On January 18th 2015, the Nigerian government through the Minister of Petroleum, Diezani Alison-Madueke, in an unprecedented move, announced that the pump price of fuel (petrol) is reduced from N97 ($0.52) to N87 ($0.46) per liter. That's a N10/liter reduction (1 liter is about quarter of a gallon).

On first thought, this pump price reduction is a welcomed development, especially when you consider that nothing goes up and comes down in Nigeria (in most cases), except for the price of Dangote Cement and the reduction in the initially proposed fuel price which led to the "Occupy Nigeria" protests in 2012.

I live in America, so for the purpose of this post, I'll reference the United States. Please note that I don't intend to make a direct comparison between Nigeria and the U.S. They are two different countries that have gone through different democratic experiences. Sometimes, we unfairly compare both countries and Nigeria is always at the shorter end of the stick.

In the U.S., the forces of demand and supply determine the prices of commodity. That's why the economy here is majorly referred to as a Capitalist Economy. In regards to oil, there's no set pump price; the cost per barrel of crude oil ultimately determines how much we pay at the pump.

At the time of writing this post, a barrel of crude oil sells for about $49. To put it in perspective, a barrel of oil was about $113 and gas prices in Texas was over $3 per gallon around this time in 2014. Right now I can get gas for $1.67/gallon. You see that the pump prices rise and fall with crude oil prices.

In Nigeria however, the price of fuel at the pump is set by the government. That takes away any form of flexibility in the market. According the government, the N97/liter price is still heavily subsidized. I bet the new price is still subsidized.

After this new pump was announced, some Nigerians opined that the government can do better than the "N10 change" and even suggested that prices should be returned to the $56/liter what it used to be prior to the 2012 hike.

The Goodluck Jonathan led government has argued for the removal of oil subsidy, claiming that it costs the government so much money and the money realized from the subsidy removed can be used to build infrastructure and further develop the country.

The government's argument seems reasonable, if (a big IF) the free market is allowed to determine the pump price and not setting a fixed price. Unfortunately, a long history of corruption and mismanagement makes the argument difficult to sell to Nigerians. How do we know that some group of oil cabals wouldn't embezzle all that money? Can we even trust the free market to behave as it ideally should? The last thing we want is a situation where crude oil prices fall (like it now is) and consumers are not feeling the effect at the pump. Trust me, this can very well be the case.

With all these, I ask: Should the subsidy be removed and let the forces of demand and supply determine fuel price? Keep in mind that the oil market (as with most commodity) is like a sine curve; it rises and falls over time :-D .

Share your thoughts!

http://infonubia.com/2015/01/is-it-time-to-let-the-free-market-determine-fuel-price-in-nigeria.html