Fuel Subsidies: Between A Rock And A Hard Place

While oil and gas production attracts most media attention, the downstream oil sector is of more importance to most Africans. Fluctuations in the price of petrol, diesel or other fuel products can have a major impact on transport and cooking costs.

While most governments in the industrialised world tax fuel prices in order to raise extra revenue, many African governments subsidise fuel prices, in an effort to improve living standards.

As recent events in Nigeria demonstrate, however, the situation is far from simple. Diesel and petrol (or gasoline) prices are generally lower in Nigeria than elsewhere in the region. This has nothing directly to do with Nigeria’s position as Africa’s biggest oil producer because its four refineries usually operate at well below capacity, if they are operating at all.

Most fuel sold in Nigeria is actually imported, generating large sums for those involved in the trade. In addition, a great deal of fuel is smuggled from Nigeria into neighbouring states where dealers can undercut local prices.

However, economists have long complained that using government income to suppress fuel prices is not the best use of state monies. Sanusi Lamido Sanusi, the governor of the Central Bank of Nigeria, says: “Subsidies should be subsidies for production and not for consumption.”

The Nigerian government itself recently calculated that the practice costs the federal government $8bn a year, a massive sum in relation to a national budget of $22bn for the current financial year.

The government of President Goodluck Jonathan recently followed the strategy of previous administrations on several occasions over the past decade of trying to remove the subsidy in one fell swoop.

The government tried to increase the price of diesel from $0.40/litre in December to $0.86/litre in January but as previously, a national strike coordinated by the country’s powerful trades union movement forced Jonathan to back down.

On 16 January, the President announced that his government would continue to pursue full deregulation of the downstream market: “Given the hardships being suffered by Nigerians, and after due consideration and consultations with state governors and the leadership of the National Assembly, government has approved the reduction of the pump price of petrol to N97 [$0.60 US cents]/litre.”

This is still a big increase on the earlier rate but the government’s policy seems odd in the extreme. Why has it not tried to reduce the subsidy gradually instead of provoking the kind of public outrage that could have been predicted?

Fuel prices are a controversial matter in South Africa too but the government makes slight adjustments in prices in order to avoid an economic shock.

The most recent price rise saw the cost of petrol increase by 3.2% on 1st February from R10.61/litre to R10.95/litre in Gauteng Province. In fact, Pretoria changes fuel prices every month in order to take into account international oil prices and the rand-dollar exchange rate.