Introduction
On the 11th of May, Nigeria topped the BBC news headlines with the headline that Nigeria had decided to raise the petrol prices in order to ease the shortages in the country. For an economist, this kind of a news headline is bound to trigger your thoughts as to why this particular nation had decided to increase the prices having in mind the fact that the country is Africa’s largest producer of oil and also it has a fair share of the international oil market.
The country’s legislative arm stated that it had found it wise to allow these prices of oil products particularly petrol at least by two-thirds in order to ease what the country’s economists would term as the crippling fuel shortages. The expectation of those behind this directive expressed high hopes that it will translate to improved competition and supply which in the end will lead to an overall drop in the pump prices.
Summary of the News
On the 11th of May this year the petroleum minister of Nigeria Kachikwu Ibe publicly announced that the ministry of economic affairs in the country had come up with a new legislative aimed at ensuring the country reaps the benefits accruing from the main economic pillar of the country. He stated that the oil prices were set to cost 145 naira which is an equivalent of $ 0.73 up from the previous price of 86.4 naira. This meant that the prices were to rise by almost double what the previous price was.
He stated that by doing this the country retailers did not have to worry as they would also benefit from the directive by getting more money, this was an assurance to the retailers to make them not get hold of the fact that the government in the new legislative had also decided to cut back on the costly subsidies on oil and petrol. This meant that the retailers too have to dig deeper into their pockets to acquire the product.
Over the recent past, the country has been experiencing a frequent shortage of petrol which has seen the prices shoot especially on the “black market” to as high as 250 naira per liter which is not a case expected for such a country with many oil deposits. The hike of these prices in times when the demand is too high as a result of the shortage has not been the only abnormal thing in the market. This largest producer in the continent at times has even had to import fuel into the country to meet the demand.
There are several reasons according to the petroleum minister which have led to such a scenario; the first reason is the state of the current oil refineries in the country. They are in dilapidated to a very great extent to the point where they current work at what can be termed as a smaller fraction of their capacity. Most of these refineries machinery have not been serviced for many years since they were established.
The second trigger for the condition is the fact that the importers of the petroleum in the country are unable to source for the foreign exchange at the rates which are official. The reason for this is the massive decline in the foreign exchange earnings of the country’s federal government.
Economic Analysis of the Situation in Nigeria
There are several reasons for the situation in Nigeria which are in play in the economics of the country. It is through the examination of the economic principles that we can be able to realize the reason as to whether the move and decision by the petroleum minister is meant to worsen or improve the situation being experienced in the country having in mind the fact that the country is experiencing a shortage in the local supply while at the same time a very high demand for petroleum.
We can break down the economic situation through an analysis using the economic principles and having in mind that they are the tools which determine the direction of the economy and in this case, they can be able to explain why the situation in the country has been prevalent every now and then (O'Connor & Faille, 2000).
The trade-offs principle is a key player in this economy, in a bid to reinstate the benefits accrued to the country from the oil benefits then the country has found it important that they raise the cost of the oil and at the same time withdraw the subsidies that were previously being injected to the oil economy. The reason for this decision is related to a discovery that much of the subsidies were ending up in people’s pockets as embezzled funds.
The opportunity cost principle which practically is aimed at reinforcing the trade-offs principle, in the case of Nigeria the government has decided to give up the benefits the Nigerians were enjoying over short-terms for a course which will guarantee long term benefits. The increased funds together with the subsidies are aimed at ensuring the refineries infrastructure is improved. It was also found out that corrupt practices are the reason why the shortages are frequently experienced thus the finances were also pumped into fighting the vice through careful research and analysis as to where the practice is rooted.
This principle is also conjoined to the rationality principle. This is because the government had realized that the rational decision to apply these two directives were cost friendly to the economy rather than having to borrow funds from external sources in the form of loans and grants which would see the economy get subjected to inflation. Rationally thinking it was a wise move because during the low-supply season the prices rise to almost double the price the government has currently set. The revenues are lost to cartels who benefit privately. These prices would ensure that the revenues obtained by the federal government benefit the whole country.
As a tool and not rule there is also an incentive principle at play in this particular situation, the incentives which the people used to enjoy the purchase of the local petroleum was in the form of subsidies. This means that the pump owners were the ones pocketing these incentives. To ensure that these customers for the government are not lost to foreign players the government has raised the petroleum prices these means that the same retailers will still indirectly benefit from the raised prices. Application of these directives appear as the better trade-offs if not good, this is because they depict how the cooperation and shared responsibility will end up benefiting all the people in the country and not just a few people who take advantage of the situation this also emphasizes the “market is good” principle as the main link on how the government is linked to the market forces and their co-ordination.
In Nigeria what is evident is the externality principle at play. This is because the principle guides us in establishing the fact that the market is not independent, and the occurrences within the market are a result of the cultural and political set up. The current government in Nigeria took office in last year march. The main reason why they government won in the democratic elections was due to the fact that the president promised the people of Nigeria that on assuming office the first reforms which would guarantee economic growth for the country would be streamlining of the oil industry. The market was marred with corrupt practices which in the long run would end up crippling the economy. This would be through sending home the corrupt government officials then establishing the areas of the economy where people were taking advantage of the industry.
The ‘real’ principle in the country is also evident where despite the country being the largest producer of oil in the continent it also exports oil from other economies. A look at the country’s GDP is also on the decline, in this case, the resource being produced by the economy does not guarantee maximum returns. It has been established that the key reason as to why this is the case is because Nigeria does not refine the oil but it exports most of the crude oil to other countries where the value is added ant the different country benefits.
The ‘money illusion’ principle, in this case, there is a large amount of money within the economy but less of the actual product consumed by the people this has seen the forces of demand and supply at play leading to inflation. The move by the government to withdraw the subsidies is a positive stride towards recovery as the excess amount of currency will be invested back into the economy. This is also linked to the macroeconomic policy principle the inflation is linked to the current unemployment being experienced in the country, there are many possible explanations for this forces.
Conclusion
Having pointed out the current situation in the country, the forces behind the crisis in the oil industry in Nigeria and the government initiative towards reversing the situation it is only a matter of time before we can assess the situation. My perception, however, is that the industry in Nigeria is likely to improve and even pause better results that in the past only if the government remains committed to eradicating corruption. There is a strong government will but over the past years, little has been actualized. Could this be a new dawn for the country’s economy?
References
O'Connor, D. & Faille, C. (2000). Basic economic principles. Westport, Conn.: Greenwood Press.
http://www.bbc.com/news/world-africa-35990319
