The simple economics of petrol pricing

by | January 29, 2018 12:50 am



Last weekend, the notorious fuel scarcity and fuel queues returned again. Even though some would say that the petrol scarcity never went away outside the major cities of Lagos and Abuja. Most people outside Lagos and Abuja are already used to buying petrol above the official pump price of N145 per litre. They do not really have to queue up to do this. They just drive in and drive out. Thus the scarcity is more prevalent in Abuja and Lagos, the two cities where the government pretends that all subsidy burden that it bears from importing and selling petrol at below market prices will continue to rise and put pressure on its finances.
Private operators would not consider coming into the petrol importation business as long as there is subsidy, which also means that NNPC will continue to bear the burden alone and the associated risks that comes with it. The country is in this situation because President Muhammadu Buhari is yet to admit that the current pricing structure is not realistic. It can only facilitate the massive smuggling of the product to neighbouring countries and effectively turn us into “Father Christmas” to our neighbours. Nigeria’s regulated price is distorting price mechanism in the West African region and encouraging smuggling. A number of other African countries due to the high cost of subsidies have put mechanisms in place to deregulate the industry and relieve their government of the burden of unsustainable subsidy payment. This has energized their market, led to better market delivery and created enabling environment for private sector led investment in the sector. Rather Nigeria’s regulated petrol pricing has become a source of cheap money to unscrupulous businessmen and women. Buhari really needs some urgent lessons on the economics of petroleum pricing or else the country is stuck in this rot.
Perhaps, the refusal of the government to liberalise the sector is unconnected with the government’s concern for the wellbeing of the masses, majority of whom are poor and would suffer untold hardships if the price of petrol continues to rise. But the government must equally consider the suffering this decision is causing the poor, which the government may be trying to protect. Most Nigerians now buy the product higher than they would have bought it at market price. Besides, it is clear to all that the NNPC has no capacity to solely import and meet the petrol demand of the Nigerian market, which means if the present situation continues, there will be more scarcity and Nigerians will continue to buy fuel at higher prices.
The long and permanent solution to the problem, as we have often state, is to simply deregulate the downstream sector of industry and get out of the business of fuel importation and restrict itself to the regulation of the sector just like what obtains in the telecoms sector. The job can be better performed by major marketers, independent marketers, depot owners and so on. They need a favourable policy environment to operate maximally.

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