This work was originally carried out by me as a research work in the department of Economics, Emmanuel Alayande College Of Education, Oyo, Nig. @ Sep. 2010.ABSTRACT
The society is dynamic, situation is constantly changing, while societal dynamism have becomes a complex phenomenon.
This report argues that the Federal Government policy towards deregulating the involved sector will have a dramatic impact on various sectors of the economy
The researcher focused directly on the petroleum sector as the 95% guaranteed source of income to the Federal Government [FG]. The report emphasized that deregulation is an Economic Stimulus Plan, and not economic jeopardy.
However, all information embedded in this write-up are meant for the general consumption of every economic agent who wishes to be increasing in knowledge, and to those that are curious to know about the contemporary economic issue.
INTRODUCTION
To those who believe that the government should intervene in the everyday running of the economy, it is bad. And to those of us who believe that the government should just govern and let the economic resources ‘go to where they are needed most, it is very good.
Manasseh E. [2009] the economy thrives when there is efficient allocation of scarce resources, like money. The unnecessary intervention of government in such cases is like suspending a water fall. As they say, water will always find its level and if it is not allowed, with time the dam will burst.
A lot of multi national businessmen with vested interest in the oil and gas industry are doing everything thing they can to stop the deregulation. They want the government to continue with its inefficient allocation of resources to the subsidy of petroleum products. It is in the best interest of every Nigerians including the generation unborn to welcome deregulation, otherwise will never understand why prices fall in other places and it dose not fall in our market.
Before the deregulation of the communication sector, there was only NITEL. Other players were allowed into the industry and the sector became more organized. I still wonder what would have happen if we had only Nigeria Airways in Nigeria.
Based on the usual nature of deregulation, the price of such commodity may bite hard originally; PMS may rise to N73 per litre in the short run but there is nothing stopping it from dropping to N35 per litre in the long run when the sector strengthens and refineries are restructured as players try to improve market share through competitive strategies..
I still wonder the major reason why the power sector has not been fully deregulated.
OVERVIEW AND HISTORIOGRAPHY
The history of petroleum discovery in Nigeria is as old as the country itself. Oil exploration in Nigeria with reference to 1908 where the appearance of oil was first discovered at Araromi [Ondo State]
At the original stage, German company known as Nigeria Butmen Corporation started the pioneering effort. But was interrupted as a result of the occurrence of First World War between 914-1918.
Another exploratory activity took place in 1937 by a company known as Anglo-Dutch Consortium that serves as the overall runner of the present day Shell D’Arcy. The exploration activity started in 1937 after Shell D’Arcy had been awarded a nationwide exploratory monopoly right. The Second World War that took palace between 1939-45 interrupted the exploratory activity. As a matter of fact, Shell discovered its first commercial crude oil in Nigeria around 1956 at Oloibiri [River State]
Nigeria has been an OPEC member since 1971. The country has the second largest oil reserves in Africa and is the continent‘s primary oil producer.
According to the Oil and Gas Journal, Nigeria had an estimated 37.2 billion barrels of proven oil reserves as of January 2010. The majority of reserves are found along the country‘s Niger River Delta and offshore in the Bight of Benin.
Since December 2005, Nigeria has experienced increased pipeline vandalism, kidnappings and militant takeovers of oil facilities in the Niger Delta. The Movement for the Emancipation of the Niger Delta (MEND) is the main group attacking oil infrastructure for political objectives, claiming to seek a redistribution of oil wealth and greater local control of the sector.
Additionally, kidnappings of oil workers for ransom are common. Security concerns have led some oil services firms to pull out of the country and oil workers unions to threaten strikes over security issues. Nigeria is an important oil supplier to the United States. Close to 40 percent of the country‘s oil production is exported to the United States. Nigeria is an important oil supplier to the United States.
In 2009, total oil production in Nigeria was slightly over 2.2 million bbl/d, making it the largest oil producer in Africa. Crude oil production averaged 1.8 million bbl/d for the year. Recent offshore oil developments combined with the restart of some shut-in onshore production have boosted crude production to an average of 2.03 million bbl/d for the first quarter of 2010.
