Wednesday, January 25, 2012

The other side of Oil Economy - Nigerian Protests

Lagos Island and part of Lagos Harbour - Nigeria
If we had some oil and gas!!! A thought which may came to the minds of millions of people living in the countries deprived of oil and gas (and subjected to oil shocks). Tensions in Middle East – which will happen constantly – used to give sleepless nights to the governments. A sober condition, if government absorbs the shock the deficit will balloon beyond any control; if they pass it to the common people, law makers will see the protesters on streets in the next day. In both cases foreign reserve will evaporate quickly.

But what’s the situation in oil economies. Let’s take the case of African oil giant Nigeria where the protesters are in streets opposing the recently doubled price of oil (from 65 Naira (0.4$) to 97 Naira (0.6$)). It’s another matter that, after facing severe protests in the streets government reduced the price by 30%. If I can put it in official way “given the hardships being suffered by Nigerians, and after due consideration and consultations with state governors and the leadership of the National Assembly, government has approved the reduction of the pump price of petrol to 97 naira (about $0.60) per litre". But what Nigerians think about their oil assets, I just went through the opinions expressed by people in various newspapers.  A number of them are given below,
Nigeria, like most of Africa does not produce anything itself, it is just luck that Nigeria has a commodity that the world wants, when that changes what will Nigeria do then?

...citizens are divided between the very few rich and the very many poor. It’s only thru the fuel subsidy that the poor feels the government. Citizens generate their own electricity and water. We don't have roads and educational facilities. The rich man's children are abroad.

Government through a public/private partnership should first provide steady electricity, good roads and clean water supply before asking Nigerians to make more sacrifice. Politicians should cut their salary and perks.

You have no idea what is like for the ordinary Nigerian! There is no cheap public transport system. The public is transported to work in the majority of states by a taxi system [OKADAS] which are small motor bikes, what do you think they consume? Water? This is why people are protesting, their cost of living has doubled but their wages remain the same, how would you survive?

The Petroleum Products Pricing Agency and the cabals that import petrol in a nation that exports 2M barrels of crude oil/ day, without functioning refinery. A senator's take home pay is $135,000/month.

Petrol subsidies are damaging for the environment, damaging for the Nigeria's economy, and are a subsidy for car owners paid by all - in effect a subsidy for the relatively well off.
The problems are manifold. Even though Nigeria is a major oil producer she doesn’t have a decent refinery to refine the crude to fuel. The result is, Nigeria imports oil for its domestic purpose - an unnecessary expenditure for a long term oil producer. Another constant complain among people is, Petro dollars flowing in to the country is not making its impact on critical infrastructure because of this people need to have oil running their diesel generators.

IMF was pushing for reducing the subsidy on oil for long time. According to Nigerian authorities subsidy was costing an equivalent of $8bn a year. They claim that this money can better spend in infrastructure and social services. An argument, administration was unable to sell to the people. Government claims that the advantage of low price for oil is going to the wholesalers, who in turn sell the subsidized fuel in neighbouring countries at full price.

Let’s consider the first case.

IMF is right, subsidized oil is creating a big hole in government's finances. But the question is what is exactly by subsidy? In the case of India, Korea, China, Germany etc, we can say that government should reduce the subsidy as these countries are buying oil from external market for full price. If government gives heavy subsidies for this imported oil, it will not take much time for the administration to find them in deep financial crisis. But in Nigeria’s case, it has the oil – in fact a plenty of oil. Why Nigerians need to pay heavy price for an item which is so abundant in their country?

It is altogether another matter that Nigeria is importing an 85% of fuel it needed from international markets because of the absence of something called a decent refinery. This is administrations problem, after all it was an oil exporter for a long time. So basically the people need to pay for the inefficiency of their administration. Same is the case with many other petro dollar economies; these countries have resources but lack the refining capacity. So in the end of the day they needs to import oil even for basic needs - the same oil they export will come back in the form of fuel but with higher prices.

What is happening to the amount countries are earning through oil export? Well, there is an excellent economic term defining it - oil curse. If Nigeria wants to change all these needs to go. Only reforms can save the country. First of its urgent to modernize the oil sector, without adequate refining capacity whatever they earned through selling the crude will evaporate by buying the oil from the foreign markets. At the same time the over-dependence on oil is dangerous, if the price of oil come down the nation will suffer a lot. So the country needs to diversify its income base and develop infrastructure - rail, road, electricity etc to attract foreign and domestic investment.

Now let’s consider the second case.

As far as the wholesalers selling the subsidized fuel on foreign markets is concerned, its government’s job to curb it. That why government’s across the world have departments like Customs, Revenue intelligence, foreign trade board, security forces etc. Another problem is wide spread corruption, people are not ready to believe that additional money coming from the rise of the fuel price will be used to develop infrastructure!!! So curbing corruption is very much important to get confidence of people in government.


Nigeria is changing after government started reforms in 2008 - modernizing banking system, curbing inflation, prospering telecom sector etc. Change is reflecting in the growth rates also. In 2008 economy grew by 6%, in 2009 it grew by 7% and in 2010 the growth rate touched 8.4% - decent rate for an African emerging market. But to sustain the growth government needs to push more reforms, but sensible ones. At the same time people also have to realize that, it will be very much painful to live in the reform years but if their country needs to place themselves on a firm track practices needs to be changed. After all, Nigeria needs to pull out 70% of her population from living below the poverty line.


Photo Courtesy: wikipedia

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