Saturday, 14 May 2016

Simple Analysis Of Why Nigerians Must Accept Subsidy Removal. A MUST READ!!

When the immediate past administration attempted to remove fuel subsidy Nigerians took to the streets to protest the decision, boisterously demanding for the installation of our only social benefit, oil subsidy. Even the opposition used the opportunity to their advantage to score some political points.

If we take it back a bit more, Olusegun Obasanjo's administration too tried to snatch the subsidy too but Nigerians repelled it, the then government had no choice but to lower it to sustainable level. I welcome the subsidy idea but I regrettably agree that it must completely go this time. Nigeria is broke, we can't afford it anymore.

I will keep my analysis very simple so an average person can fully read and understand the oil subsidy removal brouhaha. I will not play with any statistics, It will be straight to the points.

What Is A Subsidy?
Subsidy is can be describe as a social benefit design to alleviate hardship by the government for it's citizens. Where the government pay a bit of the total amount of a commodity each time you purchase it. In the case of Nigeria oil subsidy as it is popularly known, the subsidised commodity is PMS (fuel).

How The Oil Subsidy Works In Nigeria
Nigeria have oil, yes we do - In abundant even. Oil marketers extract crude oil in Nigeria then export it abroad to be refined to what you then get petrol, diesel, kerosine etc. Upon the completion of the refinement of the crude oil, it is then imported back into Nigeria as end product. During the refinement process the product incur additional charges like international logistics, custom fees, refinement cost, etc. These additional cost are then pass on to the customers (Nigerians), this is why we pay so much for these essential commodities. 

To remove the burden on us, the government stepped in, they move in to subsidise the products so every common man can afford it and benefit from the national humongous revenue the country was getting from oil sale. 

How subsidy payment works
The importing oil marketers brings the refined products into Nigeria, set a price, Nigerians pay say about 70% of the price per litre and the government pays the rest, each time we buy fuel. This sound like a good gesture right - it is but there is a loophole. And marketers are exploiting the loophole to defraud the Nigeria government in sums up to date since the inception of subsidy that's in the region of trillions of Naira.

One of Nigerians numerous past protests against subsidy removal

Why Do Nigerians Want The Oil Subsidy Reinstalled
Nigerians believes the oil subsidy as I said earlier is their only social benefit. The complete removal of the subsidy will add financial burden to their already burden ridden lives. Also they do not trust the government whether it will judiciously spend the money it saves from subsidy on other areas of their lives that needs intervention like power, road, transportation, health, education, etc

The Loophole
The Nigeria government doesn't have a ways to adequately verify how much PMS each oil company/marketer have sold to Nigerians, so a marketer that didn't even sell to Nigerians can easily forge documents claiming to have sold an x amount of PMS to Nigerians which the subsidy usually runs into hundreds of millions of USDollar. The ones that do sell to us inflate the number of litres they have sold, so as the ones that exported the crude oil for refinement abroad will turn around to divert  importation of the petrol to a neighbouring country where they will cash in on the oil full price and still claim it was sold in Nigeria to cash in on the subsidy too. 

A Refinery

Can Nigeria Still Afford Subsidy?
NO!!! We can't afford to continue to subsidise oil anymore, even there is no provision for oil subsidy in the 2016 budget. in fact we can't afford to subside anything. Nigeria main revenue comes from oil sale. During the last two administration oil prices in the international market per barrel were very profitable selling as high as $160-$120 then we were making enough money. Now the prices have plummet to as little as $28. Our income have gone down drastically so much that government is struggling to pay its workforce at the federal level, don't let's even mention the state, they are literally rundown. 

Even Saudi Arabia that it's citizen pays next to nothing for petrol had to hike its pump price by 50% upon its fail out with Iran, a big oil business partner.

Disadvantage of subsidy removal.
Hardship and financial burden for the common man, quality of life will be affected directly or indirectly. The hardship will extend to businesses too as some sole rely on this commodity to function. The oil increment will drastically affect their businesses parachuting operating cost to a scary level possibly eating to deep into their profit. Some business owners face the risk of losing their businesses, like a ice block seller for instance that depends on the generator to keep the fridge on 24/7 may not be able to afford this any longer. However, the good news is the burden will only be for a short time if we can get our priorities right. 

Benefit of oil subsidy removal.
Now that the subsidy is gone, marketers will now be compelled to build refineries in Nigeria - creating more jobs and drastically reducing cost of production that's the main driver of high pump price to begin with.

Subsidy removal is the only way to completely get rid oil subsidy scam. The government can now use the little they earn in order areas that will benefit Nigeria in the long run, or directly.

bsidy removal will bring price war and competition. In a highly competitive market the only person that benefit is the customers/consumers by default, competitors compete through price reduction. This means in the long run Nigerians will pay little for petrol without the government subsiding it - Its a win win for us! 

Overall the removal will benefit Nigerians and eases the financial burden of oil subsidy on the Nigeria government provided the little we have will be spent wisely. The government however needs to ensure their is no price manipulation in the industry where the marketers will illegally agree not to sell below a certain price. This is the only problem I can foresee. And presently the government have address this potential manipulation by setting price ceiling of N145 with the consideration of the additional charges of refinement. Maybe in the future when we have more functional refineries in the country which will essentially lower the cost of production by default the government can further shrink its ceiling price presently set at N145 for petrol.

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