The Effect Of Oil Subsidy On The Welfare Of Nigerians

The Effect Of Oil Subsidy On The Welfare Of Nigerians
Abstract
The petroleum sector is an indispensable body in Nigeria economy. It has remained the Nigerian biggest revenue earner. It still brings in more than 80% of the foreign exchange earned by the country. However, this resulted in the shortage of the quantities of petroleum products consumed locally in the country. Hence, the problem of development is generally faced in Nigeria. This work will as well go to show what actually constitute the petroleum subsidy in Nigeria. It will analyze the cost to the government if not removed and the welfare of the local consumers. It will also reveal to a greater extent what effect it has on the GDP of the economy, at its full sustenance, partly to be taken in the issue of petroleum subsidy in Nigeria. The research work used a dummy variable to explain its finds (1 when there is subsidy and when there is no subsidy).The research work however, looks into the impact of petroleum subsidy on the consumption of petroleum products in Nigeria and it was found that there are more consumption of petroleum products with subsidy than without. Among other recommendations the study opines that government should diversify the economy as quickly as possible and direct its positives to other sector of the economy that have been overlooked.
Chapter One
Introduction
This chapter states the effects of oil subsidy removal and how this affects the general well being of the ordinary Nigerian.
1.1 Background to the Study
According to Oxford Dictionary of economics, subsidy is a payment by the government to consumers or producers which makes the factor cost received by producers greater than the market price charged by producers. It is a financial aid granted by a government to individuals or groups; usually in the form of cash payment to an industry or tax reduction so that price of commodity or a service may remain low for reasons of public welfare. Governments grant subsidy to supplement citizens income, influence the cost and supply of some vital commodities to make price competitive, to remove some type of burden and to gain political will. Subsidy can also be an interventionist programme which aim at reducing the negative effect of market competition as put forth by the United Nation (2001), that “government intervention which may involve the use of subsidy, is intended to remedy such market failure either by addressing their causes or by trying to replicate the outcome of a perfect market”. Hence, social consideration such as concern for the poor, the sick and the disadvantaged may also provide a rationale for subsidizing fuel.
Nigerian government like other countries of the world is not an exception in ensuring the provision of such social safety nets. Over the years, it has used N3.0 trillion on fuel subsidy between 2009 and 2011 to provide for social and economic welfare. (Business Day Nigeria, 2012). This amount can be compared with the combined Federal Government budget deficit for the same period which was approximately N3.3 trillion. In 2011 alone, the amount spent on fuel subsidy was over N1.3 trillion which was greater than what was allocated to agriculture, infrastructure, education, and health(Business Day Nigeria, 2012). Among the products produced in the oil sector, premium motor spirit is the most consumed by Nigerians due to its significance in car use; with various fuel subsidy debate, this product price is usually more affected in terms of increase in its price. The increase in the product price usually affect consumer welfare due to its effect on transportation and consequently increase in price of other products that are associated with premium motor spirit, which includes kerosene, wax, bitumen e.t.c. Premium motor spirit is one major product that have received much attention on the debate on oil subsidy removal.
The recent subsidy removal on Premium Motor Spirit (PMS), by the Nigeria’s government seems to contradict its role in the promotion of its citizen’s wellbeing. Even though, government removed the subsidy with the intention of promoting investment and output in the oil and other real sector of the economy. On the other hand, the members of the public are not clear about its relative effect on the different socio-economic groups. This is because fuel is strategic to input-cost which can easily diffuse into the selling prices of most firms and businesses. Critical as fuel is to economic development, care must be taken to achieve the desired result; otherwise, nominal prices will have a serious knock-on effect on the total welfare of the Nigerian citizens. For instance, in year 2001, Nigeria had spent over one billion and five hundred million(N1,500,000,000.00) to subsidize fuel while in 2002, the amount spent on subsidy was twenty eight billion, three hundred and four million, eight hundred and ninety five thousand, eight hundred and eighty five naira and sixty kobo(N28,304,895,885.60.) Similarly, the amount of subsidy spent in 2003 amounted to thirty four billion, three hundred and eighty three million, two hundred and six thousand one hundred and sixty four naira with a percentage change of 21%(N34,383,206,164) and subsequently fifty one billion, eighthundred and six million, five hundred and forty four thousand, five hundred and seventeen naira and forty four kobo(N51,806,544,517.44). With a percentage change of 51% in 2004, Eighty six billion, two hundred and twenty eight million, two hundred and sixty two thousand, eight hundred and fourteen thousand and seventy seven kobo (N86,228,262,814.77) in 2005 with a percentage change of 66%, one hundred and nineteen billion, seven hundred and six one million, four hundred and ninety two thousand, two hundred and forty six naira (N119,761,492,246.00) with a percentage change of 83% in 2006, in 2007,two hundred and sixty one billion, one hundred and five million, three thousand, five hundred and fifty nine naira (N261,105,003,559) with a percentage change of 118% in 2008, six hundred and thirty billion, five hundred and seventy million, nine hundred and twenty three thousand, four hundred and seven naira and forty six kobo (N630,570,923,407.46). With a percentage change of142% in 2009, six hundred and seventy three billion, seven million, eighty two thousand, one hundred and eighty two naira and fifty four kobo N673,007,082,182.54). with a percentage change of 6.7%,six hundred and seventy three billion, seven million, eighty two thousand, one hundred and eighty three naira(N673,007,082,183)with a percentage change of 6.8% in 2010, one trillion, three hundred billion naira(N1,300,000,000,000) with a percentage change of 93% in 2011. This amount kept on increasing grossly despite the partial subsidy removal. Hence, the attempt in this study is to assess the relative effect of subsidy removal on the welfare of Nigerians.
