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Petrol Subsidies in Nigeria

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Petrol Subsidies in Nigeria

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  • September 8, 2013
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ECON1101 Essay: Petrol subsidies in Nigeria

Nigeria, an oil-abundant nation, produces two million of barrels of crude oil a day, though despite this, it relies solely on importation to sustain its refined-fuel needs. This is because its four refineries fail to function effectively and continue to operate beneath capacity. Governmental mismanagement and political corruption are some of the reasons why Nigeria’s refineries remain in this state. The Nigerian government therefore implemented subsidies in order to minimise and control prices for its imported petrol. These subsidies are government payments to firms, such as the Nigerian National Petroleum Corporation who imports and distributes petrol, in order to keep the price of petrol low so that a lower cost of living may be attained.

The market for petrol in Nigeria is currently inefficient due to the utilization of this price control scheme. Figure 1 highlights the effect of the imposed subsidy on the market. This figure highlights the shift in the supply curve to the right, from S to S+Subsidy, due to the imposed subsidy. The reason for this shift is that the government subsidy would lower production or transportation costs for firms and allow more petrol to be imported, thus increasing the supply of petrol from producing firms and lowering the price from P0 to PS. The inefficiency of the market is indicated by the deadweight loss at Point C, due to the fact that the government has to cover the additional costs to the right of the demand curve that is developed by the subsidy. From the diagram, consumer expenditure remains relatively low in comparison to the total revenue producers generate, indicating that the government expenditure in is quite high, around $7 billion a year, as indicated by Article 1. Therefore, Nigeria’s president Goodluck Jonathan wished to deregulate these subsidies in order to utilise the state’s funding to better develop the country’s infrastructure.

Figure 1: Demand &...