Petrol costs and the lingering ghost of subsidy

At its core, what was requested of the Nigerian economy by the Tinubu administration’s main reform initiatives was to distinguish between the removal of an unsustainable subsidy and the creation of a genuinely competitive, efficient downstream petroleum market. One positive from the finance minister, Taiwo Oyedele’s press briefing on “Fuel Prices and the Subsidy Question,” was to recognise that although these are related objectives, they are not the same thing.

The briefing’s most consequential proposal, the negotiated ceiling of ₦1,350 per litre on the ex-gantry or landing cost of petrol, highlights the importance of this distinction for Nigeria’s reform agenda and public finances.

The federal government intends under the arrangement described at the minister’s briefing that where petrol costs exceed this ceiling, refiners and importers will bear the ensuing shortfall and later offset this loss when costs ease. The choice of nomenclature is unimportant at this point, even though the government would rather the arrangement be described as “price smoothing”, and not “subsidy” or “price control”. Instead, the key question is whether this is a genuine inter-temporal price smoothing or a form of involuntary financing imposed on fuel suppliers.

At first reading, the mechanism resembles a form of deferred cost recovery where the supplier is certain to recover the shortfall under an enforceable, transparent arrangement. However, where future price declines are not enough, recovery is delayed indefinitely, or the government later compensates suppliers, the arrangement acquires a different economic character. At which point it becomes a quasi-subsidy, a regulatory transfer, or an implicit charge on the treasury.

This is why the government would need to answer the following questions: how will the regulatory mechanism to determine the eligible cost and verify the shortfall work? Does the supplier earn interest on deferred amounts? What happens if international costs remain high for an extended period or in the event of exchange rate shocks? Can suppliers recover the accumulated amount if prices never fall enough?

Does the arrangement apply equally to Dangote refinery, the Nigerian National Petroleum Company Limited (NNPCL), and independent importers? What happens if a supplier refuses to participate or reduces supply because its working capital is tied up? Is there a cap on the total amount that can accumulate?

Evidently, the honourable minister’s press briefing is one huge answer in search of innumerable smaller questions, including where the NNPCL will find the refined fuel stocks with which to run the scheme, and why the choice of a 30-day trial window for the roll out of the margin discount arrangement? There are many procedures for testing the waters on new policy initiatives, but there is scant evidence supporting the effective use of the country as a huge sandbox or as one randomised control trial. The consequences of a policy failure are, in cases of this nature, too large for government anywhere to backtrack from. Which leads to the question: why now?

While the prospects of a general election next year, and the living standards crisis that the populace is going through, obviously have the government’s attention, as is evident from the minister’s briefing, it is far easier here to ask how sustainable the government’s position is, when the NNPCL’s domestic refining capacity remains constrained, than to proffer an answer to what happens when the success of deregulation depends increasingly on a privately owned refinery.

Were the government’s proposals to offer petrol in the local market at less than the market-clearing price to send a clear and powerful signal to Dangote Refinery, the ensuing debate would not be simply about whether Nigeria may continue to subsidise petrol. We would need to find answers to questions around the relationship between domestic refining capacity, competition, energy security, the credibility of economic reforms and the government’s ability to capture the fiscal benefits of higher crude oil prices.

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Yet, operating from inside an export processing zone, the Dangote refinery could easily export its way out of this conundrum. Not so the federation. If the NNPCL sells petrol below its economic cost, its commercial earnings and eventual remittances would clearly suffer. Given the current straitened nature of the national treasury, it would help for the government to disclose whether the NNPCL-station discount will be paid for from the corporation’s commercial margin, by an explicit transfer, a foregone remittance, or some other scheme.

In the end, PREMIUM TIMES believes that the most important question regarding the financing of this scheme is not whether the finance ministry pays immediately. It is whether the policy creates a cost that someone must eventually bear.

Over the last three years, Nigerians have borne incredible hardships — a cost they have gritted their collective teeth through as the price for the Tinubu government’s attempts at correcting the nation’s past spendthrift ways. To reverse course midstream would be an act of cynicism even more difficult to explain and/or justify than swapping the rubric “price modulation” for “subsidy,” while reinstalling all of yesterday’s discredited arrangements.

At the same time, if the test of the appropriateness of government’s policy responses is whether they deepen rather than dilute the institutional foundations of reform, then the distinction between subsidy and price modulation might not be the one that matters. What will matter is whether this policy produces reliable fuel supply at economically sustainable prices, without transferring hidden costs to taxpayers, suppliers, or future governments.

As with the related test of ensuring that deregulation works in a market where domestic refining capacity is uneven, the national oil company’s refineries do not work, crude supply is constrained, and a single private refinery has become strategically important, the honourable finance minister will clearly need another briefing to reassure the markets and the citizenry.