1.2 Statement of the Problem
The oil sector is one of the most critical sectors to economic and social development of Nigeria. Adequate oil supply is not only a strategic input for the national development but it is undoubtedly the most vital input in transforming the industrial sector for economic growth. Particularly in Nigeria where oil is the dominant source of revenue contributing more than 80% of its revenue and 95% of its foreign exchange income (Business Day Nigeria, 2011).
In the past, government has devoted so much money into the Nigerian oil sector in form of subsidy to ensure low prices of petroleum products to its citizens. This subsidized price is expected to have maximum welfare effect on poor Nigerian. However, the amount of subsidy has been on the increase in budgets while the expected low prices of petroleum products has also been increasing with various reforms in the oil sector. Thus, the initial societal welfare that is the goal of government subsidy in the oil sector is not being maximized. The problems have been corruption of both government agencies like the Nigerian National Petroleum Corporation (NNPC), the Petroleum Product Pricing Regulatory Agency (PPPRA) and firms participating in the oil sector as marketers. The corruption level can partly be associated with non-production of oil by Nigerian refineries hence producing below average capacity and high importation of refined petroleum product. Thus, the social cost of refining and importing fuel outside the country has outweighed the social benefit (high subsidized cost to government and high prices of fuel to the citizens). The above statement is evident by the recent government policy of deregulation of the sector via subsidy removal on the account that the subsidy does not reach the targeted citizens.
In addition, over N1 trillion was claimed to have been lost to corruption as revealed by the House of Representative Probe Panel on subsidy fund Management. The Ad-hoc Committee findings also revealed the corruption by the NNPC and PPPRA along with 72 other firms which were to refund N1.07 trillion that was fraudulently paid to some oil marketers who never made any supply. Hence the real effect of oil subsidy removal on the well being of Nigerian citizens need to be ascertained.
1.3 The Research Questions
The following research questions will serve as an important guide to the study:
- What is the nature and trend of money put aside as subsidy by Nigerian government?
- What is the cost and benefit of subsidy in Nigeria?
- What is the welfare implication of its removal of subsidy on GDP, budget and sect oral allocation?
- How can the effect of subsidy removal be averted?
1.4 The Objective of the Research
This research is an attempt to investigate the controversy of government policy of removing fuel subsidy to reinvest the amount in the real sector and its possible implications on the welfare of its citizens as well as the economy. In addition, the research will;
- To examine the nature and trend of money value set aside as subsidy by Nigerian government.
- To evaluate the cost and benefit of subsidy in Nigeria.
- To assess the impact of subsidy removal on welfare via its impact on GDP, budget and sect oral allocation.
1.5 Research Hypothesis
The hypothesis to be tested in this research work, are;
- H0 – There is no relationship between subsidy and the people’s welfare in Nigeria.
H1- There is relationship between subsidy and the people’s welfare in Nigeria. - H0- Subsidy removal has no significant impact on the welfare of the Nigerian citizens.
H1 – Subsidy removal has significant impact on the welfare of the Nigerian citizen.
1.6 The Scope and Limitation of the Study
The scope of this study is effect of subsidy removal on the welfare of Nigerians. The study focus only on the subsidy removal which has been a debate since 1999 till date. The study will in no way delve into serious political issues as this does not constitute part of the research objectives. The period to be considered is from year 2001 to 2011. The choice of the period is to enable the study to examine the implication of subsidy removal on economic activities of individuals in the society that are likely to be affected. The study looked at the implication of subsidy removal on budget and GDP.
