Simply, the Cost of Fuel Subsidy in a Layman’s Language
1. Nigeria has crude oil in abundance but it is not the crude oil you use in powering your generator and other machineries.
The crude oil needs to be converted to some usable products.
This process converting the crude oil is called “refining” and the products that will be gotten from refining crude oil are petrol, kerosene, diesel e.t.c
2. Nigeria has 4 government owned refineries but none of these refinery is functional. So, government needs to sell this crude oil to foreign buyers who then process the crude oil and sell it back to us in Nigeria. This means that the cost of production when it gets to Nigeria will include:
* cost of the product as bought from the foreign seller
* cost of transporting it to Nigeria
* cost of clearing at ports
* cost of storage
* cost of distribution within Nigeria
For Example:
A. The cost of refined fuel from foreign sellers is N130
B. The cost of transporting the refined fuel to Nigeria is N60
C. Cost of clearing at the port is N10
D. Cost of storage is N10
E. Cost of distribution within Nigeria is N15
F. Margin N55
(Margin = selling price – cost of goods sold.)
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Total Cost on imported Fuel per litter is N280
*A+B+C is called landing cost
*The N280 is pump price.
3. The Federal Government in their own magnanimity now says this N280 is going to be difficult for my people to pay considering the economic situation of the country, they now instruct the marketers to sell it to Nigerians at N180 per liter, that they (the government) will pay the marketers (importers) the N100 difference in price.
4. The government now quickly ran to China to borrow money so that they can pay this N100 difference in price per liter of fuel.
5. This N100 difference in price that the government is paying per liter of fuel is called “subsidy”.
Meaning as a marketer, if you import 1 million liters of petrol, government will pay you N100m.
Note: (The Federal Government spends up to N400b per month on this fuel subsidy)
6. Some of this marketers, out of greed will buy the fuel at a subsidized rate and still not sell to Nigerians. They will rather export it to neighboring countries so as to make double profit.
6. Now, Government says they can no longer continue to borrow to pay for this subsidy. The money is too much. It cannot not be sustained beyond June 2023.
This means that the marketers will determine the price themselves based on the landing cost per liter.
Who’s at fault please.?
