Monday, 28 November 2011

Fuel Subsidies

The removal of fuel subsidies seems to be the topic of choice here in Nigeria at the moment:

On one hand you have a huge drain on scarce national resources, a large portion of which goes directly into the pockets of a bunch of sleazy players through anything from round-tripping (docking the ship and the subsidy, only to take it out again and re-register it for import and another subsidy!) to black market retailing (pocketing the subsidy and withholding the delivery until scarcity drives black market prices up which are then cashed in on).

On the other hand cheap fuel is pretty much the only tangible benefit the man on the street gets from his government. Many of my friends fear a social revolution if its removed. Mark my words, they say; remarks which are echoed by nearly every civil society organization out there - from Unions to the Nigerian Bar Association. Everybody is against it, apparently.

Its a sad state of affairs that the government really provides so little. Maybe it could provide more if it didn't 'chop' all the money itself in the form or reoccurring expense. That is to say - if we do cancel the subsidy, would the government know what to do with the extra cash?

But lets look at it rationally: In reality nobody but the oil lobby actually seeks the continuation of fuel subsidies. They:
  1. Waste an awful lot of money. The IEA and others estimate that USD 409bn were spent directly on consumption subsidies in 2010, not to mention the indirect subsidies such as tax cuts. The American example, and the corresponding support for renewable is beautifully embodied in the graph published by ELI.
  2. Make fuel artificially cheap, which in turns makes the renewable alternatives seem artificially expensive. Thus, they also distract investments into renewables, which would increase if the business opportunity were even more apparent.
  3. Drain a scarce resource. The OECD estimates that if the subsidy were removed by 2020 globally, then the global energy demand would drop 5% and oil demand would drop 4.7mb/d, or around 1/4 of the current US consumption. The IEA estimates even higher drops.
  4. Increase environmental pollution. The OECD estimates that the proposed removal of global subsidies by 2020 would reduce carbon-oxide emissions by 2 gigatons, about 1/15 of total emissions in 2011.
  5. Hardly ever reach the people they are meant to. The IMF estimates that only 1 in every 6 dollars of subsidy reaches the poor, the rest gets lost in sleaze. 
So, lets cut the subsidy and see what happens. Maybe less support from government will actually make it more accountable to the people. Who knows? My guess though is that Nigerians will maintain their resilient nature and battle on through. The original stiff upper lip.  XHK69U9FVEPU

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