Fuel Scarcity: The Consequence of a Persistent Failure To Adjust

The topic needs no introduction. If you are Nigerian, or have lived in Nigeria for any period of time, then you have probably had to queue for fuel at some point.  To most Nigerians it is simply a part of life. The current fuel scarcity has however lasted a bit longer than most would have expected. Various excuses have been given by the current administration ranging from US dollar scarcity to sabotage. The real reason is however a lot less dramatic. The scarcity is simply a result of price fixing and the failure of prices to adjust.
Why the scarcity exists? For anyone who has taken a basic course in economics then the laws of demand and supply should not be new. Simply put, if many people want to buy a product and only a few people are selling, then the buyers have to compete. They show their seriousness by offering a bit more for the product. The same happens if only a few people want to buy a product that many are selling. The few people can bargain and force sellers to accept less else they go to other sellers. People bargain and prices adjust to keep most participants happy. The same happens with fuel and you can read more about that here.

 

However things always change. The world never stops spinning and things never stop happening. In the context of fuel prices many things that affect the price change constantly. The price of the core raw material changes every day and that should affect the price of fuel. If for instance the price of crude oil doubles from $30 to $60 a barrel then you would expect the price of fuel to go up as well. Transportation costs change all the time and that should also affect the price of fuel. Exchange rates change all the time and that should also affect the price of fuel. Markets deal with these changes all the time with prices constantly moving up or down to adjust to new realities. This happens with fuel prices in Benin Republic, Niger, Cameroun, South Africa and many other countries. However in Nigeria prices are fixed by the government and never seem to adjust, at least not without fanfare. The price of crude oil could go up by 30% and prices would not officially adjust. The naira dollar exchange rate could fall by 50% and prices would not officially adjust.
Subsidy and lack of adjustment.

 

The failure to adjust comes with severe consequences. The most popular of these is the fuel subsidy, and the attendant inefficiency and corruption that goes with it. The official reason for not removing subsidies is always the effect on the poor. Unfortunately, not enough thought goes into how the subsidies come about in the first place. You can pore through the history books but you will never find a single instance where a government in Nigeria deliberately introduced fuel subsidies. In most cases it just seems to happen. You wake up one day and the government claims to have paid so and so billion in subsidies since the last budget.

 

The real source of the fuel subsidies is the failure to adjust prices when fundamentals change. The government decides against raising prices and instead opts to pay the difference. The crude oil price goes up? They just pay the difference. Naira depreciates? Pay the difference. We wake up one morning and the government says they paid N1.2tn in subsidies and we wonder where the money went. As an example, between March and April of this year the actual cost of fuel according to PPPRA has gone up to N97.88 per litre (assuming a N197 per dollar exchange rate which frankly no one uses these days). However pump prices are still stuck officially at N86.50 per litre. So someone is paying about a N10 subsidy on each litre of fuel. The subsidy isn’t there because the government wants to help the masses, but because again they have failed to adjust prices. Fortunately this government doesn’t have the resources to throw away in the name of subsidy, hence we are left with scarcity.
Smuggling and Lack of Adjustment.

 

Another consequences of the failure to adjust is smuggling. Smuggling is often blamed for fuel scarcity but it is really just a symptom of that failure to adjust. Nigeria is surrounded by neighbours who are under no illusions about the reality of fuel prices. Prices in Benin republic, Cameroun, Niger and even Burkina Faso adjust constantly. This implies that when Nigeria fails to adjust, price differentials quickly become apparent. If a litre of fuel sells for twice as much in Cotonou as it does in Lagos then fuel will inevitably move from Lagos to Cotonou.

 

This smuggling isn’t done because people are wicked or want Nigeria’s downfall but because the potential for profit is impossible to ignore. The official price per litre in Nigeria today is N86 per litre. In Niger Republic petrol sells for N183 per litre, or N294 per litre if you use the parallel market exchange rate. No surprise then that fuel is smuggled to Niger republic. Fuel sells in Cameroon at N215 or N346 per litre depending on which exchange rate you use. No surprise that fuel is smuggled to Cameroon. Similar price differentials occur between Nigeria and every country in the vicinity. Given these price differentials it is no surprise that Nigerian fuel smugglers allegedly account for 80% of fuel sold in Benin Republic. The problem isn’t that smugglers are unpatriotic, but that our neighbours have adjusted to the realities of fuel prices while we haven’t.
Refineries and Lack of adjustment.

 

A longer term consequences of the price controls and failure to adjust is the lack of participation by the private sector in the downstream oil industry. Private sector participation in the refining of crude oil is virtually non-existent and a big part of that is because of price controls. Nobody wants to invest in a sector where the government can force you to lose money. A current version of the effect of this adjustment failure is the recent abandonment of the importing and distribution part of the industry by many private players. According to minster of state for petroleum only the NNPC is currently importing fuel into Nigeria. The other players, who usually account for about 49% of imports, have stopped. They haven’t stopped because they no longer feel like doing business or because they are tired of making money, but because the price controls make it financially impossible to import. And nobody is in business to lose money.

 

These price issues are at the core of private sector absence in the downstream oil industry. I should also point out that the idea that getting our government refineries working will solve the scarcity problem is also probably false. The under-priced fuel will go where all the other imported fuel goes, our neighbours. Where they actually want to pay for it. Some have also pointed out despite the comatose nature of our refineries there is no scarcity of diesel. Food for thought?
It’s all about the politics.

 

The price fixing problems are clear to anyone who has examined the oil industry in Nigeria. Few grasp this reality better than the current minister of state for petroleum and NNPC GMD. Indeed when he was first appointed as NNPC chairman he argued for a speedy deregulation of the oil industry. Deregulation which included removing the price controls. Unfortunately politics seems to have struck again with his tone changing from deregulation to price modulation. Price modulation sounds interesting in theory and argues for prices to change when the fundamentals change. Unfortunately his version of price modulation forgot to include the political realities of government control. These realities show that politicians will always be quick to lower prices but will always fail to raise them when they should be higher.
So what is the way forward? How do we deal with the Nigerian cultural phenomenon that is fuel scarcity? The first unavoidable step has to be to get politicians and political influence out of the pricing and let markets work. Market pricing will make sure that no matter what happens fuel will be available to buy without having to sleep at a filling station or deal in plastic jerry cans. Market pricing will ensure that smuggling become pointless as there will be little arbitrage opportunities to exploit. A commitment to market pricing will also go a long way to opening up domestic refining, a practice that has been done since the 1800s and is not as complex as some make it sound, to the private sector.

 

The argument that removing the price fixing behaviour will hurt the poor is not valid. There are much better and easier ways to target the poor than fixing prices. Especially since we all know that the poor use a lot less fuel than the rich and more affluent Nigerians. We also know that our neighbours in Benin Republic, Cameroon and Niger Republic, who are certainly not richer than us, somehow manage to survive without the price controls. Or do they have two heads? The only question is if this administration has the political will to make the necessary changes or if they will kick the can down the road again. Only time will tell.

 

This article originally appeared in Premium Times

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