e-sRC

CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Nigeria as a nation over the years has been faced with an unresolved policy implementation which
is the deregulation of the downstream sub-sector of the petroleum industry in order to get
maximum benefit. The hike in pump price of the premium motor spirit (PMS) can be traced
fromthe Gowonadministration (1966 – 1975). It was an administration which boasted of the
onetime popular adage „‟money is not the problem of Nigeria but how to spend it.‟‟ However, the
regime pioneered theincrease inthe pump price of fuel from 6 Kobo to 9.5 Kobo; subsequent
government administration followed the trend. None of the previous fuel price hikes transformed
the country from its dependency nature or diversified the economy.This is in spite of the fact that
Nigeria,in addition to having three major oil refineries also imports refined products to satisfy its
domestic consumption. In Nigeria there are negative effect of the incessant increase in price,
instability of the supply and distribution of Premium Motor Spirit(PMS) as well as availability of
the products.Premium Motor Spirit is needed to power automobiles where people from all field of
their endeavours need for their daily activities. Similarly petrol is needed to power generating sets
in the country, because the electric energy supply from Power Holding Company of Nigeria
(PHCN) which is not regular and has been described in many quarters as epileptic. The instability
in the supply and distribution, shortage in supply, long queues at the filling stations, hoarding of
the product have a way of affecting the Nigeria economy negatively.
The deregulation of the downstream sector, as initiated by the Obasanjo Administration in 2003,
involved not just the removal of government control of petroleum product prices but also the
removal of restrictions on the establishment and (Adegunodo, 2013)operations including refining,
jetties and depots, while allowing private sector players to be engaged in the importation and
exportation of petroleum products and allowing market forces to prevail (Okafor,
2004).Generally, the federal government has been in the process of total reforms of the Nigerian
petroleum industry since 2000.Deregulation is a universal development which is a product of
economic globalization by these it means that deregulation brings about opening up of the
downstream sector to different players through increase competition in the longrun it wouldlead to
lower consumer‟s price.
Deregulation is freeing of government control from the regulation of a system in order for
countries to lessen public sector control and develop an open market while ensuring adequate
supply of product. For the policy to be successful in countries, they had to strategically map out
an effective policy response which transcend into full deregulation. This policy has been
successful in some countries of the world like Peru, Chile, Argentina, Mexico, Japan, and USA
among others. In Nigeria today, the issue of deregulation of the downstream sector of the Nigerian
petroleum Industry has been on for decades without any visible decision in sight. The surest point
around the issue is the debate for the removal or sustenance of subsidies for refined products.
However unexpectedly, the result of the deregulation has not been encouraging (Lawal, 2014).
There has been continuous increase in petroleum prices with continual scarcity of petroleum
products, pipelines vandalisation, large scale smuggling, and low capacity utilization at the
nation‟s local refineries (Ehinomen&Adepoju, 2012). As reported by the Nigeria National
Petroleum Corporation (NNPC) in (2019) Smugglers of Premium Motor Spirit (PMS) popularly
called Petrol,smuggle the commodity toas far as Burkina Faso, Mali cote d‟Ivore. Neighbouring
countries like Ghana has also been one of their base and these is as a result to the price difference
of PMS between Nigeria and West African countries.
The government posited that the prices would only rise in the short-term. Comparing the situation
to the development in the telecommunications industry, the government argues that the only way
to arrest and correct the structural distortions in the sector is liberalization that would encourage
businessmen to invest in building refineries and importing products to sell at prices dictated by the
market (Adagba, Eme&Ugwu) (2012). However, this is an argument not supported by empirical
evidence. Diesel and engine oil prices have been deregulated for years. Yet, unlike the situation in
the telecommunication industry, the prices have been going up. It was expected that deregulation
would give room for competition which would transform to price reduction and excellent supply
and distribution network (James, 2013).
In one breath, the government says it has deregulated the market partially yet same government
does not want to rule out the continuation of the payment of subsidies. This reflects indecision on
a critical issue such as this. Since deregulation was a major point of discussion during the last
election campaigns in 2014 – 2015, the present government administration of President
Muhammad Buhari ought to have taken time out to debate the issues surrounding deregulationand
take a major tangible decision to improve the downstream sector. The inability of previous
governments to be decisive on this issue is part of the reason why growth in the downstream subsector in Nigeria is stunted. Nigeria in the last five years has consistently spent over 1 trillion
naira that is about $5b USD annually on petrol subsidies and lesser amount has been spent on road
construction and other infrastructural development (note that only N20billion was spent on roads
in 2015). However over 1 trillion Naira was spent on petrol subsidies in the same year. The major
reasons given by those who resist the deregulation of the downstream sector of the oil industry is
that ifsubsidy on petrol is removed, the cost of pump price of petrol will increase.
It is against this backdrop that the study intends to evaluate the effectiveness of the deregulation
policy on the downstream sub sector of the Nigerian Petroleum Industry.
1.2 Statement of the Problem
Despite the abundant availability of this natural resource (Crude oil) in the country, the nation has
experienced over the years fuel scarcity, inadequate supply of petroleum products, hoarding,
smuggling, adulteration, long queues, inconsistent PMS pump price across fuel station (Okafor
,2004). The unhealthy development degenerated into poor performance of the nation’s refineries,
which resulted in excessive dependence on imports. Thus, government economic reforms became
imperative towards reviving the ailing downstream sector by way of deregulation.
