red caltex gas station during golden hour
2023 Elections, Money and Finance

What Is Fuel Subsidy?

I don’t think many Nigerians have taken the time to truly understand what fuel subsidy is, why it is important, and why fuel subsidy needs to be removed. If you are wondering what fuel subsidy is, you have come to the right place. Nigeria has crude oil reserves, not fuel. The government exports crude oil to countries like India because we don’t have a properly functioning refinery. Without a refinery, we have to buy the finished fuel product from those who refine it.

selective focus photography of fuel station
Photo by Lloyd Freeman

I will break down fuel subsidies for you and explain why there is always drama and chaos whenever any government administration mentions the term ‘fuel subsidy’.

What Is Fuel Subsidy, And What Is The Government Subsidising?

Fuel subsidy refers to a policy where the government covers a portion or all of the expenses related to producing or importing fuel, like gasoline or diesel. As a result, the government reduces the price of fuel at the pump, making it more affordable for consumers. In simpler terms, we can buy petrol at 200naira now because the government is paying part of the cost of these products. If not for fuel subsidy, petrol will be around 600naira per litre!

We Have Fuel. So, Why Is The Nigerian Government Still Subsidising It?

Before we continue, let’s check out this table for the price of fuel in the UK.

United Kingdom Gasoline pricesLitre

Well, we actually have crude oil, not fuel. Here’s what happens: the government exports the crude oil to countries like India because we don’t have a functioning refinery. Since we lack a refinery, our only option is to buy the finished product from those who refine it. According to the table above, the price of a litre of the finished product in the UK and US is $1.5 and $1.4, respectively. At first glance, these prices may not seem like much. However, when you consider the fact that $1.5 USD is around 600 Nigerian Naira, it becomes significant.

Why Do Talks Of Subsidy Always Cause Fuel Scarcity?

In a perfect world, if the government begins to talk about fuel subsidies, business should be as usual. But marketers want to make more profits, so when there are talks about removing fuel subsidies, these marketers will hoard the fuel. This is because they want to sell the old products at the new price and make more profit!

What will happen if they remove the fuel subsidy?

well, if you are wondering what will happen when they remove fuel subsidy, the answer is simple, the cost of fuel will go up!! this is because the Nigerian government will no longer pay part of the cost of fuel, meaning, you have to pay over 500 naira for a litre of fuel!

It is hard to predict what will happen if -or when- the Nigerian government removes fuel subsidies. Here are my best guesses:

  1. There may be protests and strike action in some groups. Although, I don’t really see the point. We can just rip the band-aid right now and get used to the 
  2. There will definitely be an increase in transportation, which sadly, according to history, has directly affected the cost of food.
  3. There will be provisions for other sectors, including health, education and agriculture.
  4. We may need to borrow less. Hopefully!

For a deeper understanding, check out the pros and cons of fuel subsidy especially for Nigerians!!

Pros and Cons of Petrol Subsidy

Pros of fuel subsidy:

  1. Assists in making fuel more budget-friendly for the average person, resulting in savings at the pump.
  2. Reducing our transportation costs makes moving goods and services easier.
  3. Ensuring that transportation, agriculture, and manufacturing have access to affordable energy sources.

Cons of fuel subsidy

  1. Stress the government’s budget, diverting funds away from other essential areas, such as healthcare and education.
  2. Can encourage overconsumption of fuel, leading to inefficient use of resources.
  3. Hinders the development of cleaner and renewable energy alternatives.
  4. Reliance on imported fuel can make the country vulnerable to price fluctuations in the global market. That is, our country may be at a disadvantage when it comes to the prices in the global market because we are overly dependent on imported fuel.

Yes, Dangote refinery would make a big difference, in reducing the cost of fuel

We already established that removing fuel subsidies can result in high pump prices. However, with the Dangote refinery in operation, and potentially if other refineries are also fixed, having a functioning refinery in our own country can make a significant difference. Here’s why:

When we have a refinery, we can process our own crude oil and produce fuel right here instead of relying on imports. This means we can eliminate the costs associated with buying finished fuel from other countries.

With a refinery in place, we gain control over the production process, optimize efficiency, and potentially lower the overall cost of fuel. It gives us more independence and flexibility in managing our fuel supply. Moreover, it reduces our reliance on external sources and helps us become self-sufficient in meeting our fuel needs.

By having a refinery, such as the Dangote refinery, and potentially refurbishing other refineries, we can significantly improve our fuel production capabilities. This empowers us to control the entire supply chain, reduce costs, and decrease our dependence on imported fuel.

What are some of the costs we can cut with Dangote Refinery?

So when we import finished fuel from other countries, there are a few costs involved. First off, there’s the cost of purchasing the fuel itself. We have to pay the price set by the exporting country or company, which can vary depending on global market conditions and exchange rates.

On top of that, there are transportation costs to consider. Shipping fuel from another country to ours isn’t free. We need to cover the expenses of shipping, such as maritime or air freight charges, insurance, and handling fees.

Then there are customs and import duties. Some countries impose tariffs or import duties on fuel imports. These additional charges can increase the cost of imported fuel, adding to the overall expenses. Governments may impose tariffs as a means to protect domestic industries or regulate the inflow of imported fuel.

By refining our own crude oil domestically, we can avoid import expenses, exchange rate fluctuations, international market price volatility, and tariffs. Additionally, having a refinery allows for greater control over the production process and supply chain, potentially leading to more stable and affordable fuel prices for consumers.

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