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Nigeria: Problems at the pump

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HOW does a big oil producer end up with no fuel? The irony of that predicament is not lost on citizens of the country with sub-Saharan Africa’s largest oil reserves. They endure hours-long queues at petrol stations and buy on the black market. Yet few recall a scarcity as severe as the one that peaked this month.

Drivers turned to greasy hawkers who demanded up to six times the official price for their cans of contraband. Traffic petered out in Lagos, a clamouring city of some 20m people. Local airlines cancelled flights and international carriers began diverting through other West African capitals for fuel. Since diesel and petrol are also needed to generate electricity (mainly using backyard generators, since government networks are pitiful), darkness descended on homes. Shops and offices closed and radio stations went off the air. Banks shut early, and mobile-phone companies warned of network outages. Africa’s largest economy ground almost to a halt.

For a country that churns out roughly 2m barrels of oil a day, this is a scandal. The chief cause is Nigeria’s inability to process its crude. Corruption and mismanagement have left its four state refineries to rot, forcing this fuel-guzzling country to import up to 80% of its needs.

At the heart of the rot is a controversial subsidy scheme under which the government pays wholesalers the difference between the open-market cost of fuel and a fixed pump price of 87 naira ($0.43). It is billed as protecting the poor, who see cheap fuel as the sole perk of their country’s oil riches. In practice the subsidy is a mechanism for corruption by complex networks of retailers, workers at the Nigerian National Petroleum Corporation (NNPC) and government officials. They embezzle billions of dollars by overstating their imports and pocketing the difference. At its peak in 2011, it was reckoned to cost the government $14 billion annually.

The latest shortage began when importers slowed deliveries, saying the government owed them $1 billion in backdated subsidy payments. Without those, they said they could no longer afford to import fuel. Critics responded that they were trying to bleed the government dry ahead of a transfer of power to the incoming administration of Muhammadu Buhari on May 29th, amid speculation that he may reduce or indeed terminate the subsidy.

Mr Buhari, who inherits the crisis, is ironically one of its fathers: he set up the NNPC during his time as petroleum minister in the 1970s. In 2012 the outgoing government tried to eliminate the subsidy but backtracked on reform in the face of violent protests. It had the perfect opportunity to take a second shot earlier this year, when oil prices were at their lowest. Yet President Goodluck Jonathan tried to curry voters’ favour by cutting prices even further.

Those getting fat off the scheme will fight—perhaps literally—to save it. An investigation into subsidy payments launched by Ngozi Okonjo-Iweala, the finance minister, in 2011 “led directly to the kidnap of her mother,” her spokesperson claims. Reforms are not popular with the masses, either. Although subsidies disproportionately benefit the rich, who drive bigger cars and buy more fuel, prices for petrol, transport and food would all rise.

Yet Nigeria’s popular new president has more political capital than his predecessor. Citizens are better informed about the theft surrounding the scheme. A phased withdrawal that is explained carefully to voters and balanced by social grants or investment in infrastructure might work.

Abolishing the subsidy might also give local refining a boost. Official prices are now so low that no refiner can compete. Tight government finances may force the change. Roughly $5 billion was allocated to subsidies in 2014. This year’s budget makes provision for a fraction of that amount. Low oil prices left a dent in government revenues. Foreign reserves have fallen; a crude-oil savings account is all but empty; and the currency has tanked. A cash-strapped government can no longer afford such a corrupt and costly racket.


6 Comments on "Nigeria: Problems at the pump"

  1. Jimmy on Sat, 30th May 2015 12:50 pm 

    The biggest issue with regards to the fuel shortage is that the fuel transport truck drivers are on strike. Orders from their political overlords who are threatened by changes in the Gov. It’s one political clique and it’s patrons against another. Same with Boko Haram. There are nuerous problems in Nigeria but the fuel stations would not be empty if the drivers weren’t on strike.

  2. BobInget on Sat, 30th May 2015 6:56 pm 

    Jimmy, Like everything to do with oil, Nigeria’s
    liquids fuels shortages are far more complicated then a simple labor action.

    As for Boko Haram, Jimmy, over simplification
    there is worse then ignoring.

    Two Hours Ago:

    If Boko Haram can hold out for another year while IS in Iraq and Syria, solidify its positions, IOW’s:
    Capture and control Iraq’s Southern oil fields.
    (IS already controls oil in Syria and Yemen thanks to Saudi Arabia).
    IS will be capable of sending it’s militias into
    Nigeria with the intent of destabilizing Nigeria’s

  3. Makati1 on Sat, 30th May 2015 8:41 pm 

    How many here see the shades of the future in North America? The ability to buy, at any price, is the name of the game, not failing refineries or strikes, although they too will be part of that future.

    How many making ‘minimum wage’, or less, (~24% of current employed not to mention the others not employed) will be able to buy a new car? Any car? How many will require non-existent public transport? How soon? I set the line at 2020, or sooner.

  4. GregT on Sun, 31st May 2015 12:38 am 

    I’m not quite as pessimistic as you Makati, I set the line at 2025, or sooner.

  5. GregT on Sun, 31st May 2015 1:12 am 

    “IS already controls oil in Syria and Yemen thanks to Saudi Arabia”

    Really Robert? And where do you believe that IS came from?

    Clue number 1:

    Iraq was held together by a brutal dictator. Who happened to be assassinated for “Amassing weapons of mass destruction” You know, the ones that never existed. Between 500,000 and 800,000 people were brutally murdered.

    Clue number 2:

    The FSA was given weapons and training to take out Bashar Assad. Why? Because he refused to allow the takeover of Syria’s central banks by the western banking cartels. Mission not quite accomplished yet, but with a few more coalition airstrikes over the sovereign nation of Syria, in direct violation of international law, the banksters will in all likelihood succeed. How many more hundreds of thousands of innocents need to be brutally slaughtered?

  6. zoidberg on Sun, 31st May 2015 11:19 am 

    Price controls equal shortage. Central planning socialists beware. You Cant order the tide back. A free market generates wealth.

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