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DEREGULATION OF FUEL PRICE IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

Nigeria has a long history of oil or refined petroleum products marketing, dating back to seventy years; early 1930s when precursors of Shell and Mobil engaged in the distribution of petroleum products. Up till 1995, the local fuels market was largely regulated. Pump price of fuels such as Premium Motor Spirit (PMS) or Petrol, Kerosene, Diesel were fixed by government. Within the same period, the bulk of domestic fuel consumption was supplied by local refineries. But due to the parlous state of the refineries, the bulk of local fuel requirements is now met by importation. Massive importation started from 1996 under the late General Abacha's regime. In 1998, the erstwhile military regime of General Abdulsalam Abubakar moved towards deregulation (which the industry had always desired) by allowing the oil marketing companies to import fuel directly. In the past, this was the exclusive pressure of government through the NNPC. However, importation was unattractive to the major marketers due to the local fixed price regime. The major and the independent marketers began to import fuels directly following the new policy. This helped to stem the growing supply shortfall, which had caused serious economic problems, and aggravated the country’s economic down turn. In 1999, however, the rising crude oil prices in the international market made the oil marketing companies stop import of fuels, particularly petrol, diesel and kerosene. By the second half of 1999, the NNPC had become the major importer of fuels for domestic consumption, which it had to do for strategic reasons: to avoid a political backslash that may have security implications. Even at that, the hike in fuel price has been a recurring decimal as the oil marketers complain that they are operating at a loss. Finally in 2003, the government announced a full deregulation of the petroleum downstream sector. Yet it claims that a subsidy of N14 is spent on each liter of petrol. It is in this connection that this study explores the policy of deregulation within the context of appropriate pricing of petroleum products with a view to spotlighting the challenges and opportunities existing therein. The downstream activities involve the petroleum products refining, distribution, and marketing. These activities are often carried out by Major Marketers (example, Shell, Texaco, Mobil etc. and Independent Nigerian Marketers who number about 500 and control less than 30% of the market. The downstream sector utilizes facilities like refineries, depots, pipelines, network, petro-chemical plants, and transport facilities. Many indigenous companies are found within this sector because it is relatively less-capital intensive and less technical. This sector is an area, which the government of Nigeria has made considerable investment over the years, particularly since 1970; yet the major challenges of the sector remain the non-commercial pricing environment, and lack of resources to maintain and manage the infrastructure properly. The focus of the government's policy on the downstream sector can be summarized as follows: (a) to maintain self-sufficiency in refining, (b) a need to ensure regular and uninterrupted domestic supply of all petroleum products at reasonable prices, and (c) to establish infrastructure for the production of refined products for export. The downstream sector has been a major problem for the country over the past 6 years as the NNPC has found it impossible to maintain the country's four refineries, and to provide adequate supply of PMS, Diesel, and Kerosene nationwide. The NNPC recently completed the third phase of their national pipeline distribution system. However, ·large segments of the distribution system are in urgent need of maintenance. Two of the country's refineries, at Kaduna and Warri, have petrochemical plants, which utilize refine by-products to produce carbon black, polypropylene, linear alkyl benzene, and a host of other products. It is recognized that for an olefin-based petrochemicals plant to be viable in Nigeria it must be developed by cracking natural gas liquids in the olefins plant.

