond one month will harm the economy beyond our ability to repair. That is why I recommend opening the Nigerian economy as soon as possible based on the following conditions and recommendations.

Similarly, it is not advisable to lock down cities with some weekly opening days, the threat is that even a one-hour window can cause widespread of the virus if the following measures are not taken. If the right measures are taken, then we can open the economy not only on those window days but completely. So, the following codes of living can guarantee the opening of the economy despite the presence of the virus.

1. Testing: we should provide adequate testing booths across the country, just the same way we have election polling units, we should have testing units, and people should be scheduled for testing so that everyone in a ward can rapidly get tested within 30 days. People must observe the required distance and wear face masks while in the queue. Everyone that gets tested, must collect the certificate of clearance, with which they can report back to work or open their businesses. Organizations or companies that are eager to bring back their workers to work can set up their testing booths for their staff. The idea is not to risk allowing carriers of the virus to report back to work and infect others. Housing Estates can also organize their testing booths. Anyone that tested positive should not be allowed to go back to work or business. The clearance certificate must contain an authentication barcode so that law enforcement officers can ascertain the validity of the certificate at any time.

2. Contacts Tracing: As we open the economy, everyone must minimize the number of people they meet every day, whoever you are meeting must be very urgent and important, otherwise, do most of your conversations and transactions online or over the phone. Minimize contacts to the lowest possible level. Everyone must have a book or diary in which they document names of all the people they meet daily, including their contacts, meeting location, date, and time. This will make the contact tracing easier. In case, a person tested positive, it is easier to trace his previous contacts, so that they can also be informed and forced to immediately isolate.

3. Social Distancing: As I mentioned above, after opening the economy, we must minimize contacts, and create the required physical distance when meeting someone, this does not matter if it is our friend or a family member. The social distance must be observed while undergoing normal activities. What about in a taxi or bus? In this scenario, everyone going into public transport must sanitize their hands, minimize talking and contact if possible, wear face masks, and do not touch their faces until they wash their hands. Recreational centers must enforce similar measures and social distancing, and crosscheck clearance certificates as well. Mosques and churches can also be opened, but members must have clearance certificates, observe the distancing, wear masks, wash their hands and bring their prayer mats in the case of the mosque. The prayers can be observed in many batches. Those that may not have space in the first batch can wait for the second batch or pray at home. Weddings can take place using similar measures.

4. Enforcement: There should be a law that will incriminate any negligence or failure to observe the safety measures by business owners, employers, religious leaders, and even individuals. If anyone is found not observing the codes should be taken to court for fines or imprisonment. The new job for Police and Civil Defence will now be to ensure compliance with these measures. Security agents must patrol every location to enforce compliance. There must be checking points everywhere to ascertain everyone’s clearance certificates and observance of the guidelines.

5. Distance Business and Learning: Businesses should be incentivized to take their operations online. The majority of transactions and education must be online unless it is economically and technologically impossible. The government through NITDA and SMEDAN must budget some money to help small and medium enterprises go digital. Restaurants must serve only takeaway or home delivery. There must be additional guidelines for the physical decongestion of businesses and education. Schools that can operate online must continue online, and their examinations should be online too. Teachers must learn to ask analytical or practical questions for fair assessments of true understanding, which is a rewarding skill for this century. Radio stations are good mediums for learning for those that cannot afford the internet. Primary and Nursery schools may be opened but with strict measures and observing all other codes as well.

6. Protections and Cure: there must be sensitizations on the need for everyone to protect themselves and all the protection facilities should be provided for free by the government, this should include hand sanitizers, temperature tester, and face masks. Local manufacturers should be asked to supply these things in order to create jobs for them. Generally, people should avoid contacts, crowd and touching their faces before washing their hands. For the cure, we must not give up, we should not wait for others to give us the cure, we should set up a special task force responsible for exploring all possible cure and procedure for the treatment of the virus. This should include unconventional medicine like traditional and herbal medicine. There should be a national conference where all conventional and unconventional medical practitioners would be welcomed to present their procedures or medicines for the cure of this virus. So, we should do our very best to find the cure ourselves.

7. Organizational Response: Each organization or institution or business must establish their own special unit responsible for responding to the COVID19 and setting their own preventive and protective measures for their staff and customers.

8. Investment: The money that is being shared to keep people at home should then be used to support businesses implement these measures and to revive the dead businesses. This can serve as an opportunity for a big positive shift in our economy.

So, every state should constitute a committee responsible for designing the roadmap for reopening their economies and set up guidelines suitable for their own realities and set a target date for the reopening. The above guidelines provide the starting points and ideas on how to go about it. This is urgent, because, every day we spend under these lockdowns, we incur irreplaceable costs. Let us stop these avoidable costs.

Dr. Ahmed Adamu
Petroleum Economist, Nile University, Abuja.
ahmadadamu1@gmail.com