Increase In Fuel Price: Analysis of Its Effect On Nigerian Economy.
Posted: Tuesday, October 11, 2005
by Emeka Nkoro
clericuzio and associates
I) INTRODUCTION:
Nigeria OPEC six largest crude oil producers, with her abundant natural resources still import and pay international prices for a natural resources it have in abundance due to provocative policies formulation and implementation by insensitive leaders. Lately, the reasons put forward are, that deregulated economy policies will attract investors into ( oil and gas sector) downstream/upstream sector and engender competition, that would in turn bring down the prices of petroleum products. Secondly, that the cost of subsidizing importation has become unbearable for government to sustain. That federal government through NNPC had been spending N400million daily, to subsidize import. As part of deregulation policy, federal government stopped the sale of crude oil to NNPC at the preferential cost of $18 per barrel. NNPC now buys at the prevailing international price, since its refineries are down, thus, exports and uses the proceeds to import refined fuel for local consumption. Thus, the people are saddle with continuous increase in the cost of locally consumed fuel. NNPC, major and independent marketers have become importers of petroleum products, thus, leaving pricing at the mercy of market forces. Such a situation that allows the refined petroleum importers to make abnormal profits at the expense of the country and its ordinary citizens.
) INCREASE IN FUEL PRICE AND NIGERIA ECONOMY
The effect of fuel price increase to the growth and development of the Nigerian economy can not be overemphasized. consequently, it has worsen the economic crises in Nigerian economy. In this section we discuss specifically the effect of increase of fuel price to the country’s Gross Domestic Product (GDP), Government Revenue. Furthermore, we discuss its effect on unemployment and inflation.
2.1) INCREASE IN FUEL PRICE AND GROSS DOMESTIC PRODUCT.
Since 1978, the fuel price increase has negatively contributed to the country’s GDP downward trend. The tables below summary the effect of petrol price increase to the country’s GDP.
In 1978, the fuel price increased to 15%, while GDP fell by 5.8%. In 1982 the the price rose to20kobo, while GDP fell by 0.2%..In October, 1994 the fuel price fell from N 15.00 per litre to N 11.00 per litre and stood till 1998, while GDP fell by 0.6% in 1994 and rose to 2.6% in 1995 (see table 1 and 2).
The interesting trend that is revealed in the analysis above is the negative relationship between fuel price and GDP since the deregulation policy. Thus, any time the fuel increases the GDP tend to decrease.
2.2) INCREASE IN FUEL PRICE AND GOVERNMENT REVENUE. Fuel price increase has a negative significant on Government revenue. In
1982, the fuel price increased to 20kobo, while total federally collected
revenue fell to N 11,764million. In 1986 fuel price rose to 39.5kobo, while government revenue fell to N12,382million. However, the fuel price, in 1993 and 1994 fell to N3.50 and N 11.00 per litre respectively, while government revenue rose to N138,874million and N 201,911million respectively. In 1998, fuel price rose to N 25.00 pre litre, while government revenue fell to N 463,609 million.
Thus, this inverse relationship can be attributed to labor unrest which has resulted a fall in oil and gas industry activities. Consequently affecting the revenue that would have accrued to government coffer.
2.3) INCREASE IN FUEL PRICE AND UNEMPLOYMENT
As it has been observed that labour demand is influenced by money wage rate, while labour supply is influenced by expected real wage rate. Thus, wage legislation has affected labour market negatively.
In 1982, petrol price rose to 20kobo, while unemployment stood at 4.1%. During the period 1986-1990, fuel price rose to 60kobo, while unemployment fell to 3.4%.Between 1991 and 1992 rose to 70kobo, while unemployment stood at 3.8% and 4.0% respectively. However, the inverse relationship witnessed during the period 1986-1990, can be attributed to the impact of SAP, positively on the economy, which eroded in 1991. Thus, increased unemployment rate. However, the positive relationship can be attributed to high cost of production which resulted layoff.
2.4) INCREASE IN FUEL PRICE AND INFLATION.
According to Kuti, B.R.,as posited by Mba-Afolabi, J.(1999),the outrageous price increase had made life unbearable for Nigerians as prices of goods and transport fares had risen, forcing people to trek long distances . To
complement this Tell, a weekly media publication posited that inflation may also be attributable to the hike in petroleum products and transportation cost.
