Prior to Bola Tinubu’s election, the Nigerian oil market was subsidized by the government. President Tinubu vowed that once elected, he would liberalize the oil market by lifting fuel subsidies. Now that he has been in office, he kept his promise and the result is that fuel prices have soared after subsidies were lifted.
The government of Nigeria lifted fuel subsidies in May 2023, which led to a sharp increase in the price of fuel. The price of fuel has increased by more than 50% since the subsidies were lifted.
There are a number of reasons why fuel prices have soared after subsidies were lifted. First, the global price of oil has been rising in recent months. This is due to a number of factors, including the war in Ukraine and the sanctions on Russia. Second, the Nigerian government has been reluctant to increase the price of fuel, even though the global price of oil has been rising. This has led to a widening gap between the cost of importing fuel and the price that the government sells it for.
In the short-term, it is undeniable that this policy hurts. But it was an executive decision made with a long-term vision. The removal of fuel subsidies has had a number of short-termed negative consequences for the Nigerian economy. It has made it more expensive for businesses to operate, and it has also put a strain on household budgets.
The main question to ask ourselves is why did the price of fuel subsidies suddenly increase after being lifted. The increase in prices is an adjustment to market value. When the government subsidizes an industry, it pays the producers of that industry to encourage or discourage the production or consumption of a good or service. Subsidies can distort markets by artificially lowering prices or increasing production. This can lead to inefficient allocation of resources and higher prices for consumers.
Subsidizing means that prices of goods and services are being artificially lowered, and therefore, did not decline according to market forces. When prices are artificially lowered, it then creates an increase in consumer demand, thus, provoking a shortage of these subsidized goods and services. When a shortage happens, government has no choice but to increase the prices of subsidized goods or services in order to correct the inefficient allocation of resources, which resulted from the subsidies.
So what’s going on in the Nigerian oil market is a market correction where the price of oil is compelled to increase after being subsidized for so long, before adjusting itself back to the market equilibrium price. Thus, while this market correction may seem painful to the ordinary Nigerian, it is a temporary economic pain until fuel prices adjust themselves. Once the Nigerian oil market, fuel prices will become cheaper and much more affordable.
The removal of fuel subsidies will allow the Nigerian oil market to be more competitive and improve efficiency. More importantly, fuel subsidies are a significant drain on government resources. Lifting fuel subsidies would free up government money that could be used for other purposes, such as education, healthcare, or infrastructure.