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Fuel Subsidy Debate: The Ruse and Other issues

By on September 22, 2011

Fuel subsidy debates, an emotive discuss will continue to rip apart our socio-political fabric especially with growing energy prices.  Recently, government officials has put the amount at N500 billion, it is said to be twice the cost under former President Obasanjo.  With elections gone, President Goodluck Jonathan is purported to warn that he will increase the price of fuel on grounds of deregulation.

The argument thus: doesn’t restricting subsidized fuel use demand that we put in place an effective system to distinguish between the poor and the not-so-poor? The case of Indonesia points to the fact that restricting this subsidy with banners in filling stations as “Subsidized fuel is only for the poor” has only led to a big ruse. Some luxurious car owners were sighted queuing to buy subsidise fuel while no officials seem to bother to ask the owners of those cars to purchase non-subsidized fuel.

Second, doesn’t the clamouring for increase fuel prices demand the most efficient option, which is the need for some considerations to be taken? The government must ensure that they have compensation schemes to effectively target the poor.

As a matter of fact, Indonesia has shown the way in understanding effective targeting. She promotes a community-based targeting as a good alternative to income-tested targeting in terms of gaining satisfaction and legitimacy. Their study reveals little evidence of local elites using public resources for their advantages as a result of this.

Third, doesn’t’ increase in fuel prices also require socialisation by the government? We might not have main elections around the corner except for few state elections but the fear of social tensions as a reaction to increased fuel prices has always been a concern. The fragile security gives credence to this.

Fourth, it is argued that a gradual increase is justified and holds a better result. It is said to reduce the budget strain and environmental abuses. Subsidy removal as demanded will lead to a better environment. This was buttressed by Mrs. Diezani Alison-Madueke, Minister of Petroleum Resources, where she said that loss due to fuel subsidy is unacceptable and that it was hampering private sector investment in the downstream sector, and that domestic refining was improving and could be nearing one million barrels per day.

Contrarily, it would seem that the issue of removing subsidy is the best card to play by subsequent government as in case of cash shortage. With state government crying that they wouldn’t be able to the legal minimum wage of N18, 000, except alleged fuel subsidy was cancelled, we wonder aloud, what becomes the lot of masses-consumers in an economy battered by the global financial meltdown, without a stimulus plan but cruel fuel subsidy removal.

Globally, there is a strong push for an end to subsidizing of fossil fuel with industry officials saying the idea did not make sense and would hurt U.S. energy security while environmentalists cheered the idea as a constructive use of free markets. While US fuel subsidies ($10b annually) persist, it is reported that the biggest energy subsidies in non-OECD countries are in China, India, Brazil and Russia, according to the OECD. Twenty of the largest non-OECD countries spend more than $400 million in fossil fuel subsidies. For these countries, it is of strategic interest even with better infrastructures compared to ours which comatose state and most cases just absent.

Importantly, why government haven’t shown with its figures the components that constitute the price of a litre, it is difficult not to buy the argument that with current prices we are not subsidizing anything. Government energy plans haven’t left their papers and refineries aren’t snorting.

Succinctly, subsidies are either on the production side (making the cost of production cheaper), or the consumption side (making the price of fuel cheaper to the consumer). For the industrialized world, we generally have production subsidies, which also serve as corporate welfare to the oil and coal industry who return the favor with lavish campaign contributions.  But in the developing world, consumption subsidies, which make access to energy and transport affordable in developing countries.

In all, as the debates hot up, we cannot watch the base (masses/consumers) of our economy decay chunk by chunk. Eliminating consumption subsidies is not the place to start leveling the playing field for clean energy or boosting development; it’s likely to provoke a repercussion and ensuring gridlock especially with increasing energy prices. The onus is on government to find ways to subsidize production. We advise the government to kill its policy of befuddlement and come clean with the component cost involved. Deregulation can only lead to even higher prices and inflation of virtually every commodity; as we have seen subsequent government in the past failed woefully in their promises to cushion the impact.