The Problem of Oil Subsidy in Nigeria: Negative and Positive Effects, Prevention, and Cure -By Nwaoboshi Reynold Nwanze

Introduction

Nigeria, as one of the largest oil-producing countries in Africa, heavily relies on its oil industry for economic growth and development. However, the issue of oil subsidy has plagued the nation for decades, leading to both negative and positive effects on the economy, society, and the environment.

This article aims to explore the history of oil subsidy in Nigeria, its adverse consequences, the few positive impacts it has had, and potential prevention and cure measures.

History of Oil Subsidy in Nigeria

The practice of oil subsidy in Nigeria dates back to the 1970s when the government introduced it as a means to provide affordable petroleum products to its citizens. Initially, the subsidy was intended to cushion the impact of rising global oil prices on the local population. They were first introduced in Nigeria in the 1970s as a response to the oil price shock in 1973. However, despite numerous attempts at reform, Nigeria has never successfully removed gasoline subsidies, in large part due to strong popular opposition to reform. The history of the fuel subsidy in Nigeria dates back to April 1992 when Ibrahim Babangida government raised the price of a liter of fuel from 15. 3 kobo to 20 kobo. He did it again on March 31 1986, from 20k to 39. 5k, on April 10 1988, from 39. 5k to 42k. On January 1, 1989, he increased the price from 42k to 60k
It began with the government routinely selling petrol to Nigerians at below cost to minimise the impact of rising global oil prices on Nigerians.
It has also been shown that fuel subsidy removal in Nigeria could cause inflation and reduce economic welfare (Adenikinju, 2009); hurt economic growth and reduce household income (Ocheni, 2015); and make firms less competitive (Bazilian and Onyeji, 2012).
However, over time, the system became plagued with corruption, mismanagement, and inefficiencies.

Negative Effects of Oil Subsidy

Economic Burden: The oil subsidy program has become a significant drain on Nigeria’s economy. The government spends a substantial portion of its budget on subsidizing petroleum products, diverting funds that could be allocated to critical sectors such as education, healthcare, and infrastructure development.

Corruption and Mismanagement: The subsidy system has been marred by corruption, with reports of fraudulent claims, smuggling, and diversion of subsidized products for personal gains. This has resulted in significant revenue losses for the government.

Positive effects of crude oil subsidy in Nigeria

Reduced fuel prices: Subsidies on crude oil help to keep fuel prices low, making it more affordable for the general population. This can alleviate financial burdens for households and businesses.

Economic growth: Lower fuel prices resulting from subsidies can stimulate economic growth by reducing production costs for businesses, which may lead to increased investment, job creation, and overall economic activity.

Poverty reduction: Subsidies help to ensure affordable access to energy, which is essential for household activities and productive sectors such as agriculture, manufacturing, and transportation. This can contribute to poverty reduction by enabling people to meet their basic needs and access employment opportunities.

It Is important to note that the effects of crude oil subsidies are complex and depend on various factors such as the specific subsidy design, policy implementation, and broader economic context.

In order to possibly prevent crude oil subsidies in Nigeria, the following measures can be considered:

Economic diversification: Invest in alternative sectors and promote the development of industries beyond oil. This can reduce the country’s heavy reliance on oil revenues and create a more sustainable economic base.

Energy sector reforms: Implement comprehensive energy sector reforms to promote efficiency, encourage private investment, and foster competition. This can help reduce the need for subsidies by creating a more market-oriented and self-sustaining energy sector.

Price liberalization: Gradually phase out subsidies and allow fuel prices to be determined by market forces. This can encourage more efficient usage of energy resources, reduce wastage, and create a level playing field for all market players.

Targeted social safety nets: Rather than subsidizing fuel for the entire population, identify and target vulnerable and low-income groups with specific social safety net programs. This approach can ensure that those who genuinely need assistance receive support while reducing the overall burden of subsidies.

Transparency and accountability: Improve transparency and accountability in the management of oil resources and subsidy payments. This can help mitigate corruption and prevent the diversion of funds intended for subsidies.

Invest in renewable energy: Allocate resources towards the development and adoption of renewable energy sources. This can decrease reliance on fossil fuels, reduce environmental impact, and create opportunities for long-term sustainable energy solutions.

Public awareness and education: Increase public awareness about the impact of subsidies on the economy, environment, and overall development. Educate citizens on the benefits of alternative energy sources and the potential long-term costs associated with continuing crude oil subsidies.

It is important to note that phasing out subsidies can be a complex process that requires careful planning, stakeholder engagement, and consideration of potential social implications. It should be done gradually and accompanied by appropriate mitigation measures to minimize any negative effects on vulnerable groups.

NWAOBOSHI REYNOLD NWANZE
A Law Student of Delta State University.