According to Gbosi (2004) in Oluleye (2005 >deregulation does not mean the absence of regulation. Rather, it means the deliberate informed process of removal or mitigation of restrictions, which are obstacles or non-deterministic and tend to reduce efficiency or competitive equities. In other words, economic deregulation is ''the deliberate and systematic removal of regulatory controls, structures, and operational guidelines, which may have militated against growth, operations and efficient allocation of resources in the economy". It follows therefore that the deregulation of the economy or its component comes as a result of the belief that factors of production, goods and services will be optimally priced and allocated where these prices are freely determined in a competitive environment. The major factor that usually calls for deregulation is the imbalance between demand and supply in the product and factor market (Gbosi, 2004). Adidu and Oghene (2005) observe however, that some measures of control are necessary in deregulation to avoid the outcome of monopolies, oligopolies, or the formation of cartels. This is particularly why government must also put in place antitrust laws to avoid negative consequences. According to Scheneier (2002), deregulation encourages companies in essential services to cut costs and extract customers. From the foregoing, deregulation of the petroleum downstream sector would mean opening up of Nigerian petroleum industry to competition. It will require that all aspects of production, refining, distribution and dispensing of petroleum products be self-financing (Obasanjo 2003). Prior to deregulation in the downstream sector of the oil industry, there was low capacity utilization of Nigeria's state-owned refineries and petrochemical plants. Even now, the four refineries can only produce 17 million liters per day whereas 3 0 million liters are consumed in Nigeria per day. Also, the sorry state of our petroleum products pipeline in terms of disrepair, neglect, and repeated vandalization made deregulation inevitable.

1.2     STATEMENT OF THE PROBLEM

There has been a steady increase in the· price of petroleum products since deregulation set into the Nigerian economy in 1986, and was formalized in the downstream sector in 2003. We do not hope it will cease, at least, in the short-run because the elimination of price control by the government will perforce allow the forces of demand and supply to determine the appropriate price for petroleum products.

The global decline in oil prices have shrunk Nigeria’s foreign exchange earnings by over 50%, as crude oil proceeds make up about 90% of the country’s dollar earnings. The effect has been a nationwide scarcity of dollar coupled with the Central Bank of Nigeria’s inability to meet all forex demands including that of petroleum marketers.For the last few months, the Nation has been crippled by long fuel queues and petrol scarcity arising from the unavailability of foreign exchange for petroleum marketers to import products. This forced on the NNPC the responsibility of importing over 90% of the Nation’s fuel requirement compared to 48% in past times, unfortunately the NNPC did not have the capabilities or resources to meet the supply shortfall.

Hence, the Ministry of Petroleum recognized the urgency to remove the petroleum subsidy and partially deregulate the price of PMS (Premium Motor Spirit).

1.3     OBJECTIVES OF THE STUDY

The main objective of the study is to find the problem of fuel price in Nigeria and proffer solution to the problem, specifically the study intends to;

1.     Find out the reason for fuel deregulation in Nigeria

2.     Find out the effect of fuel deregulation on Nigeria economy

3.     Proffer solution to the problem of fuel deregulation in Nigeria

1.4     RESEARCH QUESTIONS

The following questions were formulated from the objective to guide the research so as to arrive at a reasonable conclusion

1.     What is the reason for fuel deregulation in Nigeria

2.     What are the effect of fuel deregulation on price of PMS

3.     What is the solution to the problem of fuel deregulation in Nigeria

1.5     SIGNIFICANCE OF THE STUDY

The study will expose the stakeholders involve in oil and gas policy making, the government at various levels, and the society at large to the problem of fuel deregulation in Nigeria, will also expose them to the challenges face by the oil and gas industry in Nigeria, the problem of the industry and the way out to the problems. Also the conclusion made in this research will serve as a guide to the policy makers in Nigeria to formulate a reasonable policy that will take the industry forward. And finally this research will serve as a guide to other researcher who will embark on the same research in the nearest future.

1.6     SCOPE OF THE STUDY

This research work covers the oil and gas industry in Nigeria, the problems and the meaning, problem and solution of fuel deregulation will be deeply investigated on in this research.

1.7     RESEARCH METHODOLOGY

This study is basically on the problem of fuel deregulation in Nigeria. The study therefore adopts one of the traditional methods of gathering information, i.e. the secondary sources. A sizeable percentage of secondary sources that is used came from published and unpublished works which include materials extracted from: Archives, Newspapers, discussions, Conference papers, Magazines, Internets, Books, and Articles in journals e.t.c.

1.8     LIMITATION OF THE STUDY

The challenge of finance for the general research work will be a challenge during the course of study.

However, it is believed that these constraints will be worked on by making the best use of the available materials and spending more than the necessary tim

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