Is deregulation of the downstream oil sector really that bad?

Gas Station

So the unions are at it again. What do they want this time? They are threatening to go on yet another strike over planned deregulation of the downstream oil sector. They also want a hike in the minimum wage as well as a bunch of other demands but we’ll focus on the deregulation part.

So what is this deregulation all about?  Well it is popularly known as the removal of subsidies on  PMS and Kerosene. It does however also include the privatization of the rest of the process of refining and importing of crude oil and the delivery and sale of the products to the final consumers. At least that’s what I think is in the petroleum industry bill.

So lets examine what will happen if deregulation is allowed to take place and we have an already functioning local market. I know there is little or no local refining of crude oil but we’ll talk about that later. There will be an initial rise in the price of petroleum products of course. We will consume less petroleum products (both locally refined and imported) because of the increase in price. The consumer surplus will reduce, the producer surplus will increase and the burden on the government will be zero. This jump in the price however will make it profitable for producers who previously would not have been able to compete at the low price to come back into the business. The gains from the removal of the subsidies should be just as much as the losses to the consumer from the removal of artificially cheap petroleum products.

However we don’t currently have a domestic industry for refining crude oil. The downstream industry has been tightly controlled by the government leaving little or no room for private domestic refining. As a result of this policy we really have no idea what the domestic market price for refined products will be if private businesses were allowed to buy and refine crude oil. There’s every reason to believe that if the markets are allowed to function then the domestic price of refined crude products would be lower than the world price because we have a natural advantage.  We are, or used to be, the 8th largest exporter of crude oil. The costs of transporting crude to Venezuela and of transporting refined products back to Nigeria will give local producers a huge advantage, at least domestically. There is the argument that initial starting costs of building refineries is too high and local businesses would not be able to raise such funds but that is simple not true. Why? (Click Here) Refining Crude oil is not rocket science. There is also a rest of the world market for refined crude. If it turns out our local businesses can refine crude at a cost that is lower or at par with the rest of the world then there are huge gains to be made through selling refined productsl to the rest of the world.

The success of deregulation however rests on the ability of new firms and businesses to enter the market for importing and refining crude oil. The controls and barriers are still mind-boggling. That is why even though AGO lands at the ports at N40 per liter it sells at about N100 per liter. The current set of importers are reaping mega profits from their “monopoly” on imports of crude products into the country. This should in theory usually entice new firms into the business and eventually lead to lower prices but that isn’t happening. It is virtually impossible for new firms to import crude products and even harder to build a refinery because of government restrictions.

The removal of the subsidies is a good policy but is doomed without the removal of the restrictions on participating in the downstream oil industry. However if it is implemented in its entirety it could do more for the development of industry in the Niger Delta than any other policy has so far. I like the fact that the labor unions and other ordinary Nigerians can get together and stage a rally without incident but I don’t support them this time around. Come  to think of it I never do.

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