Publishers Note

A Preface By Professor Adekiniju

The downstream petroleum sector of the Nigerian economy is in very deep crisis. The sector is characterized by huge demand-supply imbalance, ever growing dependence on imports, sporadic supply shortages, inefficient supply chains and poor state of supply infrastructure. The inefficiency of the sector has imposed significant costs on the economy. Unfortunately, years of inaction have made the problems bedeviling the sector more complicated and solving them require bold and comprehensive policy decisions.

Nigeria presently has four refineries located in different parts of the country. These four refineries were built between 1965 and 1989. Since then, in spite of the expansion in the economy, continuing growth in population, and in the demand for petroleum products, no new refineries have been built. On the contrary, the four existing refineries have suffered a remarkable decline in performance, and are unable to meet today's demand for petroleum products.  The country has turned to the relatively expensive option of importing refined products to meet domestic demand.  However, in choosing this option, no serious attempt has been made to substantially upgrade the facilities at the ports for the reception of such imports.
However, government policy to keep the pump price of refined products below their market costs has led to the failure of price to perform adequately one of its most important roles in a market economy, which is, to signal the real costs of consumption to consumers. This has led to wastages and inefficiency of consumption.

Invariably, Nigeria has had to spend huge amounts of resources over the years to subsidize domestic consumption of petroleum products. Fuel subsidy has increased significantly over the years. In 2006 it was N261.1 billion (US$2.03billion) or 1.4% of GDP. It rose to 278.9billion (US$2.3 billion) in 2007 or 1% of GDP. However, the subsidy level nearly tripled to N633.2billion in 2008. Thus, between 2006 and 2008, government subsidy payments to NNPC and other marketers of petroleum products was in the range of N1,173.2billion. * The amount expended on fuel subsidy in 2008 alone was almost one and half times the size of actual Federal Government capital expenditure. In addition, huge amount of foreign exchange is regularly required to meet the importation of petroleum products into the country. 

Recent events have shown that current subsidy situation on fuel is no longer sustainable. The rising crude oil prices, deteriorating exchange rate, and fiscal challenges facing the government required a change in policy. Moreover, the oil sector needs to be made efficient and to contribute optimally to the growth of the economy. Price deregulation is fundamental to the growth of the downstream oil sector. Current dependence on imports, collapsing supply and distribution infrastructure and poor state of the refineries require a change in government policy in the sector.

While fuel subsidization is a common feature in most oil exporting countries, efforts are also been made in many of these countries, like Angola, to address the heavy burden of fuel subsidy, through a comprehensive programme of subsidy removal.
However, given the sensibilities of most Nigerians to the issue of subsidy removal, fueled by years of government failures to transform the economy and deliver on past promises to use proceeds from subsidy reduction for infrastructure development, price deregulation must be approached carefully in order to minimize socio-economic consequences. There is a need to engage all stakeholders in the demand –supply chains, in order to address fears, prejudices, and give assurances and commitments.