No More Fuel Subsidy, Now What? (Part Two)

Part 2: The Solution

Jun 23, 2023

In the part one of this article, I addressed some of the most common solutions proposed by Nigerians across the intellectual and political spectrum to solve the issue of high fuel, transportation, and other commodity prices, that have become the new normal since the President announced the imminent end to the payment of subsidies for petroleum products. I pointed out how their proposals would not only fail to achieve the intended goals, but will also do significant harm. In this article. I will present the solution(s), that I believe will solve the problems. This article will be of greater benefit to those who have read and understood the arguments made in the first part.

Click here to read part one

Introduction

The problem of high commodity prices – like every other problem – can only be solved by fully understanding the nature of the problem, and in doing this, one has the best chance at finding a solution. I am of the opinion that those whose ideas I argued against in part one of this article failed to take this most important step. They did not even go as far as accurately diagnosing the problem, and as a result, they offered solutions to non-existent problems. Let it be known that I do not in any way think myself intellectually superior to those who offered the flawed suggestions. There are many whose ideas I criticized, who I consider to be more intelligent than I, and I believe that if they had accurately diagnosed the true problem as I did, they would have offered solutions similar to mine.

What is the Problem?

Simply put, the problem is the high price of fuel. It sounds pedestrian and perhaps a bit patronizing, but that is it. The problem is the high price of fuel. The reader might think to himself: “of course it’s high fuel prices that the problem, everyone knows that”. However, when you look at the solutions offered, you see that those who offered them do not really understand that this is the problem, and are instead offering solutions to other problems.

Looking at the solutions refuted in the part one of this article, it becomes apparent that the problem was misdiagnosed. The solutions offered and why they are a misdiagnosis are presented as follows:

Minimum wage increases

For the first solution, it is apparent that people still think the problem is low wages, and are moved to suggest that wages be increased. They believe that were wages higher, the effect of the high fuel prices would be less felt. However, they fail to see things from the perspective of the producer. The minimum wage increase they think is a gain for the worker (i.e., the consumer), is loss for the employer (i.e., producer). There are other factors of production besides labour. Labour is just one factor to the producer. Land and capital are the other factors that a producer considers; therefore, insisting that wages (i.e., labour cost) be increased, when fuel prices (capital cost) rise, is just as incoherent as saying to a producer that the solution to high labour cost is to increase the price of land, or other productive factors. Those who argue for a minimum wage are saying that since one factor cost has risen (fuel), therefore, another factor cost should also rise (labour). This would come back to haunt the labourer, when the day’s work has ended, and he goes to spend as a consumer. He will now have to pay for more expensive products. He called for the increase in labour, and will pay for this increase by paying more for the products he consumes. What good does it do a man, if he earns a higher salary, but has to pay more for not only fuel (the proposed reason for his salary increase), but also for rice, bread, rent, school fees etc? At best, you would have left the man in the same state as before the minimum wage increase; worse still (assuming the minimum wage increase was ridiculously high), you would have made his condition worse than before the minimum wage increase.

Welfare programmes

The reasoning of those who made the error of thinking of low wages as the problem is no different those who call for welfare programmes. Like those in the earlier category, they believe that a shortage in personal income is the problem, and as I have explained, that is incorrect. Part one of this article explains why those who called for welfare programmes are wrong to do so

Infrastructural investments and transportation subsidies

The fact that people call for better roads, bridges, rail lines, subsidized trains, and buses, shows that they have also sidestepped the real problem (i.e., high fuel prices), and are calling – not for ways to lower fuel prices – but for more wasteful infrastructural spending.

Solving the Problem of High Fuel Prices

All the solutions offered cost everyone more through higher taxes, higher commodity prices, lower product quality, increased workload, and job loss, all because they ignored the real problem. The goal should be how to lower prices of fuel without passing the cost on to anyone else.

Increasing the Supply of Fuel

Since the problem is high fuel prices, the solution should not be to make everything else more expensive, but to reduce fuel price. That being said, there are two ways to reduce the fuel price.

1. The destructive government way, which is to subsidize it (I believe there is no need to explain why this is not the solution)

2. The market way, which is to increase the supply of fuel.

It is Econ 101 that supply decreases cause prices to rise, and supply increases cause prices to decline. It is really that simple. Increase the supply of fuel, and the price will go down.