In 2009, Nigeria exported most of its 2.2 million bbl/d of total oil production (approximately 1.9 million bbl/d were exported). Of this, close to 800,000 bbl/d (40 percent) was exported to the United States, making Nigeria the 5th largest foreign oil supplier to the United States for the year.
STATEMENT OF THE PROBLEM
According to reports, FG has been nursing to deregulate the petroleum downstream sector for more than decade. However, the major problems of this sector goes thus:
The inefficient utilization of the state owned refineries and petrochemicals in Kaduna, Port Harcourt, and Warri. And it is no more a doubt that free market forces allocate scarce resources more efficiently when compared with a centrally planned and directed economy.
Deliberate and repeated vandalization of petroleum pipe lines and cross border smuggling of petroleum products such as petrol/gas, diesel oil etc.
High volume of corruption among the Task Force Officials has also facilitated the diminishing rate of the involved sector.
Malfunctioning among the bureaucrats as a result of government legislative monopoly of the petroleum downstream sector, but to mention a few…
PURPOSE OF THE STUDY
The very first purpose is to enlighten the citizens about what deregulation seems to be, and even realize the benefits that could be derived through the successful initiation of this policy on the petroleum sector.
Another purpose is to disclose the factors that are delaying progress in the petroleum sector, and find means of eliminating these problems.
And also to make the economic agents understand better the significant of petroleum products; why the sector is to be deregulated and the viable effect particular when compared with other deregulated sectors.
SIGNIFICANT OF THE STUDY
The successful application of deregulation policy will enable petroleum sector to be more organized since other players will be allowed to enter the market, thereby facilitating the economic grow of the state.
The research work has shown that deregulation of the petroleum downstream sector will create more job opportunities to the citizens, effective allocation of scare resources is guaranteed, and also, it will avoid mismanagement in this sector. This will surely aid the government in the attainment of macroeconomic objectives.
The policy will as well encourage the ownership of refineries; create more taxes, royalty and other related revenue to the Federal government. It will ensure marginal productivity of the product at a reasonable price for the consumers and even prevent economic sabotage.
MAIN BODY
The petroleum industry in Nigeria is involved in the global processes of exploration, extraction, refining, transporting [often with tankers, and pipelines], and marketing petroleum products. The largest volume of the products is fuel oil and gasoline [petrol].
Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics.
The industry is divided into three major components: upstream, midstream and downstream. Midstream operations are usually included in the downstream category. Petroleum is vital to many industries, and is of importance to the maintenance of industrialized civilization itself, and thus is critical concern to many nations.
Series of speculations have been given based on what deregulation seems to be. Deregulation in a simple sense is described as an anti-active participation of government on a particular sector of the economy.
Deregulation policy is the removal or simplification of government rules and regulation that constrain the operation of market forces. Deregulation dose not mean the elimination of laws against fraud, but eliminating or reducing government control of how business is done, thereby moving toward a greater level of improvement.
Adejuwon S. [2009], described deregulation as a process of taking anyway government intervention on a particular industry to stem an increase in compensation. The intervention on a regulated industry is to promote competition, Price and Profit.
Charles C. [2009], if deregulation policy could be critically examined, it will be clearly deduced that deregulation of the petroleum, downstream will significantly contribute to the economic development of the state.
T he rationale for deregulation is that fewer and simpler regulations will leads to improved level of competitiveness, therefore higher productivity, more efficiency and lower price overall.
However, it is important to juxtapose “price deregulation” and “price subsidy.” This is in order to address the issue more objectively.
Price subsidy is a payment made either to the producer/seller or to the consumer/purchaser of a commodity, for purposes of making the commodity cheaper than the actual market-determined price of the commodity in question. The market price of a commodity usually consists of the cost of producing or importing the commodity, plus the seller’s percentage profit mark-up.
