The Effect Of Increase In Fuel Price On Transportation

Project and Seminar Material for Economics

Abstract

Fuel is a major factor among many others influencing transport costs and transport rates in Nigeria. This aim of this study to examine the effect of price hike of furl on transportation system using Ascent Transport Management Abuja as a case study. The study made of simple random sampling and responses were derived from the staffs of the company using questionnaires. Findings from the study reveals that the increase in fuel prices affects both passengers and the profitability of transport companies. The study recommends above all thing that government should ensure they bring back the fuel subsidy policy and more so transportation companies should seek for more strategies that would help them remain in business in the face of low patronage from passengers during fuel increment.

Table of Content

TITLE PAGE
Certification
Dedication
Acknowledgement
Table of Content
List of Tables
Abstract

Chapter One:

Introduction

1.1 Background of the study
1.2 Statement of the problem
1.3 Objective of the study
1.4 Research Question
1.5 Significance of the study
1.6 Definition of terms

Chapter Two:

Review of Literature

2.1 Review of concepts
2.2 Theoretical Framework
2.3 Review of Empirical studies
2.5 Chapter Summary

Chapter Three:

Research Methodology

3.1 Research Design
3.2 Population of the study
3.3 Sample size determination
3.4 Sample size selection technique and procedure
3.5 Research Instrument and Administration
3.6 Method of data collection
3.7 Method of data analysis
3.8 Validity and Reliability of the study

Chapter Four:

Data Presentation and Analysis

4.1 Data Presentation
4.2 Answering Research Questions

Chapter Five:

Summary, Conclusion and Recommendation

5.1 Summary
5.2 Conclusion
5.3 Recommendation
References
Appendix

Chapter One

Introduction

1.1 Background of the Study

Price fluctuation in the market for fuel has a constantly evolving effect on the logistics industry. Rapid increases in the price for fuel can have a delayed and devastating effect on freight management companies, and a sudden fall could result in short-term boosts in profit and a surge of competition within the market to provide consumers with the lowest price.

One of the major components of globalization is the transportation sector, which plays a very significant role in daily activities and the economy. During the 20th century, trade scale changed from local to global and therefore freight transport system became a global network. In particular, freight transportation is one of the most important economic activities. Freight transport has been growing even more rapidly than passenger transport and is expected to continue to do so in the future (Ribeiro et al, 2007). Truck, train, and ship are the three common transport vehicles being used for movement of containers, which are characterized by a number of advantages and disadvantages. The cost of transportation is an important selection criterion among influential parameters on identifying the appropriate mode of transportation mode for freight shipment. The main challenge of today’s transport costs is oil price. Freight movement in most modes remains largely dependent on expensive and finite fossil fuels, predominantly diesel fuel (Russell et al, 2014). The foremost single factor affecting the retail price of diesel fuel is the price of crude oil (Noordin et al, 2009). Crude oil as an energy source is a vital component that determines the condition of the world economy (McSweeney et al, 2008). Its price fluctuations impact on all industrial sectors whether directly or indirectly, be it in banking, energy, retailing or transportation industries. The impact of oil prices on transport sector depends upon three issues, which are, the relevance of the oil price on the cost of the energy used for each transport mode, to what extent oil price is transferred to transport fuel prices, and the relative weight of the energy cost on total operating costs for each mode (Casamassima et al, 2009). Fuel prices are a cost to transportation industries and a direct cost to consumers. Fuel price is one of the most important factors affecting transport cost, which comprises more than 50 percent of the total operating cost for the transportation industry nowadays (Ribeiro et al, 2007). Since the sensitivity of transport operating cost to the oil price change varies significantly across shipment modes, the oil price has become an important factor in freight mode choices. Casamassima et al. Noordin et al, (2009) revealed that the sensitivity of fuel costs of road mode and railway crude oil price was 40%, while maritime was 100% since marine fuels are exempted from government taxation. In addition, they estimated the influence of doubling of crude oil price on transport cost of road and rail freight was 10%, while for maritime was 50%.

As the cost of fuel rises, carriers are forced to raise prices or take losses. In turn, the cost of fuel does not only effect the logistics company, but also the shipper and the profit source of the shipper as well. It is an outward domino effect: If it costs more for the freight carrier to transport the freight, the shipper is going to be charged more to make up for this. If the shipper is going to be charged more to transport the freight, the receiver is going to be charged more to make up for their added costs.

