A Review of the Nigerian Energy Industry

Deregulation and fuels pricing in rural Nigeria

fuel-subsidy-removal03 December 2013, Sweetcrude, Abuja – Fuels pricing in rural areas follow a different trend because the retail outlets are fewer compared to urban areas; and so the fuel retailers can afford to charge higher prices, due to lesser competition, or outright collusion among the few retailers. This can result in market failure. The customers in these areas are said to operate in a ‘captive market’ depending on the distance the motorists have cover to get to the nearest township (where cheaper fuels could be obtained). Therefore, pricing in rural and remote areas have to be closely monitored by regulatory agencies.

Some commentators have argued that the operations of free market forces should not be impeded for any reason. However, in this case the unfettered operations of market forces will lead to socially and economically undesirable outcomes because higher fuel prices in rural / remote areas will increase the cost of living in those locations and some of the effects could be rural-urban migration; abandonment of agricultural, fishing and mining activities; low levels of investment in economic activities in rural areas, crimes, etc.

Exceptional market conditions such as acute and sudden shortages in the supply of goods and services whose demand is price inelastic or sudden hikes in prices of such goods (e.g. petroleum product) have often led to calls for regulation. In this case, the social consequences of allowing the free market principles to prevail would be unacceptable in distributional terms. So, government intervention is justified on grounds of market failure. Therefore, policymakers have to predict the pricing and distributional consequences of proposed measures and design a form of regulation that would lead to outcomes consistent with the overall public interest. Some other commentators agree that the achievement of ‘social justice’ represent a higher value than the protection of free markets, since markets are basically instruments that have to be assessed by their effects on society.

The notion of ‘territorial justice’ provides another basis for ‘regulation in the public interest’ (i.e. social regulation). This notion suggests some equalization or redistribution of resources between regions, which can be achieved typically by financing or subsidizing services from the Central Fund. For instance, the Petroleum Equalization Fund (PEF) was set up as a Nigerian Government Agency to redistribute petroleum products between the southern and northern parts of Nigeria, and to equalize fuel prices. In a deregulated downstream petroleum regime, PEF and the Petroleum Products Pricing and Regulatory Agency (PPPRA) in Nigeria will have to play an increasing role in addressing the rural-urban fuel price differential.

The rural-urban fuel price differential is one of the manifestations of unacceptable distributional outcomes when free market forces are fully in play. The use of subsidy schemes for fuels has been a popular tool for governments all over the world in addressing the special needs of rural and remote populations. The vulnerability of such population groupings to probable predatory pricing practices from established fuel supplies or limited competition among the few fuel retailers in such locations has encouraged the design of policy instruments to counteract fuel pricing problems in such locations and the attendant high cost of rural living.

From an economic stand-point, subsidies are thought to distort competition depending on the absolute size of the subsidy as well as its size relative to the cost of the activity being subsidized. Provision of subsidy is not entirely a bad thing, depending on the goal behind it. Subsidies are regarded as an important policy tool for promoting business development and for addressing social problems and market failures. Economic policy provides five main justifications for subsidies, as follows: growth promotion, income re-distribution, correction of externalities, provision of special goods, and for increasing economic returns. Subsidies could be classified into two categories based on purpose, such as ‘resource allocation purpose’ (e.g. for externality correction, reducing costs, etc) and distributional purpose (e.g. addressing regional inequalities, income redistribution, etc). However, there are six main instruments for effecting subsidies, such as direct cash transfers; tax concessions; provision of cheap credit; regulatory subsidies (where government uses regulatory instruments to subsidize particular groups; ‘benefit-in-kind’ subsidies (where sales by State-owned companies are made at lower-than-market prices); and purchase subsidies (where government makes purchases at higher-than-market prices).

Even the industrialized and developed countries have recognized this challenge of fuel pricing problems in rural / remote locations and the need to address it. It is important for the Nigerian Government to recognize that this challenge will arise in rural locations under a deregulated fuel price regime, and to study how the advanced economies have dealt with it. For instance, countries like Australia introduced the Petroleum Product Fuels Subsidy Scheme (PPFSS) under the State Grants (Petroleum Products) Act since 1965 targeted at reducing pump price of petroleum products in rural and remote areas. 21% of all State Grants in the UK is directed at rural development. Also, the European Union guidelines on State Aid also provides that aid may be granted by its Member States where there are serious economic, social, geological, or environmental problems; to promote the development of areas where the per capital income levels are low, or where there is serious unemployment; or to facilitate the development of certain economic activities or of certain economic areas, provided the aid does not affect trading between Member States.
*Dr Chijioke Nwaozuzu, a petroleum expert wrote from Abuja. Email: cnwaozuzu@gmail.com. Tel: 070 6874 3617 (SMS Only)

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