One of the most challenging sectors over the years has been the downstream sub- sector, which is
the distribution arm and connection with final consumers of refined petroleum products in the
domestic economy. The incessant crises in supply of the products culminated in the decision by
Government in 2003 to deregulate the downstream sub-sector, deregulations of the downstream
sector was initiated with the aim of reducing economic waste and lighten social burdens caused by
government control. Lawal (2014) was of the opinion that the experience of petroleum products
scarcity in Nigeria has crippled national economic activities and increased the cost of doing
business. The resulting scarcities inevitably lead to a flooding of the market with adulterated
products, which usually leads to the damage of vehicle and machines. On Several occasion, and in
many part of the country particularly outside of the big cities and towns, a greater part of
Nigerians have been forced to buy petroleum products at 300% higher than their official
price(Richard ,2012).
Balouga (2012) had in fact contended that since 1973, the downstream sub-sector of the Nigerian
oil industry was deregulated and that the nation‟s first refinery in Port Harcourt was actually a
private initiative of the Shell BP Petroleum Development Company and that it was only through
policy reversals and the introduction of uniform pricing of petroleum products that the
development of a feasible downstream was truncated. However, the manner of its implementation
has been contentious because it fails to put into careful consideration the economic realities in
Nigeria. The over-dependence on oil has created vulnerability to the vagaries of the international
market. With the recent international trend VicePresident Osinbajo calls for diversification, as
reported in Vanguard newspaper
As we move to diversify our economy, we are aware that we need oil to get out
of oil. Yet, our window of opportunity to benefit maximally from the petroleum
industry is narrowing .The increasing breakthrough in renewable energy use;
the incredible speed of the expansion of the use of electric vehicles — Japan
now has more electric charging stations than gas stations; all point inexorably
that the party might be over sooner than we expected .Also, to ensure that the
country derives the maximum benefits from the petroleum sector, in spite of the
global challenges, Osinbajo stated that the Federal Government had to deal
frontally with the critical issues bedeviling the sector, such as the deregulation
of the downstream sector and its continuing challenges. (Vanguard Newspaper
November 10th2016).
Drawing from the report of Vanguard Newspaper (November 2016) during a book launch of the
Ministers of Petroleum, the Vice President Osinbajo made it clear that despite the most advocated
diversification of the economy, Nigeria needs the oil wealth to diversify. Therefore getting the
maximum benefit from oil and getting deregulation policy to be successful in Nigeria is crucial.
In particular, the place of oil in the mind of the average Nigerian has become more profound since
the deregulation of the downstream sector. The contradiction is more glaring now with the recent
fall in crude oil demand at the global markets, which means less external earnings for Nigeria, and
also increases expense burden on imported refined petroleum products. It is such contradictions
that make the Nigerian economy appear aspeculiar at times, as policies seem to ignore what
appears obvious to do. As such, policies intended to address the deficiencies and shortcoming in
the structure end up being poorly implemented because of regional, political or rent-seeking
selfish interests. With the deregulation of downstream sector the federal government raises the
price of fuel to N145 a liter the policy aims to increase the supply of fuel in Nigeria. To remedy
the fuel shortage, the Ministry of Petroleum Resources removed regulations restricting the
importation of fuel on the 11th May, 2016. The policy change is expected to increase the supply
of fuel in the country and drive up competition, which will eventually lead to a fall in fuel prices
(Sahara Reporters, 2016).This development of policy change however barely a year is and the full
evaluation of this recent development cannot be fully analysed. Therefore for the purpose of this
study we considered evaluation of the effectiveness of deregulation of the downstream sub sector
of the Nigeria Petroleum Industry from 2012 – 2016.
The wide-ranging question that come to mind, is how effective is the deregulation policy in
ensuring adequate supply of the Premium Motor Spirit(PMS), fostering appropriate pricing
mechanisms, stimulatingcompetition and eliminating shabby practices in the industry?
The problems which this study seeks to address are itemized as follows:
i.To what extent has the deregulation of the downstream sector of the petroleum industry
improved the supply, availability and affordability of petroleum product?
ii. Has the pump price of petroleum been affordable since the inception of deregulation in 2003?
iii. Will deregulation of the downstream petroleum sector bring about high production and
distribution capacity?
iv. Have the rate of long queues at the fuel station and black marketers activities been addressed?
v. Has the issues of artificial scarcity sometimes created by the independent oil marketers been
curtailed by the Nigeria National Petroleum Corporation (NNPC).
vi. Have deregulation of the downstream Sub-sector stimulated competition and reduced
government spending on subsidy?
1.3 Research Questions
In view of the stated problem, the following questions are raised to direct this study
i. To what extent has the deregulation of the downstream sub sector of the Nigeria petroleum
industry guaranteed adequate supply and distribution of Premium Motor Spirit (PMS)?
ii. Has the deregulation policy ensured appropriate and affordable pricing of the Premium
Motor Spirit (PMS)?
iii. How has the deregulation of the downstream sub-sector of the petroleum industry
improved the availability of petroleum products?