Energy & Mining

Gas in the tank

Fuel subsidies in Nigeria

The removal of fuel subsidies will reform Nigeria's downstream oil industry, while enhancing the green energy sector.

It is a long-established tradition in many oil-producing countries that the local market price of petroleum-based commodities is much lower than international standards. As the refining of oil is a costly business, the price of refined fuels is kept artificially low only with the help of subsidies paid by the oil-rich governments. Such governments, in turn, pay the subsidies with the help of earnings from crude oil exports. This is hardly a virtuous circle. Oil-rich nations sell their crude oil barrels and then spend a large portion of their petrodollars on buying refined oil products to sell to their citizens at a subsidized price.

Nigeria, the largest oil exporter in Africa, is no exception. The oil-rich country exports nearly 2 million barrels per day (bpd), and, as it has negligible refining capacity, it used to spend over USD300 million each month on fuel subsidies, especially for diesel. This model of subsidization continued until 2020, when the authorities came to the conclusion that things have to change if Nigeria wants to move a step closer to a true free market economy. However, to avoid a market shock and potential dissent among citizens, the government continued to subsidize certain hydrocarbon fuels. Even in June 2020, and months after the termination of fuel subsidies, the government was still spending USD14 million on fuels subsidies—though admittedly a huge drop from the previous figure of USD300 million per month.

The government chose an ideal moment to lift oil subsidies: during the oil crash of the early 2020 when hydrocarbon prices were already at an all-time low. The move liberated the government from paying huge fuel subsidies and—in essence—modernized Nigeria’s downstream oil sector. With costly subsidies out of the way, the funds can now be spent on more productive needs such as social uplift and modernization of the nation’s transportation infrastructure—especially public transport. The remaining subsidy, which is a shadow of its former self, is mainly paid to importers that stocked up imported hydrocarbons before the coming into effect of the new regulations.

Just after the removal of the price caps, as per President Muhammadu Buhari’ approval on June 4, 2020, the country witnessed a drop in demand for fuel, which can be interpreted in several ways. However, the optimistic interpretation is that as the pricing regime becomes more realistic, consumers will avoid unnecessary journeys and strive to use the fuel in their tanks as economically as possible. This is a blessing in disguise in terms of curbing Nigeria’s air pollution, as well. Nigeria has been struggling with air pollution for years, especially in its previous capital and the largest city, Lagos. Global Air Report of the Health Effects Institute (HEI) sees Nigeria having one of the poorest air qualities in the world, with some 150 people in every 100,000 losing their lives directly because of air pollution every year. If the withdrawal of fuel subsidies can save hundreds, if not thousands, of lives every year, then perhaps it can be regarded as an upside for public health and the climate.

Air pollution aside, megacities such as Lagos and Abuja also suffer from heavy traffic congestion. The elimination of fuel subsidies will force citizens to avoid all unnecessary travels with cars, which will facilitate public transport in the country, with countless knock-on effects on Nigeria’s international brand image, tourism, and the distribution of commodities across Lagos and Abuja.

All that said, increasing Nigeria’s capacity for oil refinery is not a bad thing in and out of itself. Although the cancellation of subsidies on mainly imported fuels is a positive development, there is nothing wrong with Nigeria increasing its domestic diesel and gasoline production given its large petroleum reserves.

In late 2020, the Waltersmith modular refinery was launched in Ibigwe, Imo State. The ground-breaking project will also have a second phase that will raise the refinery’s current 5,000bpd capacity to 50,000bpd—a surprising 10-fold increase in the output of refined petroleum products. The launching of the second phase will change Nigeria’s position as an absolute importer of diesel and gasoline to a potential exporter to neighboring countries.

Even better than refining oil locally is shifting the focus from refined hydrocarbon fuels to green energy. Doye Ogionwo, CCO of ZOLA Electric, told TBY about Nigeria’s immense potential for shifting to green energies. Ogionwo noted that the go-to power source in Nigeria is diesel, especially for electricity generators, with roughly 100 million people and businesses relying on diesel. This costs Nigeria USD345 million every year—only for the of electricity generation. Green energy companies are trying to reduce Nigeria’s dependence on diesel and gasoline, and the elimination of fuel subsidies can be a real incentive for Nigerians to turn to green energies wherever possible.

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