1.2 Statement of the Problem

The Petroleum Products Pricing Regulatory Agency (PPPRA) announced on Thursday 11th March, 2021 that the Nigerian government has increased the pump price of petrol to N212.61 per litre. According to the agency, the landing cost stands at N189.61 per litre while fuel depot owners will sell to marketers at N206.42, (Premium Times reports).

This announcement comes days after Nigerians suspected there would be a hike in fuel price as depot owners were reportedly hoarding the product, and increasing prices with expectations of fuel price increment by the government, even though the NNPC responded to the speculations via a statement by its Group General Manager, Group Public Affairs Division, Kennie Obateru.

As the price of fuel increases, other basic needs of Nigerians including transportation and the cost of goods and services, to name a few, are also expected to increase in price, making it more difficult for the average citizen to afford food and other basic needs, especially without any increase in their income.

Nigerians have since taken to social media with the hagtag #FuelPriceHike to object to the decision, with several people calling for a protest in Ojota, Lagos State. Many Nigerians on there social media pages have been complaining that Nigeria no longer use coins and with the increase of fuel price to N212.61 per litre, how would they be able to get their balance when ever they purchase petrol. In 1978, fuel price per liter was 0.5 kobo. Today, #FuelPriceHike is a major problem to the Nigeria’s economy especially for an average Nigerian. Hence, this study seeks to investigate the effect of 2021 fuel price hike on transportation system in Nigeria.

1.3 Objective of the Study

The main purpose of this study is to investigate the effect of increase in fuel price on transportation using Ascent Transport Company (ATM), Abuja as a case study.

The study specifically aimed to:

Examine the effect of fuel price increase on passengers of ATM, Abuja.
Find out the effect of fuel price increase on business operations in Abuja.
Investigate the effect of fuel price increase on the profitability of ATM, Abuja.

1.4 Research Questions

What is the effect of fuel price increase on passengers of ATM, Abuja?
What is the effect of fuel price increase on business operations in Abuja?
What is the effect of fuel price increase on the profitability of ATM, Abuja?

1.5 Research hypotheses

The following null hypothesis will be tested in this study:

Ho1: Fuel price increase does not have any effect on passengers of ATM, Abuja
Ho2: Fuel price increase have no effect business operations in Abuja.
Ho3: Fuel price increase does not have any effect on the profitability of ATM, Abuja

1.6 Significance of the Study

This study will enable the government of Nigeria to see the need to put measures in place to subsidize fuel in the country and avoid unnecessary hiking of the fuel price. This study will also help transport companies to draft a good strategy and mechanism to always curb the fuel hike issues in the nearest future. This study will further serve as an eye-opener to the general public to know that when ever there is a fuel hike in the country, transportation tends to be expensive. This study will also serve as a reference piece for future research on this or related domain.

1.7 Scope of the Study

This study will focus on investigating the effect of increase in fuel price on transportation. This study will also examine the effect of fuel price increase on the profitability of ATM, Abuja. This study will be delimited to only the staffs of ATM, Abuja.

1.8 Limitation of the Study

Like in every human endeavour, the researcher encountered slight constraints while carrying out the study. Insufficient funds tend to impede the efficiency of the researcher in sourcing for the relevant materials, literature, or information and in the process of data collection, which is why the researcher resorted to a limited choice of sample size. More so, the researcher simultaneously engaged in this study with other academic work. As a result, the amount of time spent on research will be reduced.

1.9 Definition of Terms

Effect:

A change which is a result or consequence of an action or other cause.

Price Hike:

A sudden or large increase in prices, rates, taxes, or quantities.

Transportation:

Transportation is the movement of humans, animals and goods from one location to another.

1.10 Organization of the Study

This research work is organized in five chapters, for easy understanding, as follows Chapter one is concern with the introduction, which consist of the (overview, of the study), statement of problem, objectives of the study, research question, significance or the study, definition of terms etc. Chapter two highlight the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding. Chapter five gives summary, conclusion, and recommendations made of the study.

Chapter Five

Conclusion and Recommendation

5.0 Introduction

This chapter summarizes the findings into the effect of increase in fuel price on transportation using Ascent Transport Company (ATM), Abuja as a case study. The chapter consists of summary of the study, conclusions, recommendations and suggestions for further studies.

