Removal of gasoline subsidy in Nigeria sparks protests and cut in demand

20 January 2012

Demand for oil products in Nigeria is likely to fall in the first quarter of 2012 following the removal of a gasoline subsidy, according to the International Energy Agency’s latest Oil Market Report (OMR).

The decision by the government to instigate a subsidy removal programme was made after it revealed that the subsidy cost the economy an unsustainable $8 billion in 2011. The subsidy cost more than double the estimate for 2010. With two-thirds of the population living on $1.25 a day, it was difficult for the government to continue to support a subsidy that cost nearly $50 per person last year.

The OMR noted that this was a bold decision, adding that “fuel subsidies are not only enormously wasteful but they also greatly distort the efficient distribution of resources, whilst often fuelling corruption.”

However, when the subsidy was removed at the start of this year, gasoline prices more than doubled, reaching $0.90/litre, which sparked political unrest. Workers went on a national strike, disrupting the Nigerian economy.

The government quelled the unrest by agreeing to partially scale back on its subsidy removal programme. A gasoline price of $0.60/litre has now been set. Although this is still 50% higher than pre-removal price levels, it is one-third down on the initial price hike.

“In hindsight, a more gradual process might have been advisable,” the OMR stated. “Nor do the measures seem to have been accompanied by much in the way of public consultation or targeted assistance for the poorest members of society.”
  
“Nigeria is on the watch list for 2012, with oil product demand likely to fall, at least in [the first quarter of 2012],” the OMR concluded. “Persistent industrial disputes, of the kind seen in January, could further reduce forecasts, not just for oil demand but also for economic growth in general.”

The IEA’s World Energy Outlook 2011 estimates subsidies to fossil fuels amounted to $409 billion in 2010, with oil products representing almost half of the total. Nigeria has been among the world’s biggest subsidisers of oil products in recent years.

What is the Oil Market Report?
The Oil Market Report (OMR), a monthly IEA publication which provides a view of the state of the international oil market and projections for oil supply and demand 12-18 months ahead.

What is a subsidy?
Any government action directed primarily at the energy sector that lowers the cost of energy production, raises the price received by energy producers, or lowers the price paid by energy consumers.