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PETROL SUBSIDY: “Facts and Figures in Favor of Petrol Subsidy Reinstatement”; an Economic Analysis

 Published January 15th, 2012

In a Town Hall meeting organized by the Newspaper Proprietors Association of Nigeria (NPAN) in Lagos, on 23/12/2011, the Nigerian Economic Propagandists (including the Finance Minister, the Minister of Petroleum Resources and the CBN Governor) deployed False and Figures to back their case, insisting that the government is exploring ways to close wastage in the system.

It is revealed, in this analysis, that petrol subsidy, is more of an Economic Stabilizer than Economic waste. Thus, if use wisely, petrol subsidy can serve both as Welfare Package during oil Boom and a Rescue Package during oil Glut. Let analyze the situation.

During the meeting, the CBN Governor prophesies that if the oil price crashes again by 30 percent, it will be difficult for the government to pay worker’s salaries and that is when the country will experience hardship. NO! This is quite misleading.

Given the fixed price of =N=65 per liter of petrol, there is positive/direct relationship between the price of oil and the amount of subsidy paid by the government. Thus the higher the international price of oil the higher the cost of petrol subsidy to the government. The opposite is the case when oil price falls.

Given the current oil price of $110 per barrel, if the price falls by 30 percent, 0.3 x $110 = $33, the price will fall down to $110 - $33 = $77 per barrel. Thus the price falls down to $77 per barrel. Since the 2012 budget is based on benchmark oil price of $70 per barrel, the country will be saving $7 per barrel as excess should the price of oil crashed by 30 per cent. If we multiply $7 by the quantity of oil barrels produced daily in Nigeria (2.48 million barrels), we have 2.48m x $7 = $17.36 million.

Considering the claim that about 50 per cent of the oil output goes to the oil Companies, thus 2.48/2 = 1.24m barrel per day. Therefore, should the oil price falls by 30 per cent, Nigeria will be saving excess of 1.24m x $7= $8.68 million daily in the Excess Crude Account (ECA). How could the CBN Governor said, it will be difficult for the country to pay worker’s salaries or experience hardship?

Now that the price of oil per barrel is $110, the country is saving an excess of $110 - $70 = $40 per barrel per day. Thus saving 1.24m x $40 = $49.6 per day in the ECA. Further, since oil production constitutes a joint fixed supply of petro, distillate fuel oil, kerosene-type jet fuel, residual asphalt and road oil, petrochemical feedstock, lubricants, kerosene and others, and that petrol is the major product, a fall in the price of oil is said to have been caused by fall in the demand for petrol.

Therefore, should the price of oil falls by 30 per cent; we may expect the price of petrol to fall, even earlier, by same proportion. The current price of petrol is $0.87 per liter and 30/100 x 0.87 = $0.26. If the price of petrol fall by 30 per cent, then the price will be; $0.87 - $0.26 = $0.61 (=N=97.6 per liter). Since the price of petrol per liter is =N=65 before the removal of petrol subsidy, the amount of subsidy to be paid by the government will be 97.6 – 65 = =N=32.6 per liter instead of =N=75. Note: the price of petrol rose from =N=65 per liter to =N=140 per liter after the removal of subsidy. By implication, should the oil price falls by 30 per cent, the cost of subsidy to the government will fall by 56.5 per cent. We better stop rigging figures!

Furthermore, should the price of oil fall from $110 per barrel to, say, $30 per barrel (an amount below the budget benchmark oil price), that is; by 72.7 per cent. The price of petrol will follow, thus it will fall by 72.7 per cent, that is; 0.727 x 0.87 = $0.61, then the price will fall to 0.87 – 0.61 = $0.24 per liter of petrol or =N=38.4 per liter. Hence the issue of subsidizing the price will not even arise. The gap in income created by the dramatic fall in price from $110 to $30 per barrel can be bridge with the saving made to the ECA. Stop this economic propaganda! Let face the reality.

In this regard, should the price of oil crashes to $30 per barrel and the price of petrol falls to =N=38.4 per liter, the government can strategically impose an indirect tax of =N=26.6 per every liter of petrol imported since the local price of petrol is fixed at =N=65 per liter. Thus, should 20 million liters of petrol be imported daily, the economy will be receiving =N=532,000,000 daily on petrol import. What a rescue package! Can’t our policy makers prophesy this fact?

Fuel Subsidy Removal: “Unveiling the Propaganda at a Glance”

Sunusi Lamido: The subsidy benefits the rich not the poor.

Response: Why did its removal affected the poor the most? Never forget the fact that it is the common people that use motorcycles, cars and buses for transportation. We don’t travel on air!

Sunusi Lamido: Some oil marketers are smuggling the subsidized fuel to neighboring countries (like Niger and Cameroon), harming the economy in the process.

Response: Niger has a border with Libya as it has with Nigeria and the price of fuel has been much lower in Libya ($0.17/=N=27.2per liter) than in Nigeria, why are there no such cases of illegal fuel export? Please reinstate subsidy, secure our borders and punish the smugglers.

Sunusi Lamido: With fuel importation and subsidy government creates jobs for other countries and improves their economies.

Response: It is the importation not subsidy that creates jobs abroad. Fix the existing refineries and construct new ones according to the economy’s requirement.

Sunusi Lamido: Other governments subsidize from excess not borrowing.

Response: Nigeria’s current oil production is 2.48 million barrel per day. Considering the claim that 50% of the output goes to oil companies, the country is exporting 1.24 million barrel per day. Given the 2012 budget benchmark oil price of $70 per barrel and the market oil price of $110 per barrel, the country is now saving $40 x 1.24m = $49.6 million per day, that is; =N=7.94 billion per day, in the Excess Crude Account (ECA). If it is true that 35million liters of fuel are imported daily, the government will pay subsidy of 75 x 35m = =N=2.63billion daily. If deducted from ECA, the balance will be =N=5.31billion per day. Is Nigeria not subsidizing from excess? Why must we borrow while the country is still having $33 billion in foreign reserve account talk less of internal revenues from FIRS, Nigeria Custom Service, and Port Authority to mention but few?

Sunusi Lamido: If oil price crashes by 30%, it will be difficult for the government to pay workers’ salaries talk less of subsidy.

Response: If oil price falls by 30% ($77per barrel), the government still saves $7 x 1.24m= $8.68 million per day (=N=1.39billion per day). The price of fuel will fall proportionately to =N=98 per liter, and the amount of subsidy to be paid will decrease to =N=33per liter. Thus 33 x 35m= =N=1.16 billion per day. If deducted from the daily excess the government saves 1.39b - 1.16b = =N=230 million per day in ECA. Sir, you are off track! Please, reconsider.

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