5.1 Summary of Study

In this study, our focus was to examine the effect of increase in fuel price on transportation using Ascent Transport Company (ATM), Abuja as a case study. The study aimed at examining the effect of fuel price increase on passengers of ATM, Abuja, finding out the effect of fuel price increase on business operations in Abuja, and investigating the effect of fuel price increase on the profitability of ATM, Abuja. The study made use of random sampling. 80 eighty responses were elicited from the field survey. Staffs of Ascent Transportation Company form the population of the study.

5.2 Conclusion

The following conclusion was drawn from the finding of the study

Fuel price hike has a significant negative impact on Nigeria Transport system and passengers as a whole.
The increase in fuel price limit mobility of passengers who would have love to travel because of the fright that cost of transportation is on the increase
Increase in fuel has a negative impact on transport companies as they tend to invest more on low energy vehicles and reduce the number of their vehicles on the road.
Moreso fuel price hike affects transport companies as they limit the number of route they toll. This is because their might be a low tide of patronage from passengers.
By limiting the number of vehicles makes cost of operation high for transportation companies and their over heads increased as they might be forced to shut down a bit until fuel price comes back to normal.

5.3 Recommendation

The following recommendation was made due to finding of the study

Government of Nigeria should see the need to put measures in place to subsidize fuel in the country and avoid unnecessary hiking of the fuel price.
Transport companies should draft a good strategy and mechanism to always curb the fuel hike issues in the nearest future
Fuel subsidy will reduce the overall transport costs and rates incurred on transport distance andaccessibility, also, the removal of fuel subsidy will increase the overall transport cost and rates incurred on transport distance and accessibility;
Fuel subsidy will reduce the overall transport costs and rates incurred on product packaging, special handling, bulky or perishable products also, the removal of fuel subsidy will increase the overall transport cost and rates incurred on product packaging, special handling, bulky or perishable products;
If goods are transported in large quantity, more fuel will be required; therefore, the advantage incurred on transporting large volumes of goods is a disadvantage to the amount of fuel to be consumed. If fuel is been subsidized, the cost of fuel to be consumed when transporting large volumes of goods will be minimized but in the case of subsidy removal, the cost of fuel to be consumed will be at a very high rate and transport service provider must be critical and analytical in taking decisions of cost;
In a nation that has no close substitutes to vehicle fuel or energy, fuel subsidy is mostly preferable and will results into reduced transport costs and rates but in the case of fuel subsidy removal, transport costs and rates will increase. It is quite better that before subsidy removal, other sources of energy or fuel to power a vehicle such as hydrogen gas, electric, solar and others should be made readily available, for it will normalize the high effects on transport cost and overall production cost;
If fuel is subsidized, the import costs will be minimized but if fuel subsidy is removed, import cost will be very high and this will significantly increase the cost of the products and consumables. If Nigeria will rely on importation, there is need for fuel subsidy. The present shifting in the diversification of the economy should also results into shifting from fuel subsidy to fuel subsidy removal. This will also improve the development of Nigeria economy;
Efficient transport infrastructures results into low fuel consumption and the better if fuel subsidy removed. Also, poor transport infrastructures results into high fuel consumption and fuel subsidy is needed. Hence, fuel subsidy removal should be better considered if the government must have provided a smooth transport network for easy accessibility.

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Frequently Asked Questions

How do fuel costs affect the cost of Transportation?

This means the products are going to be sold to consumers at higher costs to make up for the higher transportation and fuel costs. Basically, higher fuel costs cause product inflation, and affect every aspect of production transportation along the way. The bottom line: higher fuel costs means a higher price passed on to the consumer.

What happens when fuel prices rise?

Rapid increases in the price for fuel can have a delayed and devastating effect on freight management companies, and a sudden fall could result in short-term boosts in profit and a surge of competition within the market to provide consumers with the lowest price. As the cost of fuel rises, carriers are forced to raise prices or take losses.

How do oil prices affect the logistics industry?

When Oil Prices Rise As the cost of fuel rises, carriers are forced to raise prices or take losses. In turn, the cost of fuel does not only effect the logistics company, but also the shipper and the profit source of the shipper as well.

What is the relationship between fuel costs and product inflation?

Basically, higher fuel costs cause product inflation, and affect every aspect of production transportation along the way. The bottom line: higher fuel costs means a higher price passed on to the consumer. When the cost of fuel falls, the reverse generally applies. The savings are passed on to the consumer in the form of lower prices, as expected.