Posts Tagged 'subsidies'

The anger over fuel price reform in Nigeria

By: Ingrid Krüger

Earlier this month, the Nigerian government decided to more than double the domestic fuel price, from the initially subsidized price of 40 cents per liter. After a week of general strike, the Nigerian government gave in to the pressure, only keeping less than half of the initial price increase.

What makes a fuel price reform so difficult in Nigeria? Nigeria is the largest crude oil producer in Africa, producing more than two million barrels of crude per day(1) and cheap fuel is considered a birth right among Nigeria’s citizens as in the other OPEC member states. The Nigerian government’s ability to subsidize fuel is challenged, however, both by the vast size of Nigeria’s population and by the country’s lack of sufficient refinery capacity.

Nigeria is the most populous country in Africa, with a population estimated to almost 160 million inhabitants.(2) This makes Nigeria oil poor when crude oil production is measured in per capita terms compared to, say, sparsely populated Kuwait, that produces around the same amount of crude. Furthermore, the Energy Information Administration (EIA) reports that because of “poor maintenance, theft, and fire”, Nigeria’s four refineries are operating below capacity. In 2009 and part of 2010, Nigeria’s refineries were operating below 30 percent of capacity, forcing the country to import around 85 percent of the fuel it needed.(3) The vast population and the lack of sufficient refinery capacity in Nigeria make subsidization of the domestic fuel price a very expensive economic policy for the Nigerian government. This may help explain why international comparisons rank Nigeria’s domestic fuel price above the OPEC average and even above the OPEC average within Africa.(4)

Even though subsidization of fuel implies great costs for the Nigerian government, it is difficult to make the citizens in Nigeria accept a domestic fuel price increase. Corruption and poverty make domestic fuel price increases highly unpopular and fuel price hikes have led to general strike in the country in the past. Nigeria receives the very poor rating of 2.4 on Transparency International’s Corruption Perception Index (CPI), an index scaled from 0 to 10 where 0 is “highly corrupt”.(5) In December, the Economist wrote that “the most moderate estimates suggest that $4 billion to $8 billion is stolen from Nigeria’s state coffers every year”.(6) The corruption among politicians in Nigeria indicates a great waste of the country’s natural resources. To the citizens in Nigeria, it seems that they are picking up the bill for the politicians’ corruption. The revenues foregone by corruption could have been spent investing in poorly needed refinery capacity. Furthermore, poverty makes a doubling of the fuel price unbearable for many people. In 2004, which is the most recent year with data available, more than half the population was living below the national poverty line in Nigeria.(7) As long as corruption and poverty remain high, fuel price hikes will continue to cause great anger in the oil producing country.

 
1 OPEC Annual Statistical Bulletin 2010/2011: http://www.opec.org/opec_web/en/publications/202.htm
2 The World Bank: http://data.worldbank.org/indicator/SP.POP.TOTL
3 Energy Information Administration (EIA): http://www.eia.gov/countries/cab.cfm?fips=NI
4 GIZ. Data Preview ‘International Fuel Prices’ 2010/2011: http://www.gtz.de/en/themen/33729.htm
5 Transparency International: http://cpi.transparency.org/cpi2011/results/
6 The Economist. Dec 3rd, 2011: http://www.economist.com/node/21541042
7 The World Bank: http://data.worldbank.org/country/nigeria

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Attempting to turn the tables on Iran

By: Ingrid Krüger

Iran is among the top three holders of proven oil reserves in the world and is OPEC’s second largest oil producer and exporter. The Iranian state has subsidized domestic gasoline for years, an expensive shortsighted policy, because it could afford it. Since Iran has limited refinery capacity, the oil rich country has made itself dependent on gasoline import. President Obama, who is very concerned with Iran’s nuclear programme, is well aware of this weak spot and sees it as giving him an opportunity to affect Iran’s foreign policy. Last week the U.S. Senate approved a sanctions bill targeting those who export gasoline to Iran.

The Iranian President Mahmoud Ahmadinejad congratulated Obama on his election-win in 2008. Anticipations grew before President Obama’s speech in Cairo last year. The Cairo Speech was held a week before the disputed presidential election in Iran and some months before Iran admitted building a uranium enrichment plant. President Obama then spoke under the banner of ‘a new beginning’. He admitted a ‘tumultuous history’ between the US and the Islamic Republic of Iran, but stressed that the US was prepared to move forward.

Last week, in The 2010 State of the Union Address, Obama’s language had changed. Obama now stated that Iran has become more isolated by insisting on violating international agreements in pursuit of nuclear weapons. ‘[A]s Iran’s leaders continue to ignore their obligations, there should be no doubt: They, too, will face growing consequences. That is a promise.’

