FACULTY:                           LAW

What is petroleum subsidy?
An overview of petroleum subsidies in Nigeria.
Who benefits the most?
Are petroleum subsidies good for National Development?
What plans has the government Announced to reform the petroleum  sector?
Who would be the winners and losers if the transformation of the petroleum sector is carried out?
What are Nigerians stand to gain from the transformation of the petroleum sector.

If any sector of our society is in dire need of reform, it is the petroleum industry. Over the years government has introduced various measures to support the industry and keep its products affordable for Nigerians.
So far over 1.123 trillion naira is being spent annually with nothing concrete to show for it. In the main the benefits accrue only to a for Nigerians, because the process has been abused and is rife with corruption.
It doesn’t make sense to continue supporting such a scheme.
            So for us it not about subsidy removal, it is about transformation. Transforming the oil industry to better perform in international best practice by restricting government involvement to regulation.
            Encouraging competition and allowing petroleum products find their true market prices.
            We should support the removal of the subsidy and the passage of the petroleum to totally transform the petroleum sector and make it profitable  for the government and people. When this is done, trillion of naira that government spend; in supporting the industry will be saved and redirected to sectors that  most benefit the poor.
            Generally, subsidy refers to the money paid, usually by government, to keep prices below what they would otherwise be in a free market system such intervention by government leads to a distortion that has the potential of imposing large economic costs. More specifically, fuel subsidy is the difference between the price a consumer pays for the pump price of fuel and the actual total cost of producing or importing it.
            For instance, the price of petrol is currently pegged at N65 per litre but the actual cost of supply is about N138 per litre at crude oil price of $110 per barrel. Therefore, the subsidy element is about N73 per litre. This means that for every litre of petrol purchased at the official price of N65, the government contributes N73. it should be noted that only petrol and kerosene currently enjoy government subsidy, and that imported and locally proceed. Petroleum products enjoy these subsidies.
            Government expenditure on this amount to about N1.123 trillion naira annually.

Nigeria like many countries around the world, have used subsidies over the years to promote a range of social and economic objective. Like many developing nations, it has many priorities vying for support. These include poverty allegation, infrastructural  development, health and education.
            Given these competing demands, deciding where to allocate public financial resources is one of the governments most important and difficult tasks.
            The people have a vital stake in these decision, but unfortunately there is often little public debate  about what should be subsidized. Even when citizens are desirous of participating in discourse on the issue, information about the costs and who benefits is often scarce. In most cases however, the ordinary man is busy making living and raising families with little time to devote to monitoring the activities of government.
            However, the need for effective oversight of government’s expenditure cannot be overemphasized. This is even more so because subsidies  have major impact on social equity, economic growth and environmental preservation.
            For decades now, Nigeria has subsidized the cost of petroleum producers. In fact the government spends more on subsidies to fuel than it does on capital expenditure for public infrastructure health and education. It is estimated that   government spends about N1.123 trillion annually on fuel subsidy. Over the years government has progressively reduced the subsidy on diesel, petrol and Kerosene. Presently, there is zero subsidy on diesel (AGO), one premium motor spirit (petrol and House hold kerosene are still being subsidized.

            In debating the merits of Nigeria’s fuel subsidy it is important to understand who benefits the most form the program. Contrary to popular bereft, it is the rich not the poor who dis-proportionally benefit from Nigeria’s fuel subsidy. With the government subsidizing the market to keep domestic fuel prices artificially lo, it is those consume the most that have a greater benefit form the subsidy. Nigeria’s poor rely primarily on public transportation as such their per capital fuel consumption is significantly less than the country’s rich, who generally use private vehicles.
            Neighboring countries also benefit significantly form Nigeria’s fuel subsidy through smuggling. It is a fact that chose in the villages who never travel anywhere do not consume fuel whatsoever. Their benefit form the subsidy is almost zero. However because of the subsidy the government is unable to provide basic amenities that would impact their value more directly.
            The urban poor also don’t benefit as much.
Illustration: Ibrahim  Musa a grate man takes a bus from federal government Housing Estate Ludge F.C.T to Maitama and back. It takes a bus about four litres to do this journey. This but take sixteen people fuel subsidy on the four litres of fuel used is n302.8 if the divide this by 16 people and it gives you N18.93 that means today Ibrahim Musa who one of the sixteen people in the bus gets N18.93 as subsidy.

            Fuel subsidies affect the economy in several ways. A readily observable effect is the cost on the government budget, but there are more subtle and equally important impacts on the economy. By artificially lowering the price of certain type of energy subsidies encourages over consumption and inefficient use of those resources. Lower prices also alter investment decisions by discouraging energy diversification and reducing the incentive for energy supplier to build new infrastructure.
Giving  that we import most of the petroleum products we use, Nigeria must buy  most of its fuel at international market prices. Selling that field more cheaply domestically results in huge losses for the NNPC that must be funded by the government (i.e the taxpayer), resulting in a major financial burden on the whole
            Large subsidies on imported oil make Nigeria’s fiscal position highly vulnerable to changes in global energy prices. When international oil prices rice dramatically, like they always do, the government is forced to either drastically increase prices- which can be politically difficult and cause a sudden rise in inflation or make corresponding increases to its subsidy budget, which can be crippling for the economy. If the government chooses to maintain subsides.
            At times of high oil prices, it must borrow additional funds or cut expenditures to other programs. The volatile market and uncertainty about the government’s financing needs increases the cost of government borrowing, adding to future debt repayments.
            Most damaging is the fact that it takes funding away form infrastructure, health, education and agriculture. The negatively impact on development and economic competitiveness in the long-term. 