The subsidizer bears the difference between the final selling price and the actual cost of production/importation, plus the seller’s percentage mark-up for profit, when or where applicable.
On the other hand, the basic concept of price deregulation entails the removal of a subsidy or cancellation of a discount on the selling price of a commodity. The removal of subsidy ordinarily results in the purchaser of the commodity paying more than the market-determined price of the given commodity. Deregulation is usually done in order to arrive at the true value of a commodity, as naturally and freely determined by the forces of supply and demand for a given commodity.
A market-determined price is therefore the price consumers or purchasers of a commodity freely pay for the commodity. The quantity of the commodity that is available for sale vis-à-vis the quantity that the consumers are demanding and are willing to pay determine that price.
In most circumstances, many governments and managers of an economy subsidize selling prices of certain goods and services. The price subsidization is in order to make the affected goods and services affordable by the generality of the consumers. Generally, governments and national economic managers undertake price subsidization for many, many reasons.
ü One reason may be because the commodity in question is a basic or essential need, which the generality of a country’s populace cannot afford to pay, owing to the general level of poverty in the country.
ü Another reason is when the general economy and activities in its different sectors are centrally planned and directed. It may also be in order to promote mass consumption of a given commodity or social service.
ü Furthermore, price subsidization may be predicated on the need to ensure general socio-political stability etc.
Generally under a free enterprise national economic system of management, the forces of supply and demand are allowed to determine the general and specific prices of goods and services. In countries where the allocation of national economic resources is centrally planned and directed, governments play a more active role in the allocation of resources and the general determination of the prices of certain goods and services. Nowadays however, few countries are completely free enterprise economies. Few, if any, are 100% planned economies either. There is no doubt that free market forces generally allocate resources more efficiently than in a centrally planned and directed system.
As far as Nigeria is concerned, the country professes, in theory, preference for the free enterprise system of management of the national economy. But in practice, there is a lot of meddling in the allocation of economic resources. There are lots of bureaucracies and regulations, including those relating to the subsidization of the prices of petroleum products in the country. Policy implementation is a big problem. Corruption is a bane in general governance and administration of social services.
Many sectors of the economy are over-regulated. Government oversights and monitoring of economic activities are poorly and inefficiently carried out. Because of these problems, the good intentions of government in the regulations, including those of price subsidy on petroleum products, are invariably defeated. In particular, taxes and related government revenues are hardly fully collected and adequately accounted for by the responsible public officials.
It is noted that successive Federal Nigerian governments have been subsidizing the prices of petroleum products in Nigeria. The Federal Government of Nigeria fixes the prices of petroleum products in the country; to reflect unpredictable changes in the world market for crude oil and petroleum products. Many times Government action in this regard precipitates industrial and social unrests. At present the few existing domestic oil refineries, which are basically owned by the government, are in trouble. The bulk of petroleum products sold in the country is largely imported at high costs.
Policy actions to encourage private ownership of oil refineries in the country have not been successful, for many reasons. One of the reasons is that few, if any, prospective private refineries would like to invest and operate under existing stringent regime of government regulation of the downstream petroleum sector. There is no need to delve into the rationale for the adoption of the policy of petroleum products price subsidization in Nigeria.
However, what has been observed is that in the midst of the subsidization, many Nigerians have made private fortunes. Smuggling of the products outside the shores and borders of the country has very much thrived, at the expense of loss of government revenues and the generality of Nigerians. The policy is said to have cost the Federal Government of Nigeria billions of naira. The cost should have been used in developing critical sectors of the Nigerian economy, including agriculture, physical infrastructure, and social services, among many others.
Now the Federal Government of Nigeria is finding itself unable to continue with the subsidy, particularly in the midst of falling revenue from crude oil exports. Implementation of government budgets is in jeopardy. It is no wonder that the Federal Government is being called upon to reconsider the policy of continued subsidization of the prices of petroleum products in the country. Many Nigerians are uncomfortable with moves by Government towards the removal of the subsidy, by way of deregulation of the prices of petroleum products in the country. The fear is that deregulation will not only generally result in increases in the prices of petroleum products in the country but also in increases in the general prices of other goods and services in the country. This is because everybody in the country and all other economic sectors are generally bound to be adversely affected by significant increases in the prices of petroleum products in Nigeria.
