Zero Equilibrium On The Nigeria's Fuel Subsidy Debate: Escaping the Binary Thinking

– By Chinedu Okoye 

Summary:

• The susbdiy debate amngst Nihwrian economists and economic commentators has been a little bit to shallow, with parties making a case for a knife-edge subsidy or no subsidy, absent an independent look into the situation, to understand how best.to approach them.

• Zero Equilibrium economists points out the pros and cons, the actual trade-off, and the foundational issue that seems to be off the radar of the many voices, as an attempt to elevated the conversation reciriecing energy to the right areas.

• We conclude that the opportunity costs attached to a reinstatement of Fuel Subsidies would essentially be a trade-off of short term gains for long term pains.

• Nigeria's petroleum problem is fundamentally a productive capacity and resource conversion problem, and the subsidy debate is only one part.

The Underlying Issue no One's talking About:

My argument on Subsidy isn't 'for' or 'against'. It is efficiency or inefficiency in oil production, industrial development, the respurce output gap,and most importantly making the most efficient use of Nigeria's Crude Oil endowments to distribute the gains across society.

One argument I always come across on Subsidy is that: Nigeria's Crude should benefit the citizens.

This much is true, and I do not believe any reasonable economist would object to this. Where Zero Equilibrium differs, is the transmissions mechanism.

Whilst others see Subsidy, I see low output to contain or cushion prices, a robust Syrategic Crude reserve, and a pressured Excess Crude Account (ECA). This limits the ability of the government to intervene on fuel prices.

However a proper utilization of said oil receipts and an expansion in Crude oil and gas explorations to boost output is more essential to Zero Equilibrium economists than pump price reduction.

The this isn’t a stance against lower fuel prices. But against suppressing government revenue on consumption, assets a proportionate increase in Crude oil domestic production.

The Complication for Refiners:

This becomes even more complicated once we introduce domestic refining.

Dangote is now the largest refinery in Nigeria, with current capacity around 700,000 barrels per day, and plans to expand to approximately 1.4 million barrels per day. However, Nigeria's crude-production problem does not disappear simply because refining capacity has expanded.

Though crude oil sullly to Dangote refineries improved in Q2, as the NNPCL supplied 71% of the domestic crude supply to the refinery, and met its local refinery obligations. Reuters reports that the refiner received over 550k barrels per day in August, whoch was twice the 2025navwrgae intake.

Whilst this is a wclone improvement in domestic supply, Nigeria still has a crude-supply constraint relative to the scale of its refining ambition, ad the rfiner hopes to double its capacity to 1.4mbpd.

At a 700kbpd refinery capacity, a 29% import share would imply roughly 200,000 bpd of imported feedstock if that ratio were sustained.

Should the refiner complete the planned expansion to 1.4 mbpd, and the same 29% import ratio persisted, the refinery could require roughly 400,000 bpd of imported crude.

In that scenario, the subsidy would almost be inconsequential, and marred by transactional complications, with a larger amounts of Crude sourced outside the country, it becomes irrational to subject the Local Refiners to a price, below market determined ir objective exchange-value.

This is perhaps the reason Mr. Aliko Dangote doesn't want subsidies, and why his opposition to subsidy should not simply be interpreted as opposition to cheaper petrol.

If he can.be assured a guaranteed 100% capacity - now and when he upscales to twice the current output - we would be having a different conversation. 

The Macro Angle:

Subsidizing fuel might support households, but in a not so business supportive economic environment, the overall output gains would be negligible. But at the same time, it depresses the macroeconomic stability whoch is a prerequisite for growrh, once the missing supportive factors are treated.

In other words, you'd essentially be sacrificing longterm output growth, for short-term relief, absent the fiscal or monetary flexibility to implement growth enhancing projects.

The ZE View:

• Zero Equilibrium economists are more concerned with fiscal consolidation for long-term sustainable growth. The extent or pace if this growth depends a great deal.on maximising returns from Crude.

• The discussion, once shifted from short-term gains, to long-term stability and growth, reveals a much deeper problem and a much more foundational issue.

• Addressing structural challenges to oil output growth would do.more tontransfer these gains to the common man in kind, or in non-monteary form.

• Where fiscal and monetary flexibility are constrained, every naira diverted toward maintaining a consumption subsidy has an opportunity cost. It could have gone toward: energy infrastructure; transport infrastructure; crude exploration; oil-field rehabilitation; gas development; industrial infrastructure; agricultural productivity; human capital; or other investments capable of expanding future output.

However this does not mean every subsidy Naira would automatically become productive investment. We've not seentnhsinplay out. But it does mean thay there will be lesser space for industrial and output growth driven expenditure.

• The subsidy debate is therefore being conducted at the wrong level. It is being framed as: Subsidy helps Nigerians, and no subsidy hurts Nigerians.

• Zero Equilibrium rejects that binary vueww, and asks: What is the most efficient mechanism for converting Nigeria's crude endowment into broad-based and sustainable welfare gains?