If the House and the Senate agree on how to merge their two versions of the sanctions bill, all that is needed for the bill to become law is President Obama’s signature. After years of having tried to please the Iranian public with dirt cheap gasoline, domestic gasoline demand has grown far beyond what Iranian refineries are capable of producing. To please the Iranian public, Iran has become dependent on importing gasoline, despite its vast oil reserves. President Obama is now exploiting this vulnerability in an attempt to turn the tables on Iran.

Cutting gasoline subsidies in Iran, post-presidential election unrest, and expectations of hard-hitting economic sanctions from abroad

By: Ingrid Krüger

The Iranian parliament has decided to turn around and back the plan of president Ahmadinejad to cut gasoline subsidies. It is surprising that president Ahmadinejad still pushes this highly unpopular plan, considering the post-presidential election unrest in Iran. Or is it?

After Ahmadinejad was elected for his first term in office in 2005, he continued underpricing a range of consumer products, including gasoline. The Iranian president spent oil revenues on an ad hoc and populistic basis to the point where he was forced to curb spending.

In addition, because of Iran’s enrichment of uranium, the fear of gasoline supplies from abroad being cut in the near future – in a country dependent on gasoline imports – puts pressure on Ahmadinejad to make Iran less dependent on gasoline imports today.

After Iran revealed its second nuclear plant in September and also test-fired a long-range missile, concerns grew that Iran could unleash a nuclear arms race in the region, although Iran has stated repeatedly that their nuclear program is a peaceful civilian nuclear energy program. Hard-hitting economic sanctions might delay any plans to spend resources on needed investment in refining capacity. If these economic sanctions also include cutting gasoline supplies to Iran, Iranians might turn the blame on the sanctioning states for the increase in domestic gasoline prices.

Since economic mismanagement helps explain the Iranian dependence on gasoline import, it might appear that cuts in gasoline supplies from abroad would turn the public against its government and thereby push Ahmadinejad to new negotiations on Iran’s nuclear program. The sanctions are however a punishment for what Iranians consider their right, Iran’s nuclear program, and the protests are therefore likely to be turned against the sanctioning states instead.Ahmadinejad could argue that increasing the domestic gasoline price was a necessary step to adjust domestic consumption as gasoline supply from abroad was likely to be cut. The sanctions will then unlikely lead to the type of protests against president Ahmadinejad such as ‘you were the one that wanted this nuclear program, now look what economic problems it has brought with it’. Not only would cutting gasoline supplies be a bad targeted sanction, it is also likely to have some unwanted consequences for the sanctioning states.

Phasing out gasoline subsidies in Iran: strengthened targeted social assistance

By: Ingrid Krüger

Iran was the first country in the Gulf Region to discover oil in 1908. Iran now holds the world’s third-largest proven oil reserves. The oil revenues have made it possible for the Iranian state to expand its activities, leading to the question of how the Iranian state is making the people benefit from its large oil revenues. The government’s subsidization of gasoline is an example of short sightedness characteristic of oil revenue spending in Iran. The gasoline subsidies might appear beneficial to the Iranian people at the time being, but come at great cost.

Iran’s low refining capacity makes it dependent on gasoline imports to keep up with domestic demand. Gasoline subsidies imply lost revenues at the present moment and will also be detrimental to the future, as seen from the suffocating air pollution in Tehran. In an IMF Country Report from August last year, an increase of gasoline prices in Iran to their import border price is recommended. However, when rationing was introduced and gasoline prices increased in Iran in June 2007, it led to angry protests. As a carpenter in Tehran put it; ‘there is no reason why we should pay the same price as people outside Iran do, we have all this oil beneath our feet’. Last year, the government decided to increase the rationed amount and to allow gasoline sales above it at a higher price.

t’s hard to set ‘the right price’. Any increase in the gasoline price must be carefully thought through, in order to avoid going one step forward and two steps back. The purchasing power of Iranians must be taken into consideration. It is not the absolute increase in the gasoline price that is important. The importance of the relative increase was shown in Yemen in July 2005 when local diesel prices were more than doubled, leading to public protests and leaving dozens dead after violence broke out in the streets. It is crucial that the price increase does not take the Iranian people by surprise.

The IMF Country Report stresses that a price reform must be ‘accompanied by strengthened targeted social assistance and, possibly, some form of cash transfers from oil revenues to households’. Will the Iranians themselves be informed about how fast and by how much the gasoline prices will be increased each time? How will the state use its strengthened finances to target social assistance better in the future?

 


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