The Price of Cheap Petrol

Nigeria abolished a fuel subsidy aimed at consumers. It is now considering whether a different subsidy, directed at production, could deliver cheaper petrol without repeating the old system’s distortions.

The proposal would give domestic refineries crude on preferential terms. The intervention would be capped, independently audited and tied to domestic supply. Supporters argue that lower feedstock costs could encourage refining and eventually reduce petrol prices.

The government warns that Nigeria has already paid substantial economic and political costs to remove the petrol subsidy. Giving up revenue through a price concession, it argues, could recreate the distortions that reform sought to eliminate.

The distinction is not simply whether the state writes a subsidy cheque. A Nigerian barrel worth $80 abroad could be sold to a domestic refinery for $60, leaving no direct treasury payment while removing $20 in potential public revenue. That may still be defensible if the policy buys more domestic refining, but the economic cost remains.

The article separates efficiency from subsidy. Removing freight or handling costs that do not arise when crude moves to a Nigerian refinery may represent efficient domestic pricing. Selling crude materially below its economic value to change commercial behavior is a subsidy. The debate has become more immediate because Nigeria now has the 650,000-barrel-a-day Dangote refinery, while smaller modular plants remain far behind it and state-owned refineries have yet to sustain commercial production. In practical terms, Dangote is currently the country’s only commercial-scale domestic petrol producer.