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PROJECT TOPIC: DEREGULTION OF FUEL PRICE IN NIGERIA

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CHAPTER ONE

INTRODUCTION

1.1     Background to the Study

Nigeria has a long history of oil or refined petroleum products marketing, dating back to seventy years; early 1930s when precursors of Shell and Mobil engaged in the distribution of petroleum products. Up till 1995, the local fuels market was largely regulated. Pump price of fuels such as Premium Motor Spirit (PMS) or Petrol, Kerosene, Diesel were fixed by government. Within the same period, the bulk of domestic fuel consumption was supplied by local refineries. But due to the parlous state of the refineries, the bulk of local fuel requirements is now met by importation. Massive importation started from 1996 under the late General Abacha's regime. In 1998, the erstwhile military regime of General Abdulsalam Abubakar moved towards deregulation (which the industry had always desired) by allowing the oil marketing companies to import fuel directly. In the past, this was the exclusive pressure of government through the NNPC. However, importation was unattractive to the major marketers due to the local fixed price regime. The major and the independent marketers began to import fuels directly following the new policy. This helped to stem the growing supply shortfall, which had caused serious economic problems, and aggravated the country’s economic down turn. In 1999, however, the rising crude oil prices in the international market made the oil marketing companies stop import of fuels, particularly petrol, diesel and kerosene. By the second half of 1999, the NNPC had become the major importer of fuels for domestic consumption, which it had to do for strategic reasons: to avoid a political backslash that may have security implications. Even at that, the hike in fuel price has been a recurring decimal as the oil marketers complain that they are operating at a loss. Finally in 2003, the government announced a full deregulation of the petroleum downstream sector. Yet it claims that a subsidy of N14 is spent on each liter of petrol. It is in this connection that this study explores the policy of deregulation within the context of appropriate pricing of petroleum products with a view to spotlighting the challenges and opportunities existing therein. The downstream activities involve the petroleum products refining, distribution, and marketing. These activities are often carried out by Major Marketers (example, Shell, Texaco, Mobil etc. and Independent Nigerian Marketers who number about 500 and control less than 30% of the market. The downstream sector utilizes facilities like refineries, depots, pipelines, network, petro-chemical plants, and transport facilities. Many indigenous companies are found within this sector because it is relatively less-capital intensive and less technical. This sector is an area, which the government of Nigeria has made considerable investment over the years, particularly since 1970; yet the major challenges of the sector remain the non-commercial pricing environment, and lack of resources to maintain and manage the infrastructure properly. The focus of the government's policy on the downstream sector can be summarized as follows: (a) to maintain self-sufficiency in refining, (b) a need to ensure regular and uninterrupted domestic supply of all petroleum products at reasonable prices, and (c) to establish infrastructure for the production of refined products for export. The downstream sector has been a major problem for the country over the past 6 years as the NNPC has found it impossible to maintain the country's four refineries, and to provide adequate supply of PMS, Diesel, and Kerosene nationwide. The NNPC recently completed the third phase of their national pipeline distribution system. However, ·large segments of the distribution system are in urgent need of maintenance. Two of the country's refineries, at Kaduna and Warri, have petrochemical plants, which utilize refine by-products to produce carbon black, polypropylene, linear alkyl benzene, and a host of other products. It is recognized that for an olefin-based petrochemicals plant to be viable in Nigeria it must be developed by cracking natural gas liquids in the olefins plant.

According to Gbosi (2004) in Oluleye (2005 >deregulation does not mean the absence of regulation. Rather, it means the deliberate informed process of removal or mitigation of restrictions, which are obstacles or non-deterministic and tend to reduce efficiency or competitive equities. In other words, economic deregulation is ''the deliberate and systematic removal of regulatory controls, structures, and operational guidelines, which may have militated against growth, operations and efficient allocation of resources in the economy". It follows therefore that the deregulation of the economy or its component comes as a result of the belief that factors of production, goods and services will be optimally priced and allocated where these prices are freely determined in a competitive environment. The major factor that usually calls for deregulation is the imbalance between demand and supply in the product and factor market (Gbosi, 2004). Adidu and Oghene (2005) observe however, that some measures of control are necessary in deregulation to avoid the outcome of monopolies, oligopolies, or the formation of cartels. This is particularly why government must also put in place antitrust laws to avoid negative consequences. According to Scheneier (2002), deregulation encourages companies in essential services to cut costs and extract customers. From the foregoing, deregulation of the petroleum downstream sector would mean opening up of Nigerian petroleum industry to competition. It will require that all aspects of production, refining, distribution and dispensing of petroleum products be self-financing (Obasanjo 2003). Prior to deregulation in the downstream sector of the oil industry, there was low capacity utilization of Nigeria's state-owned refineries and petrochemical plants. Even now, the four refineries can only produce 17 million liters per day whereas 3 0 million liters are consumed in Nigeria per day. Also, the sorry state of our petroleum products pipeline in terms of disrepair, neglect, and repeated vandalization made deregulation inevitable.


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