Nigeria: Imminent Adoption of The Long-Awaited Petroleum Industry Bill
            It has now been five years-during which licensing rounds, contract renewals, and investment have been  put on hold-since the concept of a new petroleum Act merged in Nigeria. President Jonathan recently announced that the long-awaited petroleum Industry bill, which is reportedly aimed at major reform of the Nigeria oil and gas industry, will be submitted shortly to the Nigerian National Assembly to be passed into law.
The main objectives of the envisaged legislative reform are as follow:
Establish a new tax framework that encourages further investment in the petroleum industry while optimizing accruable revenues to the government.
            We have yet to see the final version of the new fiscal regime that has been fiercely debated over the past four years between policy makers and industry players.
            On the basis of the last publish version of the petroleum industry bill, oil companies will pay tax on changeable profits as follows: 50 percent for on share and shallow water areas and 20 percent for frontier acreage and deep water areas.
Establish a commercially oriented and profit-driven nationaloil company (‘NOC’) to which certain assets and liabilities of the existing state-owned. Nigerian national petroleum corp will transferred. The federal government aim is  divest a certain, as yet unidentified, portion of shares in the NOC to the public within three years.
            Deregulate and liberalize the downstream petroleum sector. With the passage of the petroleum industry bill, the Nigeria downstream sector would largely be freed from government regulations, with less interference from the local authorities.
            Under the new regime there will be zero subsidy on petrol and diesel, however, house hold kerosene used mostly by the poor will continue to be subsidized.

Against the backdrop of the recent debate on subsidies on premium motor spirit commonly known as petrol) It is pertinent to highlight, in details some of the pertinent questions that have arisen about what deregulation in this sector means, why the subsidy on  PMS was removed, what the subsidy removal man in tangible terms, and some of the thing government can and will, do with the savings that will accrue from this policy.
Frequently asked questions on deregulation of the downstream petroleum sector and removal of petroleum subsidy.
1.         What is meant by the deregulation of the downstream petroleum sector?
            Deregulation of the downstream petroleum sector refers to the reduction, or removal of government controls, nits and regulations that research free operational activities in the sector. This does not marinara complete elimination of the laws that government smooth operations of activities in the downstream oil sector rather.
2.         What is the rationale behind the government’s plan to deregulate the downstream petroleum sector? Deregulation of the downstream oil sector will improve the efficient use of scarce economic resources by subjecting decisions in the sector to the operations of the forces of demand and supply. This will attract new sellers, buyers and investors into the market, thereby increasing competition, promoting overall higher productivity and consequently, lowering prices over-time. The ultimate effect of this chain of activities so increased gains for the people of Nigeria who would be getting the most out of their natural resources. For example, following governments deregulation in the telecommunication, there has been a reduction in all tariffs.
            Deregulation has the potential of serving as the catalyst for the total transformation of Nigeria

            An already stated above, the benefits of fuel subsidies accrue mainly to high-income groups and their cost falls on the whole tax paying population. As a result, fuels subsidies are a regressive policy with the poor households paying relatively more and receiving fever benefits than wealthier ones. The removal of subsidies would therefore have long term economic benefits for the economy as a whole including the poor.
            Nonetheless, removal of subsidies would have some short-term negative impacts on some groups. Those likely to be most impacted by the removal of subsidies in Nigeria would be high-income groups in urban and rural environments as they consume the most petroleum products. These groups would most likely reduce their overall consumption in the short-term in order to mange higher fuels price.
            In general, rural and lower-income groups consumer larger portion of agricultural goods, whose price is less sensitive to changes in fuel price. However, the urban poor are likely to be uninerable to fuel price rises. This is probably because, they commute more processed foods and goods.
            In the longer term, a higher petroleum price is unlikely to have harmful effects on the poor because it would be compensated by the economy wide benefits of subs idly reduction improved fiscal sustainability, increases social spending by the government, more efficient allocation of resources and increased investment.
3.         Is rehabilitating the refineries part of the strategy for deregulating the downstream petroleum sector?
            Yes in the last 12 months the country’s refineries have worked relatively well, and tis has led to increased capacity utilization from 30% to the current 60%. This means that for 12 months now, the country’s refined petroleum production capacity has been steadily on the increase. To further improve on this to an internationally accepted level of 90% capacity utilization in the next 24 months, the original contractors responsible for building the refineries have been contracted to carry-out a turnaround maintenance (TAM) of these refineries.
4.         Are there countries that have deregulate their downstream petroleum sector and removed subsidies?
            Yes, there are examples of countries that have removed petroleum subsidiaries, including oil producing countries. In particular. Only recently Ghana announced that it would re removing fuel subsidies in order to sustain its fiscal consolidation.

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