How to Increase Supply

Due to high prices, there has been no time better than now in Nigeria’s history to be a fuel supplier. The prices are at an all-time high, and are projected to rise still. There is ample profit to be made, yet, strangely, we do not see new refineries popping up at every street corner to refine petrol so as to maximize profits. This is so because there are government (foreign and domestic) installed obstacles in the way of those who would want to cash in on this opportunity. Here is what must be done if we desire to see an increased supply, and the falling prices that will most certainly accompany it.

1. Remove Regulatory bodies with their Endless Regulations

I am uncertain of the exact cost of obtaining a license to refine petroleum in Nigeria, but I am certain, that costs of licensing and regulations are nigh endless. However, if the goal is increased supply let any and everyone (including but not limited to small and medium scale refiners) who wishes to refine fuel do so without having to pay any licensing fees, and without restrictions on how much to produce, what prices to sell, to whom to sell etc. This will literally make Nigeria the easiest place to refine petroleum in the world. This will trigger the establishment of small and medium scale refineries in every corner of the oil producing parts of Nigeria, and anywhere in the world where producers have difficulty with regulations, you can be sure that Nigeria would be their choice of destination for production.

2. Cut Taxes

Nigeria currently has a 30% corporate tax, a 24% income tax, a 7.5% value added tax, a 5% consumption tax, and very many other taxes that eat into the profits of those who would invest in fuel production. I recommend, that if the government is serious about seeing lower fuel prices, they cut taxes, or altogether suspend all the taxes (by whatever name) for all who wish to refine petroleum.

If taxes are cut, or suspended (hopefully forever), then Nigeria automatically becomes the cheapest place in the world to refine petroleum. This will cause foreign investors to rightly reason that Nigeria is the only place on earth where you get to keep most, or all of your money, if you refine fuel.

Doing this will flood Nigeria with cheap fuel, and drive down the prices.

3. Stop Inflation

As explained in an earlier article titled: “Pure Bliss No Longer Tastes Good - Blame the CBN”, inflation is central bank policy not something that just happens. Inflation occurs when the central bank – through intentionally complicated means –creates money. Rising prices are just one of many destructive symptoms of this money creation (i.e., inflation).

Stopping the CBN from expanding money and credit will guarantee that the price level remains where it is, and begin to decline after some time. This means that the Naira (i.e., the Nigerian currency) will become more valuable over time. Although this is not required to increase the supply of fuel, it will be a mouth watering bonus for investors – as whatever money they make in Nigeria gets to keep, and eventually increase its value over long periods of time. Also, seeing as a general rise in prices (i.e., what is incorrectly defined as inflation) is a direct consequence of money supply increase, keeping the money supply fixed would help fuel prices drop faster.

Possible Objection to this Suggestion

Raw Material Cost

Some might argue saying this suggestion may not be as effective as advertised, as the raw material required to produce refined petrol (i.e., crude oil) is expensive, and would add to the cost of the finished product. The solution to this is easy:

OPEC gives its member states a daily production quota (an international REGULATION). According to the ridiculous agreement, Nigeria, and other OPEC states must not exceed their daily quota. This simply means that crude oil prices are actually artificially high. If there were no quotas, countries would be free to produce as much as they could, and the prices would plummet. We saw this in 2014 – 2016, when the US, Iraq, and Libya (among others) increased oil production, causing prices to drop[1] dramatically.

If the same policies I suggested are applied to crude oil, the supply would greatly increase, causing its price to fall, therefore, reducing the cost of the raw material (crude oil). The only obstacle to this is political, and not economic. I will not address the politics of OPEC and global oil prices here, as that would detract from the issue in focus.

There are other possible objections that can be raised, but I will save them for future articles

Conclusion

As I said, the problem is high prices, and the only real solution is to allow the free market to increase the supply, and cause prices to fall. If taxes and regulations are out of the way, and the money supply is fixed, many small and medium scale refineries will be operational in a few months, and by my estimation, if this is done, we will begin to observe significant price falls in about six months.

Thank you for your time

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