THE FUEL SUBSIDY: I stand with Bihari. I stand with labour.

By Jefrey Odigie

I stood with Goodluck Jonathan for the removal of fuel subsidy and I stand now also with Buhari even though with sufficient skepticism. Here is why.

A lot have been said about the removal of fuel subsidy and different interpretations have been forwarded to its implications and consequential effects on the economy and the people. Before going further to look at the effect of the removal, I will quickly try to give an arithmetic explanation of how the new price figure was computed and arrived at by the PPRA and the government.

The factors affecting the price of fuel can be identified to be cost of dollars and the cost of crude oil in the international market add the fixed cost of production, taxes, freight and excise duties.
We can say that the price of fuel is directly proportional to the price of crude oil and the price of dollars.
An increase in any of this two variables will lead to an increase in the price of fuel per litre in Nigeria.
We can represent the above as
mathematical equation to

Fx = Pc + Pd + Z

Fx = price of fuel per litre

Pc = price of crude

Pd = price of dollars.

Z = constant representing cost of refining, freight, tax and duties.

These are relatively constant in comparison to the variables over a long term.

It follows therefore that the price of fuel is directly dependent on the price of crud and the price of obtaining dollars for importation, the exchange rate. This was confirmed recently by the vice president Osibanjo in his address that the fuel increase is due to the change in the price of obtaining dollars as the importers have been told to source their currency from parallel market.
If the cost of dollars increase, the price of fuel, Pms Will increase.

According to the template released by PPPRA on the 2nd of may this year , it stated that fuel arrives Nigeria at a price of 99.37 naira per litre without subsidy. Note without SUBSIDY. With a subsidy 14 naira it is dispensed to the public at 87 naira using the exchange rate of 197 naira to a dollar.

At 197 naira to a dollar, at 40$ to crude oil, without subsidy fuel will sell for 99.37 naira per litre.

If Pc price of crude is constant, then the above equation is only determined by price of dollars.

Fx = kPd. All others constant.

99 == K197

If we now buy dollars at the new rate of black market fixed at 290 by the government, therefore we will expect to buy fuel per litre at:

Fx = ( 99 * 290 ) / 197

= 145.73 naira.

This is the value that has been released by the government as the new price per litre of fuel, PMS.

Fx = 145 naira.

However there's a problem with this estimated figure, that I will tell you.

When fuel marketers besiege the parallel market to source for dollars, pressure will be mounted on it and based on supply/ demand forces the dollar cost will push up and will tend towards increase. This was also confirmed by Aliko Dangote few days ago when he was reported to have said that removal of subsidy will push the exchange rate to as high as 500 naira.

Meanwhile as of today tge government has assumed that the cost of dollars is 290 naira. But we know this is not true, as dollar is well above and at a cost of 350 naira on the average.

I therefore say that the government is not sincere to the people knowing fully well that the importers will not get dollars at the rate of 290 but 350 naira.
Therefore, going back to our formula we can say that on a short notice, we should expect the price of fuel to increase and be sold at :

Using the exchange rate of 350 to a dollar, we have

Fx = (99 * 350) / 197

= 175 naira.

The exact price to expect fuel would be 175 naira per litre.

As of now we can be sure that the fuel is sold at 145, because importers are yet to embark on new order with the dollars sought at 350 naira from the black market. What we have now that they are dispensing is old stock which was suppose to be sold without subsidy at most price of 100 naira per litre.

In a month time from now Nigerians should be prepared to pay as high as 175/ 180 naira per litre for fuel. That is when new arrivals must have been taken delivery at the different stations.

What I have done here is assuming that the price of crude oil in the international market remains at the current price of 45$ average.
What happens when the crude oil price changes? Price of fuel definitely will increase. This is expected and it's well known , but to what extent does it affects price of Pms?

Example:

If crude increases to 80$ per barrel then Nigeria will make more money and the foreign exchange situation will improve.