Going by analysis, in 1978 petrol price increased to 15kobo,while inflation rate rose to 21.7%. However, in 1993 petrol price fell to N 3.25, while
inflation rose to 57.20%. In 1998, fuel price rose to N 25 .00,whileinflation
rate stood at 10.00%. Furthermore, in 1999, it fell to N20.00, while inflation rate declined to 6.6%. The inverse relationship can be attributed to deficit financing by federal government.
) RECOMMENDATION AND CONCLUSION.
RECOMMENDATIONS:
The following recommendations are made in the hope that they could Proffer a solution to the destabilized economy, prompted by hike in fuel prices.
i) Since we import, based on world export market such that we bring into the country refined oil products, the next thing to do now is to subsidize. Since the federal government makes more money from excess of budgetary projection per barrel. The president should prepare supplementary appropriation bill to get fund approved to subsidize the local prices of petroleum products. That’s, government should control the prices of petroleum products, rather than leaving it to market forces, by which, it means to the importers the NNPC and the private internal and external business moguls. Such a situation will enable the small clique of refined petroleum importers to make abnormal profits at the expenses of the country and its ordinary citizens. However, government should sell to NNPC, price that is below the price that prevail in world oil market while NNPC export (crude oil) base on the world oil market price and use the excess to subsidize the imported refined oil products.
ii) The nation refineries’ Turn-Around-Maintenance (TAM) should be consolidated with transparency and accountability. If our existing refineries are functioning at full capacity, they can meet Nigerians’ internal fuel needs and some excess for export and strategic reserve of products demand. Therefore, their repairs should be given urgent attention. Thus, price hike comes after, not before the repair of the refineries.
iii) The labour union and private sector should be carried along before the increase to forestall a major unrest.
iv). Also, the resources should be channeled to productive ventures that would lead to physical development and touch the life the average Nigerian
CONCLUSION. From the analysis so far, we are to say that fuel price hike has worsen the economic situation of Nigeria. However, if the above recommendations are put in place, the fuel situation when price increases would improve the economy and the protest and threats of labor would be avoided. Consequently, the economy will be disengaged from stigma and economic quagmire that have had been inhabiting the Nigerian economy from experiencing real economic growth/development. .
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Mba-Afolabi, J. 1999. “The oil price of hike blunder", Newswatch, January 18, Pp8-16.
Mumum, M. 2004. “On a gunpowder keg": TELL, No.25, June 21, Pp18-24.
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Top-level comments on this article: (10 total)infact it is very helpful to me.i answer my question very well with this hints.
yes, impressivethanks you for comment
well i feel that proper referencing to the facts raised should be considerably seen to. The reason is to allow for a round view and support for the issues raised. The issue of subsisdization of the petroluem product is an ideal point but has its short comings. This short comings are that of increase abnormally in the issue of Bunkering which however increases crime rate. With this, some individuals will get themselves involve in such an henious activity however creating a status of fear for international investors . Most students, especially in Nigeria would want to be detailed enough is as it could boost the educational sector however stimulating people to get information about the going-ons ---monday gabriel
well i feel that proper referencing to the facts raised should be considerably seen to. The reason is to allow for a round view and support for the issues raised. The issue of subsisdization of the petroluem product is an ideal point but has its short comings. This short comings are that of increase abnormally in the issue of Bunkering which however increases crime rate. With this, some individuals will get themselves involve in such an henious activity however creating a status of fear for international investors . Most students, especially in Nigeria would want to be detailed enough is as it could boost the educational sector however stimulating people to get information about the going-ons ---monday gabriel
its O.K.IF ONLY U COULD HAVE GIVEN BOTH GOOD AND BAD CONTRIBUTIOND ,IT WOULD HAVE BEEN SUPER.
Good stuff, fully packed, incisive and broad. I wish you will up-date it as soon as the need arises. Keep the good work going and more power to your elbow. Regards... SOKOMBA NUHU -- Abuja, Nigeria
this is good but try and work on the effect on the rural area....from
It was very helpful. pleases update when necessary. Thanks for the knowledge shared. Would be glad to know how you arrived at the figures.
l strongly agree that petroleum has done more damage to the nigeria economy than good.Government of nigeria should once and for all check this distaster,otherwise the economy would sink and nigerian would go back to slavery.A should be stipulated and a specific price should be agreedd upon by the nig govy.Any violation would attract the needed penalty.
Yes
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