CHAPTER ONE
INTRODUCTION
Petroleum subsidy is one of the most passionate and controversial issue of the Nigeria‘s petroleum industry irrespective of the technical, economic, political aspects and implementation of politics adhering to one pricing system or another would largely hygiene the ultimate pattern of cost and profit sharing of the two major parties concern that is the producer (NNPC) and the consumers.
The momentum generated by the exploitation and exploration of oil has been regarded by many as a "mixed blessing". Nigeria started exploring its petroleum resources in the mid 60's, however, it was until the early 70's that large scale production was realized in Nigeria and by May 1970, had entered the league of the largest ten oil producers and by1973, oil accounted for over 80% of our foreign exchange earnings.
The presence of petroleum and the greater spending power which followed has no doubt acted as a catalyst in Nigeria‘s economic development constraints-finance. Consequently, however, it has given rise to the planning executive and completion of some worthwhile project and has given a stronger "twice" to Nigeria in international politics.
The oil arrival created its own problems, given Nigeria‘s absorptive capacity conceived in its widest context. There have been adjustments. However, not only has the petroleum power created illusion in the economy, it has given impetus to false hope. Many policy decisions were not given through thought since finances was not a constraint.
The consequences of FESTAC and UDORJI award are still with us. The enormous financial power also led to the federal government over extending its activities and responsibilities resulting largely to waste and inefficiency.
Petroleum subsidy has been removed several times in the past years beginning from 1980 to present, because of the drastic reduction in the government revenue as a result of oil glut in 1981 and the attendant austerity situation, also because of the loans collected from the international monetary fund (IMF). This is to enable the country to meet up with its foreign debts. In 1986 the federal government removed 80% of the subsidy on the price of petroleum products. The second tier foreign exchange marked (SFEM) and its successor foreign exchange market (FEM) inflated the remaining 20% subsidy to nearly (100%) because of the decline value of naira via-a-vis the us dollar.
The federal ministries of information disclosed sometime in 1987 that government would save or gain more than #6 billion per annum in revenues if petroleum products were correctly priced. He analyzed that the cost of producing one barrel of petrol was #110.79. It was sold locally for #35.48 and showed a loss of #75.79. It was the intention of government to stop this loss, but the percentage of subsidy removed will be such that people will suffer undue hardship. It was contended that the removal would generate additional revenue to the government. It would also conserve petroleum products for export and so earn additional foreign exchange.
More so, the heavy subsidy of petroleum products contributed to the lopsided development of the Nigeria energy system. It was also inferred that the extra #6 billion could be used to support the economy and provide social amenities.
Currently the objective of subsidizing, that is to aid the poor- stabilize prices, promote economic growth which have not been achieved rather NNPC resorted to massive importation of products to stem the scarcity. The short fall between the landed cost of imported products and their selling prices are also the subsidy claim by NNPC. This so called subsidy can be justified for now and until such a time that the power supply situation in the country improves to the extent that it enables the ordinary Nigerian to work hard enough to raise his income level to a level absorb future increase in petroleum products, and until there is an acceptable level of infrastructural development to cushion the impact of increased cost of petroleum products.