At exchange rate of 350 to a dollar
If crude price increases from 40$ to 80$
Therefore:

175 == K 40

? = K 80

? = [ 175 * 80 ] \ 40

? = 350 naira.
Fx, price of fuel per litre equal 350 naira.

However an adjustment will have to be made to the above due to the fact that as crude prices increases the exchange rate will also improve and the cost of dollars will fall from 350 to about 250 naira (parallel market). This is reasonable.

We will therefore expect to buy fuel at 250 naira per litre when the price of crude rice to 80$ and exchange rate of 250naira to a dollar.

ECONOMIC INTERPRETATION.

The economic interpretation of the above is to show that the federal government postulation that the price of Pms fuel per liter is wrong and Nigerians should never expect a reduction in price of fuel but an increase, a gradual increase and determined by international pricing system.
The federal government has also lied to the public through the vice president that subsidy has not be removed, or he is not competent to speak on such issues as he his not a mathematician, economists nor scientists to be able to see beyond the surface of the figures. I will like to also bring to your notice that the subsidy is actually a result of exchange high exchange rate. Subsidy cannot be divulged from the exchange rate as it affects the importation of fuel. It is in real sense a discount on the rate of dollars for the importation of fuel in other that the price of it could be maintained.
As long as we continue to import fuel we will continue to have problem with fuel and it's pricing system. Over the years fuel subsidy has been removed by all successive governments and it seems that there's no end to it. This is so because the exchange rates keeps wiping out the gains of the removal.

The idea been sold today is not different from what it was yesterday, and that is to deregulate the market. However the government should do more than a laissez faire policy, otherwise a stronger cabal and price fixing is bound to occur very soon, a monopolistic arrangement of the major dealers by fantastically corrupt people. Most of the smaller oil dealers cannot import fuel due to financial constraint.

It is important to say here that the solution to fuel problem is the building of refineries across Nigeria by the dealers and those that have been given licenses by the previous government should be made to commence such within a period or their license to operate in the oil industry be withdrawn since they are not working for the interest of the country. The company's can be sold to the masses. This happened everywhere and the railway companies of America in the 1900s were one of those companies that faced sanctions.

Only the refining of fuel within Nigeria will bring down the price of fuel.

This government is economical with the truth. Do not expect fuel price to go down, now or in future until refineries are working and new ones built.

I therefore support the planned strike action of the labor unions to press home better palliative measures to cushion the effect of the hardship to be experienced as 50% of the bargaining power of the naira will be eroded immediately due to the increase.

It is only in Nigeria we compare the price of fuel to what is obtained in other countries, but never compare the purchasing capacity of the salary rates of the people to that of the corresponding countries.

The confusing aspect of the government is the divergent voices from the officials speaking different tones and speaking from both sides of their mouths. A big minus.

Today it is like the gates of political freedom and quest to economic liberation is perpetually being closed upon us. The new formula and slimming methodology, which we are not consciously and subconsciously consulted, aligned to, offer no guarantee to the attainment of economic and basic liberties for Edo indigene and Nigerians at large, reminiscent of civilized society with equal opportunities to development of human and natural resources.

The palliative measures rolled out is in no lesser means a joke and an insult on Nigerians
A situation like fuel price hike that will affect over 150 million Nigerians, a palliative measure was to affect the lives of 8.9 million of which barely 3 million are adults and the rest 5.5millioIns primary school children; another waste and a means of corruption to fill the pockets of of party sponsors with a whopping 93.1 bn naira for feeding.

One million persons to be paid a sum of 5000naira is another waste as the criteria for the selection is and cannot be fair and transparent.

I implore the organized labour to press their demand along salary increase to reflect the drop of purchasing power of their salaries which has been grievously affected by inflation.

However the re installation of fuel subsidy is not an option, and should not be negotiated. The government should make sure that it is not reintroduced in future. It should put all economic factors and forces to bear to bring down the price within a short time through the building of new refineries private or otherwise, and the control of exchange rates through market forces but with subtle maneuvering.