1.7 Justification of the Research
The major goal of any economic policy is to achieve optimal welfare for its populace. This welfare is a broad term that cannot be totally captured in this study. However, the research will only consider the aspect of welfare that can be measured in the amount of money spent on consumer goods and services, as emphasized by Jhingan (2003) that economic welfare is that part of social welfare which can directly be measured in money. He further stressed that increase in economic welfare can result into increase in the total welfare of any society. This study highlights the cost and benefit of subsidy removal and its welfare implication on Nigerians.
This research will be relevant to the policy makers. It will guide them to make quality policy that will serve the best interest of the general public. Its recommendations will also provide some practical solutions to subsidy issues in Nigeria and finally, the research is expected to contribute to the general body of knowledge and further serve as reference material to future researchers in the field.
1.8 Chapter Organisation
This project is organized into five chapters; chapter one introduces the background of the study as well as the research problem, objective and the significance of the study. Chapter two deals with the literature review. The review of the relevant literature is further divided into: conceptual literature which examine the various definitions and meaning that scholars gave to the term subsidy. Theoretical literature deals with theory that explain subsidy implication on prices, quantities supply as well as quantities demanded while empirical literature sited other people’s research work and findings in similar study.
Chapter three focuses on the research methodology which outline the method adopted in the research. Chapter four is concerned with the data analysis, presentation and the interpretation of the result using the method specify in chapter three. Finally chapter five contains the summary, recommendations as well as the conclusions of the study.
Chapter Five
5.0 Summary, Conclusion and Recommendation
Introduction
This chapter presents a general synopsis of the entire work, and offers some recommendations in the light of the findings made.
5.1 Summary
This research project is an attempt to investigate “The welfare effect of subsidy removal in the Nigeria oil sector”. This concern has its root from the current economic predicament under focus in the society and the seeming inability of the relevant stakeholders to surmount this challenge as portrayed by the recent probe on subsidy management by the house of representative ad-hoc committee. This is with the view to arrive at useful suggestions and recommendation that will help to improve the achievement of welfare goal of the state.
Also, seeing that development in the oil sector; with respect to fuel prices, supply and consumption have major implication in the industrial production and the nation’s development, it is imperative to settle theoretical and practical issues surrounding the long standing controversy of fuel subsidy which has often heated the nation’s polity.
In an effort to test the validity of the hypothesis built around this work, secondary data were sourced out, regressed and analyzed. Thus, the emerging fact suggests many implications. One of the findings is; it was discovered that inefficiency in the management of the subsidy alongside corruption arisen from individual hedonistic interest has hampered the national interest and consequently resulted into dead weight loss – a loss that can be avoided if transparency prevails over the oscillation of selfish interest. To achieve the state’s welfare goal, the integral institution necessary to check this human tendency must actively work together to monitor, observe and to sanction all forms of deviation from the laid down laws and regulation.
Based on the regression result and the tests carried out, one can say that subsidy positively impact welfare of the Nigerian citizens. Nonetheless, looking at the other side of the coin, the limitation posed by the internal factors such as the attitude of the regulatory agencies (NNPC and PPPRA), and marketers has become a game of gain. Over the past decade, this challenge has been expensive that what was subsidy then has now been eroded that the targeted population received only a little out of the huge amount sunk. It is this residual portion of subsidy that the masses so much value to protest its removal. Thus one can not ignore the positive impact of this subsidy in contributing to the welfare of the ordinary Nigerian Citizens.
5.2 Conclusion of the Findings
This research work is intended to throw some light into the contribution of subsidy to welfare and the likely implication of removing subsidy in the Nigeria’s oil sector. Based on the data obtained and the trend analysis conducted, it is evident that subsidy growth contributes to welfare growth. Also, the regression result suggests that subsidy removal does not only affect the welfare of the populace but also destabilize economic activities. Therefore, a gradual reform of the sector by putting necessary machineries to replace the existing ones is the best way. The study also indicates that PMS consumption contributes to real GDP while contrary to expectation, budget expenditure have an inverse ralation with GDP; in light of these findings, some recommendations are hereby proffered below
5.3 Recommendations
- Subsidy removal adversely affects the welfare of the average Nigerians citizen. Therefore the authorities concern (Government) should put the necessary alternative welfare programme in place before removing subsidy.
- Government should intensify effort to combat corruption which remains a canker that surreptitiously destroys the economy before it is notice.
