Subsidies are not the solution to the oil crisis

Government intervention in the form of subsidy carries enormous dangers if not managed properly

The Russia-Ukraine war and the attendant sanctions that have targeted Russia have spiked fuel costs globally, and Africans are also feeling the pinch in their pockets. However, government intervention in the form of subsidy carries enormous dangers if not managed properly, as Nigeria’s experience shows.

Countries like Uganda, Ghana and South Africa have seen fuel prices rise since the war started in March 2022. This has not been the case in Nigeria where, save for the perennial unavailability of the product, prices have remained stable since the war started. This is not because of Nigeria’s oil riches. All of Nigeria’s three state-run refineries are largely moribund, forcing the country to rely on importing refined fuel like non-oil producing countries. The prices have remained stable because of an expensive fuel subsidy regime.

Subsidies as an interventionist tool are not in themselves bad, and where used correctly can cushion price impacts on the population. One compelling argument for fuel subsidy is that higher prices impact people’s income and might lead to inflation, especially in countries where commerce (especially agricultural produce) is done by road transport and commuters/traders would have to bear any additional costs that higher prices might lead to. In Accra, Lagos, Nairobi and Addis Ababa, the provision of subsidized state-backed mass transport facilities is likely to benefit more people in real terms and have more impact than subsidizing fuel that mostly benefits the rich and those in urban areas. An investment in subsidized public transportation, either directly in reduced fares or in infrastructure such as the provision of vehicles to transporters, will directly impact the people that need such a subsidy.

But the biggest argument against a fuel subsidy regime, from Nigeria’s experience, is the massive corruption that it can breed over time, making few people super wealthy rather than collectively improving the lives of all. For instance, investigations in 2012 when the government of President Goodluck Jonathan attempted to remove the subsidy on imported fuel opened a can of worms into a fantastically corrupt system. The investigations revealed that Nigeria’s middlemen oil importers and smugglers were milking the system of billions in kickbacks and making a killing by diverting subsidized petrol to unregulated markets.

Some of the countries bordering Nigeria (such as Benin, Togo, Chad and Cameroon) do not subsidize fuel, meaning that the price of the product is higher in such places. Fuel tankers laden with products subsidised by the Nigerian government are diverted to these countries and even as far as Mali, where the product is sold at market value with the marketer pocketing the difference, which runs into millions of naira.

This discovery has however done little to discourage the practice and Nigerian authorities have imposed measures such as shutting down filling stations in border towns, which they accused of being part of the racketeering scheme.

This tactic by dubious oil marketers of diverting fuel from countries where they are subsidized to markets where they can sell unregulated has also been reported in Kenya – perhaps taken out of Nigeria’s book – where four major oil marketers were accused of economic sabotage for diverting some of their stock to neighbouring countries.

Kenyans have paid oil marketing firms KSh 49bn from a stabilization fund that was created in 2021 to cushion the effect of high fuel prices but this has not ensured a free flow of the product as there also have been scarcity issues similar to those observed in Nigeria. Hence, while subsidized fuel is often touted as targeted at vulnerable populations, in Nigeria’s case it has disproportionately benefited the rich.

Fuel subsidy is also addictive and that is the danger for countries currently mulling the idea of subsidized fuel in the face of present realities. The longer subsidies exist, the more entrenched the opposition to remove them. Indeed, while subsidies are thought of by governments as interim measures soon to be lifted “when things return to normal”, the Nigerian experience shows that things really never return to normal. In oil-exporting countries, the task of removing subsidies has proven even more challenging because it is difficult to convey to the public, who see it as their share of the commonwealth. The last time an attempt was made to remove fuel subsidy in 2012, nationwide protests swept through the country despite the government holding several town-hall meetings to point out the dangers of diverting funds from other critical sectors into paying for cheap fuel. In countries with lean resources, the opportunity cost of subsidized fuel comes at the detriment of other critical sectors of society. As is currently the case in Nigeria, countries end up paying more for fuel than they do for education and health, for instance.

In Nigeria, subsidy removal has become a political issue to be used during electioneering but no government has been able to stop it. If anyone had told Nigerian authorities that they would be subsidising fuel decades after it was proposed as a short-term measure in the early 1990s, they would have dismissed it. Since then, every attempt by the government to remove it has been met by protests and outrage from the public.

Again, the volatility of the oil industry means that prices will often fluctuate. For how long would governments adjust to the market’s mercurial nature rather than allow the laws of economics to play out remains uncertain.  Moreover, no one, except the belligerents, knows when the conflict in Europe will end or when the sanctions regime against Russia, a major oil producer, will be lifted. Thus, the chances are that a quick-fix subsidy payment might turn into years and even decades of diverting public funds to keep the price of fuel affordable, making it even more evident that there are no short-term solutions for the predicaments we face today. Perhaps, now is the time for Africa to invest in key infrastructure around public transportation and for oil-producing countries to build functional refineries. This would, without a doubt, reduce the effects of costly fuel on a large number of people.

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