VENTURES AFRICA – Oil prices might have fallen over 40 percent in the last year, but that hasn’t stopped Nigeria, Africa’s biggest crude producer, from spending more to subsidize local consumption of fuel.
Oil has experienced a sharp price plunge since it peaked at around $110 in January 2014. Since then, oversupply, market speculations and shale activities within North America gathered forces to fuel one of the biggest crises in history, with oil hitting an all-time low of $43 per barrel. Though prices have rebounded to a high of $62 this week.
While oil producing nations like Venezuela and Russia had long being a state of panic, consumers, who either pay a fortune for heat in Europe or spend a ton of cash to ride their cars everyday are have been thrown into period of jubilation. industries have also benefited immensely from this crash. “A 10 percent fall in oil prices should lead to a 0.1 percent increase in economic output,” a group of analysts told the BBC when discussing Europe’s new found blessing.
Down in Africa, Nigerians could be forgiven expecting to enjoy a similar slice of good fortune as several African countries like Tanzania, Senegal, Malawi and Algeria, had announced a drop in official fuel prices. And that eventually came on January 18, 2015, when the government announced a N10 reduction in fuel prices to N87, from a previous N97. This was greeted was sheer joy and excitement as commuters will not only pay less for transportation, but prices of goods will be shielded from inflation, given that the naira is suffering a similar free fall.
However, beyond the public jubilations lay a worrying development; not only is Nigeria still subsidizing fuel, it is now spending more to do this. When it made the January 18th announcement, it was revealed that subsidy per litre of gas was N10. That figure has swollen to about N15 this week. A more staggering statistic from Petroleum Products Pricing Regulatory Agency (PPPRA) shows that the country is spending N632 million ($3.19 million) everyday to provide 40 million litres of cheaper gas for its citizens.
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Many have kicked against this strategy, suggesting rather that a complete removal of the subsidy is ideal. This, according to their argument, would have minimal impact on the economy and will save the government unnecessary spending in the coming years.
The argument is solid. With the changing global landscape for oil – Shale vs Sheikhs – and the lingering instability locally, the country could do itself a world of good by shaking off recurrent expenditures, particularly that of oil subsidization which has the potential to always become bloated.
While prices may have experienced a rebound, a result of Shale production cutbacks, the U.S., the world’s biggest consumer of oil, has already exceeded 70 percent of its targeted demand to become self-sufficient. British Petroleum has even gone on to suggest that it could become a net exporter of oil pretty soon. This will greatly alter the playing field for oil producing nations. Already, its singular act of cutting oil imports, notably from Nigeria, and raising Shale production fuelled the current oil crisis that has ravaged the economies of Nigeria and Russia, plunging their currencies into some of their worst annual performances in history. Though Nigeria has found refuge in buyers from Asia (India is now its biggest customer), the signs are on the wall that a conservative spend, and a subsidy-free payment slip is better for the African economic powerhouse.
For a country that has trimmed its 2015 budget in the face of dwindling oil prices and is set to pass a budget with 92 percent of its expenditure going into payment of recurrent bills, a swelling subsidy payout could also force an unwanted visit to the IMF or World Bank.