Deregulation Of The Nigerian Downstream Petroleum Sector


This subject matter has been on the policy agenda since the General Olusegun Obasanjo’s administration, and is still a major decision point for the new General Mohammadu Buhari’s administration. I have noticed that some commentators on this issue mistake deregulation of fuels prices with the deregulation of the entire downstream petroleum sector (which comprises of refining, supply and distribution, supply and distribution infrastructure such as pipelines, depots, terminals, etc, and finally retail fuel stations). Previous Nigerian Governments had planned to privatize national refineries because they have been operating inefficiently and far below name-plate capacity. This probably signals the imminence of deregulation of the downstream petroleum industry in Nigeria. However, deregulation needs to take into account the characteristics of the product and sector involved.

I was recently part of a dialogue on this issue, and one of the commentators said that Nigerians are enjoying the beauty of communications through mobile telephony because the sector was deregulated and that he expects a similar outcome with the deregulation of the downstream petroleum sector. I weighed in by asking him to differentiate between mobile phones and petroleum products. He replied, with gusto and verve that both were merely tradable commodities and with ‘my tongue in cheek’ I agreed with him. But here are the facts!

Petroleum products like education or training etc are classified as ‘special products’ or ‘impure public goods’ because their supply has multiplier effects on the socio-economic and political life of a community. However, unlike education the prices of petrol, diesel, and aviation kerosene, and lubricants affect the prices of all transported goods, and by extension all other services. Although such goods and services do not have the basic characteristics of public goods (e.g. roads, national defense, policing, power transmission, etc) they do however contain some public good dimensions. ‘Impure public goods’ can be freely traded in the market but require periodic regulatory interventions because they may be subject to some degree of market failure, with disastrous consequences for society.

As source of fuel, petroleum products have high energy content compared to gas and coal. Their fluidity creates economies of scale during storage. Currently, there are no adequate substitutes for petroleum fuels in transportation, and virtually none in the field of lubrication and aviation. These qualities have combined to make petroleum products the fuels of choice in modern transportation. Therefore, any disruption in fuels supply and distribution within a given location is a call for disaster and will likely result in socially undesirable outcomes.

The economics of the petroleum retail trade presents an equally unique situation. The demand for petroleum products is not price elastic, i.e. an increase in price does not produces a corresponding decrease in demand or volume consumed. Similarly, a decrease in price does not produce a corresponding increase in demand or volume consumed. Petroleum products are similar to tobacco and alcoholic drinks (due to their addictive nature) in the sense that an increase in price does not produce a corresponding decrease in demand or quantity consumed. Hence, most Western Governments tend to derive significant revenues from imposing high taxes on tobacco products, wines, beers and spirits. Government’s usual justification is that for health care reasons, they are compelled to impose these high taxes to discourage the abuse of these products.

However, these governments can afford to levy high taxes on tobacco, wines and spirits, because their prices do not affect the prices of other consumer goods. However, petroleum products are dissimilar to tobacco, wine, beers, and spirits in the sense that a decrease in the prices of these products can produce a corresponding increase in demand or quantities consumed. This unique economics of petroleum products has been a source of potential abuse by non- discerning governments (either through hike in pump prices, or high fuel taxes) and by fuel retailers (through high pump prices) where the prices are unregulated.

Therefore, under a deregulated downstream petroleum regime, the most important aspect that the regulatory agencies have to keep under close watch is the pricing of petrol, diesel and kerosene (i.e. reregulation). Parallel pricing or price leadership are regular features of petroleum products retail market.

–Prof. Nwaozuzu is a lecturer at the University of Port Harcourt

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