The fears and concerns are not unfounded. But the change in policy that is being canvassed is a necessary evil. The fact is that in many well managed economies of the world, the prices of petroleum products are generally allowed to be influenced by market forces of supply and demand for the products. Their citizens have become used to these routine price changes. But in Nigeria the attitude is different, because of a long standing tradition of subsidy.
The question now is whether Nigeria should continue to subsidize the prices of petroleum products in the country. Most analysts, including this commentator, do not support Government continuation of the policy because continued subsidization of the prices of these products in Nigeria is a classic example of inefficient allocation of resources, from which the Nigerian economy generally is bound to lose more than it can gain. The long sustenance of this policy has been very wasteful to the economy generally. One cannot correctly recollect the number of times Government fixing of the prices of petroleum products in Nigeria has caused social and industrial crisis in the country. To be able to anticipate the benefits of the deregulation of the downstream petroleum sector, Nigerians should compare the benefits they have derived from the deregulation of the telecommunication sector that was formerly highly regulated and monopolized by Government.
Given that all price deregulations have costs and consequences, the critical issue to examine is how best to mitigate and minimize the consequences of the deregulation of Nigeria’s downstream petroleum sector. One of the consequences is the general resistance expected from powerful forces that have been benefiting from the situation.
Resistance is also expected from the private and corporate consumers of the products, particularly the organized labor. The latter is generally known to have the proclivity to agitate against Government removal of subsidies on products that adversely affect the welfare of its members.
Deregulation of the petroleum downstream sector will entail final consumers of petroleum products in Nigeria paying the market-determined cost of production or importation of the products, plus the percentage profit mark-ups. Certainly if and when the sector is successfully deregulated, the Federal Nigerian Government, which has been subsidizing the prices of the products, will stop doing so.
The money that Government saves by the stoppage will be utilized for other development needs of Nigerians. What will be the other implications of the deregulation? Immediately, petroleum product consumers will start paying the exact cost of producing or importing the products, plus the percentage profit mark-ups.
If the costs of producing or importing and transporting the products to the different points of sale, plus the necessary profit percentage mark-up increase, the consumers of the products will start paying more for the products. If the costs fall, the consumers will pay less, as determined by the market forces of supply and demand. All things being equal, deregulation will minimize the problem of scarcity of the products, product hoarding, corruption in the allocation of the products to their marketers, etc.
The consequential effects may not be as smooth or as simple as those herein summarized. It is almost certain that the issue of uniformity of petroleum product prices in all parts of the Federation will disappear. The selling prices, among other considerations, will be determined by the cost of bringing the products to the various points of sale. If the deregulated prices are higher than the ongoing prices, there will likely be an agitation against the deregulation by labor and other adversely affected consumers. Since the products are consumed by every household in the country, the effects of the deregulation will be extensive and wide-spread. Therefore deregulation of the prices of petroleum products in Nigeria is a major, critical, if not, a volatile one in the country. It is a big and an inevitable task. Because of its long historical existence in the country, the deregulation of the prices of petroleum products in Nigeria should be well planned and carefully and tactfully executed.
Accordingly, consultation by Government with labor and all relevant major stakeholders in the planning and execution of the policy cannot be avoided. First and foremost, an impact assessment of the policy on Nigerians should be carried out. Thereafter the general citizenry should be properly enlightened, if they are to appreciate the need for the deregulation of the sector. Through all available media, including the mass and electronic ones, the Federal Government should demonstrate to Nigerians and stakeholders the extent of the subsidy to be removed, vis-à-vis the adverse impact of its continuation, particularly in the face of Government’s current dwindling oil revenue.
