#FuelScarcity: Multiple pricing can work

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

Nigerians are a hypocritical bunch. I am Nigerian. It is curious that fuel suddenly became scarce after signals began to emerge that President Muhammadu Buhari might be interested in seeking a second term in office. Incidentally, former vice president Atiku Abubakar moved to another political party in obvious pursuance of his own presidential ambition at about the same time. Now there is increased violence here and there, gas pipelines supplying power stations are suddenly catching fire and fuel is scarce. Even though intuition should not suffice to attribute causation, it is a little too much of a coincidence that these negative events are happening just as the political cycle changed into a higher gear. Recent killings by criminals in the middle-belt region, who to witnesses looked like “Fulani herdsmen”, can be dealt with by the security agencies; if they choose to. Pipelines can be policed; costly but doable. Besides, many already know to turn on their generators when there is a power cut; which is almost everytime. But how did fuel supply become short all of a sudden? Mr Buhari blames saboteurs. (See? Intuition can be reliable.) Considering the timing – the scarcity started curiously during the Christmas festivities – the president may be on to something. In any case, he would not have made such a pronouncement if his security chiefs did not show strong evidence of sabotage. Even so, the fuel scarcity has a robust economic explanation.

Call it anything but…
Fuel marketers would have had a terrible Christmas if they continued to sell fuel at the current N145 per litre without some support from the government. About a year ago, when the retail price was set, crude oil was selling for less. And the naira was artificially stronger. On those two variables alone, it would not require a stroke of genius to know that should everything else remain the same, it cannot be profitable for fuel retailers to continue selling at that price. To make the point, the marketers likely chose the best opportunity for them to be heard. Well, they succeeded. Most analysts, if not all, suggest it would be politically suicidal for Mr Buhari to increase the price of fuel at just the moment he is trying to woo the citizenry to allow him a second chance at the State House. He did get away with past price increases, though. But now, “the times they are a-changin’.” If for political reasons the Buhari administration cannot now afford to increase the price of fuel like other more sensible countries have done, there is only one option available to it. And there is a word for it: subsidy. Wait a minute, the government does not pay subsidy on fuel anymore. So how have marketers been able to continue supplying fuel for the most part of the second half of last year – when crude oil prices appreciated significantly – without going bankrupt? It has to be that they had been receiving some form of support. We just must not call it “subsidy”; too sensitive.

Multiple choice
But should a temporary solution be again applied to what is a perennially recurring problem? The authorities probably hope they would be able to manage the situation until the mega refinery being built by the country’s richest man Aliko Dangote is completed. But at what cost? During the most recent fuel scarcity period, how were so-called black marketers able to sell their stock? I am not aware that any of them sold for less than twice the official retail price of N145. Their customers were not ghosts. There are many Nigerians who are willing to make the trade-off between price and availability. What could be wrong with having a system where this set of people get to pay a premium for the convenience of shorter lead times and assured supply at private filling stations while those not as endowed buy at the official price at filling stations of state oil company, NNPC? Yes, there are not enough of them. Heard of franchising, anyone? The NNPC could simply approve a number of filling stations per locale to supply fuel it imports and supplies to them at the official price. And as part of the arrangement, the approved filling stations would be branded with its logo. That way, anyone who desires to buy fuel at the official price could simply go to an NNPC-branded filling station. And those who do not want the inconvenience of likely queues at the official stations could simply buy fuel at a likely higher price at the private ones. The authorities should give it a try.

Also published in my BusinessDay Nigeria newspaper column (9 Jan 2018). See link viz. http://www.businessdayonline.com/fuelscarcity-multiple-pricing-can-work/

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s