THE IMPACT OF PETROLEUM SUBSIDY ON THE CONSUMPTION OF PETROLEUM PRODUCTS IN NIGERIA

THE IMPACT OF PETROLEUM SUBSIDY ON THE CONSUMPTION OF PETROLEUM PRODUCTS IN NIGERIA

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CHAPTER ONE

INTRODUCTION

Petroleum subsidy is one of the most passionate and controversial issue of the Nigeria‘s petroleum industry irrespective of the technical, economic, political aspects and implementation of politics adhering to one pricing system or another would largely hygiene the ultimate pattern of cost and profit sharing of the two major parties concern that is the producer (NNPC) and the consumers.

The momentum generated by the exploitation and exploration of oil has been regarded by many as a "mixed blessing". Nigeria started exploring its petroleum resources in the mid 60's, however, it was until the early 70's that large scale production was realized in Nigeria and by May 1970, had entered the league of the largest ten oil producers and by1973, oil accounted for over 80% of our foreign exchange earnings.

The presence of petroleum and the greater spending power which followed has no doubt acted as a catalyst in Nigeria‘s economic development constraints-finance. Consequently, however, it has given rise to the planning executive and completion of some worthwhile project and has given a stronger "twice" to Nigeria in international politics.

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The oil arrival created its own problems, given Nigeria‘s absorptive capacity conceived in its widest context. There have been adjustments. However, not only has the petroleum power created illusion in the economy, it has given impetus to false hope. Many policy decisions were not given through thought since finances was not a constraint.

The consequences of FESTAC and UDORJI award are still with us. The enormous financial power also led to the federal government over extending its activities and responsibilities resulting largely to waste and inefficiency.

Petroleum subsidy has been removed several times in the past years beginning from 1980 to present, because of the drastic reduction in the government revenue as a result of oil glut in 1981 and the attendant austerity situation, also because of the loans collected from the international monetary fund (IMF). This is to enable the country to meet up with its foreign debts. In 1986 the federal government removed 80% of the subsidy on the price of petroleum products. The second tier foreign exchange marked (SFEM) and its successor foreign exchange market (FEM) inflated the remaining 20% subsidy to nearly (100%) because of the decline value of naira via-a-vis the us dollar.

The federal ministries of information disclosed sometime in 1987 that government would save or gain more than #6 billion per annum in revenues if

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petroleum products were correctly priced. He analyzed that the cost of producing one barrel of petrol was #110.79. It was sold locally for #35.48 and showed a loss of #75.79. It was the intention of government to stop this loss, but the percentage of subsidy removed will be such that people will suffer undue hardship. It was contended that the removal would generate additional revenue to the government. It would also conserve petroleum products for export and so earn additional foreign exchange.

More so, the heavy subsidy of petroleum products contributed to the lopsided development of the Nigeria energy system. It was also inferred that the extra #6 billion could be used to support the economy and provide social amenities.

Currently the objective of subsidizing, that is to aid the poor- stabilize prices, promote economic growth which have not been achieved rather NNPC resorted to massive importation of products to stem the scarcity. The short fall between the landed cost of imported products and their selling prices are also the subsidy claim by NNPC. This so called subsidy can be justified for now and until such a time that the power supply situation in the country improves to the extent that it enables the ordinary Nigerian to work hard enough to raise his income level to a level absorb future increase in petroleum products, and until

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there is an acceptable level of infrastructural development to cushion the impact of increased cost of petroleum products.

It is self-evident that as at the year 2000 there is no subsidy removal or whatsoever on Petroleum products in Nigeria. Indeed, from current cost of refining at $10 per barrel sold to the NNPC refineries, the price of petrol (PMS) should be #15 per liter as against the pump price of #22 per liter. Thus the current price of PMS includes sufficient government task indicating that no subsidy exists on the current product prices.

More so, when the naira hopefully recovers its lost grounds, a new (reversed) twist may be given for the problem of petroleum subsidizes. It goes to show that whatever the action the government may take on petroleum between 2000 and the year 2003, it probably will not be the last word on the matter

1.1  BACKGROUND OF THE STUDY

Nigeria is one of the major sources of crude oil in the world. The importance of petroleum to Nigeria can only be appreciated when one realizes the dominant role it plays in our economy. Petroleum products and export is the main stay of the Nigerian economy providing almost 90% of our export earning locally petroleum products are used as major sources of energy for the industry.

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Petroleum is an international commodity, which is highly politicized since variation is supply of the commodity has been known to cause ripples in the international commodity is evident for the cartel cliché that exist to bring about a measure of control in the supply price marketing of petroleum. Petroleum prices are based on the dollar currency.

It has been believed in the past that Nigeria stood ready and in fact subsidized petroleum products. This accounted for low prices of petroleum products. this accounted for low prices of petroleum products in Nigeria and comparative prices obtained in other countries their oil glut which had affected the Nigerian economy adversely has caused the country to reduce the subsidy on petroleum products. Of later Nigeria has sought assistance from world international financial institution.

The aid has required that the nation reduce or reduce or remove entirely subsidy on petroleum products before any assistance can materialized Thus, so that the country can earn more income to solve its debt problems.

The dollar removal of subsidy and thus, increase in local prices of petroleum products has generated a lot of attention lately. All this reduced us to delve into the study of the economies petroleum subsidies in Nigeria

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1.2     STATEMENT OF THE RESEARCH PROBLEM

During the national debate on the international monetary fund (IMF) loan, in 1985, most Nigerians oppose to the withdrawal of the so-called government subsidy on petroleum products in Nigeria, which was part of the (IMF) conditionality‘s. But the military government rejected the loan; it went along in 1986 to remove 80% of the subsidy. While the economy was still battling with the inflationary consequences of this, the second-tier foreign exchange market (SFEM) was introduced.

In addition to refueling inflation, SFEM introduced other distortions in the economy. One of such distortion is the pricing of petroleum products in Nigeria. Therefore, the need to review the domestic price of petroleum products has become necessary for the following problems.

1.2.1 The domestic price of local products is well below what operates in other countries including our neighboring countries. This low price level, for petroleum products has tended to encourage the usage of products as amply demonstrated in the growth pattern, which is not explainable on the rate of industrial growth of the country. Furthermore, this price differential has encouraged active trafficking in products across our borders and shores. The

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result is that government is subsidizing a much larger population in respect of petroleum products.

1.2.2. The creation of distortions in the consumption of petroleum product. Subsidy discourages consumers (especially the private sector of the economy) from being cost conscious.


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