The Government should convince and show Nigerians that there is hardly an option to the pending policy change. Government should assure Nigerians that the deregulation is bound to result in the overall long-run interest of the generality of Nigerians. It should further assure Nigerians that the prices of all other factors of production will gradually and eventually be deregulated. Labor, in particular, should be given ample opportunity to bargain for fair and equitable level of compensation, which gives due consideration to the employer’s ability to pay and the level of labor productivity in given establishments.
If labor does not agree to a hundred percent immediate removal of the subsidy on the prices of petroleum products in Nigeria, a gradual and phased approach to the deregulation should be considered by Government. In order to minimize wide-spread agitations and possible social unrests, it is critically important for the Federal Government to ensure that it carries all major stakeholders along in the actualization of this important policy change.
CONCLUSION
The ultimate goal of every society is to have a functional and qualitative administrative policy frame work that will ginger all areas of the nation’s economy. America for instance that is enjoying the dividend of stabilized economy did not arrived at where they are today but from criticism and controversies.
Deregulation policy of the petroleum downstream sector is an economic stimulating plan which ought to be amicably dialogued and resolved has now becomes a controversial issue as a result of hidden agenda. We must not allow individualistic egocentricness to jeopardize the progress of this giant nation.
The government is determined to nurture private sector participation, hence it licensing of private refineries and deregulation of petroleum product prices in order to improve local capacity. In the next 3-5 years, consolidation is expected in the oil refining and marketing sector.
Based on the usual nature of deregulation, price of such commodity may initially bite hard, but in the shot run, there is nothing stopping it from dropping to it lowest minimum price level. Deregulation is not degeneration; therefore, the policy ought to be initiated.
The merit of deregulation out weight what the enemies of the policy are preaching. The fact remains that Nigerian economy need to be stabilized and the stability of the economy begins from the petroleum sector since our economy is monopolistic in nature. The huge amount of fund federal government spends on subsidy need to be re-channelized to other crucial sector of the economy.
However, Nigerians should begin to see government progammes such as deregulation policy from positive direction since the long run dividend cannot be overemphasized.
RECOMMENDATION
The research work focused primarily on the contemporary government policy on the petroleum downstream sector with an extraordinary and validated idea of scholars.
The research is an action investigation which presumed to provide quick solution to the problem at hand. Meanwhile, enough information is embedded in order to make conscious citizens adequately informed.
In my opinion, this report is therefore recommended to all economic agents. Through this report, consumers of petroleum products will be adequately informed about the development in the sub sector, while investors [domestic or foreign] need to be aware that the sector has become more save economically. It will as well facilitate the attainment of macroeconomic objectives
It is also recommended to the unborn generations since it will serve as a study guide and reference material to them.
SUGGESTION FOR FUTHER STUDIES
There is need for further studies as long this sector is concerned, since the scope of the sector will get more escalated as a result of government deregulation policy.
More economic stimulating theories need to be formulated only if Nigerians are conversant about the mega blessing that is endowed in this giant territory.
RE: To some school of though that hold the view that deregulation policy cannot be accomplished; it may be realistic, but all the same, further research ought to be carried out in order to be able to expose and rectify the likely constraint whether endogenous or exogenous that may retrogressing the growth of the centrally focused sector in the long run.
References:
Dedolpo A. [2009]; Privatization and Deregulation
Akiner et al. [2004]; The Capsin: Politics, Energy and Security
New York: Routledge.
Johnson U. A [2009] History of Nigerian Petroleum Industry
Publisher of Comprehensive Economics, for Senior Secondary
School.
Kombo M. B. [2009] Mode of Deregulation in the Downstream Sector of Nigerian Petroleum Industry
Lawal W. A. [2009]; Public Finance
Department Of Economics, EACOED, Oyo
Manassetream E. [2009]; Deregulation Policy of the Petroleum Downstream Sector; Good or Bad?
Speight & James, G. [1999]; The Chemistry and Technology of Petroleum.