- Government should cut down its extra-political and administrative spending by 35% in order to reduce financial constrain arising from its increasing desire to reduce welfare spending.
- Our four refineries should be put to full capacity and more should be licensed. This is because an import-based deregulation only helps to create job opportunities abroad thereby increasing the nation’s unemployment problem.
- Policy makers should be equipped with both economic and political expertise so as to enable them to consider the best policy alternative that properly serves the interest of the nation. This will also enable them to adequately analyse the long run cost and benefit.
- Government should encourage the implementation of transparent institutions and regulatory authorities that will ensure accountability and strong policy implementation environment.
- The need for a balance welfare reform. There is need for government to properly restructure a balance welfare reform that will reach the targeted population. Also, since the welfare of a state is organic (i.e. interdependent), the reform should go beyond oil sector to include other real sector like agriculture and manufacturing sector.
- The government should checkmate the activities of the Nigerian National Petroleum Corporation (NNPC) and the Petroleum Product Pricing Regulatory agency (PPPRA) for proper record keeping and accountability.
- Government should strictly consider all the recommendation put forth by the house of representative ad-hoc committee on subsidy management.
- There is need for a gradual implementation of subsidy reform in order to enable the masses adjusts their energy consumption alongside their income.
- The adverse impact of subsidy removal on the income and welfare of low income group should be compensated to upset the effect o inflation shock on their real income.


The Complete Material Will Be Sent to You in Just 2 Steps
Quick & Simple…
![]()
Make Payment (Through Transfer) of ₦5,000 to the Account Below
![]() | Acc No: 0811003731 |
| Samphina Academy | |
| Current Account |
Or CLICK HERE To Pay With Debit Card
| FOR STUDENTS OUTSIDE NIGERIA | |
| CLICK HERE To Pay With Card ($15) | |
| FOR GHANA STUDENTS (GHS 100) | |
![]() | MTN MoMo |
| 0553978005 | |
| Douglas Osabutey | |
![]()
Send the Following Details on WhatsApp ( 07062590260 ) After Payment
- Payment Details
- TOPIC: The Effect Of Oil Subsidy On The Welfare Of Nigerians
The Complete Material Will Be Sent To You On WhatsApp After Receiving Your Details
T & C Apply
Students Review
List of Related Works
The Impact Of Government Expenditure (Subsidy) On The Consumption Of Petroleum Products In Nigeria
The Impact Of Fuel Subsidy Removal On Poverty In Nigeria
Fuel Subsidy Removal And The Nigerian Economy
Implications Of Fuel Subsidy Removal Crisis In Nigeria
Fuel Subsidy Removal And Microeconomic Performance In Nigeria
Effect Of Fuel Subsidy On The Economy Of Nigeria
The Impact Of Petroleum Subsidy On The Consumption Of Petroleum Products In Nigeria
Audience Perception Of Federal Government Removal Of Fuel Subsidy In January 2012
Political Economy Of Fuel Subsidy And Sustainable Development In Osun State
The Effects Of Fuel Subsidy Removal On Nigerians’ Standard Of Living
The Impact Of Government Subsidy On Household Energy Consumption Patterns In Maiduguri
Oil Subsidy Removal And National Development
The Impact Of Staff Welfare Scheme On Workers Productivity: A Case Study Of Colben
Staff Welfare And Job Performance (A Case Study Of Eco Bank Nig. Plc, Ikpoba Hill Branch)
The Impact Of Effective Unionism On The Determination Of Workers Welfare
Labour Welfare And Industrial Relations In A Depressed Economy
The Impact Of Incentive Welfare Schemes On The Performance Of Workers
Knowledge Of Family Planning Among Women Of Childbearing Age (20-35) Attending Infant Welfare Clinic
Survey Of Social Welfare Service In Nigeria Prisons
The Impact Of Staff Welfare On Organizational Performance
Impact Of Employee Welfare Services In Emenite Co Ltd
Nexus Between People’s Welfare And Government Economic Policies: Evidence From Ekiti State
Employee Welfare Programme In Nigeria (NITEL Limited)
Impact Of Lecturers Welfare On Academic Performance Of Tertiary Institution Students
Assessing Economic And Welfare Values Of Fish In The Lower Niger River
The Impact Of Teachers Welfare Package On Teachers Job Satisfaction
An Investigation Into The Effect Of Family Welfare On The Performance Of A Missionary
Media Staff Welfare And Effective Journalism In Nigeria
Staff Welfare And Institutional Development
Employee Welfare Programme In Nigeria (Nitel Limited)


