What Tinubu's Fuel Subsidy Removal means for Nigerian SMEs and Business Owners

Why its here and what you can do to manage its challenges

by Ellis Coco

Published on Aug 19 2023

Power Challenges

Nigeria has an energy problem. Failures in the electricity grid have caused estimated economic damage equivalent to 5-7% of Nigeria’s total GDP, and the national electric grid has caused a fiscal deficit of nearly $2 billion USD. The electricity sector suffers from corruption and incredibly slow development. This has resulted in only 55% of Nigerians having access to electricity and nearly 80% of small business owners in Nigeria relying on diesel and petrol generators for their electricity needs. This has created a huge reliance on cheap sources of petrol and diesel for generators, as well as the demand for petrol used for transportation and utilities.

Nigeria's History with Oil and Subsidies

Even though Nigeria is reliant on cheap fuel for power, the way Nigeria refines its petrol and diesel is very expensive. Even though Nigeria pumps an estimated 1.4 million barrels of oil per day, this oil has to go through the costly process of being shipped overseas to Europe, refined into fuel, and then shipped back into the country.Despite environmental ramifications and the very costly process of exporting oil and importing fuel, Nigeria’s reliance on petrol and diesel for power has largely been the best option for Nigerians. Subsidies have made petrol inexpensive and accessible for Nigerians at the expense of the government. However, this additional burden comes at the expense of other potential spending such as infrastructure development and paying off the country’s national debt.As a response to this, in 2012, the government decided to remove the subsidies. Nigeria erupted into protests, and after the removal of the subsidy, which doubled fuel prices, the price of nearly all goods and services rose sharply as well. This is indicative of how reliant businesses in Nigeria are on inexpensive fuel, as a rise in the fuel price resulted in a doubling of the price of goods and services. Protestors rallied against corruption in the fuel and energy sectors as well as the government removing the business lifeline that was the fuel subsidy. After the country-wide protests, the subsidy was reinstated.

The Current Situation

The subsidies remained until June 30th of this year, when President Tinubu announced that he would remove the subsidy once again due to budgetary concerns. These concerns were warranted, as the government spent an incredible 1430 trillion Naira to fund the subsidy in 2021. In 2022, this price ballooned to over 4000 trillion Naira- an unsustainable trend.After this was announced, protests have taken place nationwide as fuel was being hoarded at its previous price and the price instantly doubled to reach the current price. National petrol usage fell sharply from 67 million liters/day to 48 million liters/day due to scarcity. In addition to the massive surge in price of petrol and diesel, there has been an inflation of the prices of other products, as their production cost is deeply connected to the price of fuel. With no return of the subsidy in sight, and prices of fuel rising, what can the government do about it and what does this mean for you?

How can the country navigate it?

To look at a possible solution to this issue, we can look at the country of Bangladesh and their past oil and gas issues. Like Nigeria, Bangladesh is heavily reliant on oil and gas for its economy and requires the crude oil that they pump to be exported and refined elsewhere. Their solution was to build a pipeline from Bangladesh to India, lowering the costs of the refinement process and making the oil their country relies on less expensive. Nigeria could find a solution using the same principle, for example, securing a beneficial trade deal with one of the countries or organizations importing Nigerian oil, such as the EU or India. This would lower the cost of refinement by using one country to exclusively refine their oil for a more affordable price, similar to how Bangladesh partnered with Indian oil refineries.Another solution that is currently being explored is the expansion of domestic refinery operations to fit the capacity of the country’s oil production. On May 22nd, President Tinubu began work on the Dangote Refinery; a refinery in Lagos that would vastly decrease the cost of refinement by doing it domestically and would have the capacity to refine most, if not all of Nigeria’s oil production. Both of these avenues are viable solutions to the issue of oil exports, however, the latter may take several years.

What this means for your business

As a small business owner or operator, the price of petrol and diesel are inextricably linked to the operating costs and profit margins of your business. Fuel prices are high, no new refinery is in sight, the current refinery is slow to get to full capacity, and it looks like there will be no fuel subsidy instituted for the foreseeable future. This spells out a financially unsustainable future for Nigerian business owners. Business owners should avoid/limit reliance on petrol and diesel for power and shift towards alternatives in renewable energy such as solar panels to power their business in lieu of unreliable power grids or fuel-reliant generators.At Earthbond, we're building the one-stop-shop for small business owners energy solutions.  Whether you're looking to go fully off grid, or just to become more energy efficient to lower your costs, we can help you.

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