Pumped Up

Nigeria's artificial fuel crisis presents its leadership with real problems  

Oiling the wheels

Largely unbeknownst to people outside Nigeria, the country is currently being held to ransom by the middlemen in a multi-billion dollar illicit payment scheme, who are betting that money, influence, and the "Nigerian factor" will allow them to prevail.

The perpetrators of this latest duplicity are a band of infamous profiteers known collectively as "oil marketing" firms. Their present desire is two-fold:

1.      To be removed from a list of companies who are being instructed to return billions of Naira to the Treasury after being publicly implicated by a high-profile National Assembly probe, which revealed positively eye-watering levels of corruption of the country's "fuel subsidy" scheme.

2.      To continue receiving fuel subsidy payments, despite pleas from the Ministry of Finance that the money budgeted for the subsidy this year has been exhausted.

The "subsidy probe" was originally spawned by nationwide protests against the President's ill-fated attempt to abruptly end the fuel subsidy this past January, more than doubling fuel prices and shutting down the economy for a week, until he was forced to partially reinstate the program. The investigation has long since transcended into political melodrama, with the head of the probe committee revealing himself a hypocrite by rather naively taking a $620,000 bribe in what turned out to be a police sting operation (google "Faroukgate"). Lost in the fog of political war was the fact that the Nigerian government appeared to have spent billions of Naira buying fuel which either never existed, or whose price had been hiked up, from a "cabal" of shady, politically-connected oil marketers. Particularly curious was the manner in which this spending had rocketed upwards during the months leading up to the 2011 general elections, seemingly in defiance of global market prices at the time.

Fill 'er up

The oil marketers' latest attempt to resuscitate their flow of stolen money first came to my attention a few days ago when, with no warning or apparent reason, cars began queuing outside Abuja petrol stations, and taxi drivers started asking for higher fares because there is "fuel scarcity." At first I paid this no mind since, on its own, there is nothing unusual or alarming about a fuel shortage in Nigeria. In the time I've been here there has been one every six months or so, and their possible causes are legion. In the absence of a public transport system, Nigerians are extremely dependent on their cars, such that even rumors of a fuel shortage are enough to trigger panic buying and round-the-block lines at petrol stations. Besides, Ramadan was coming to an end, and those wishing to travel during the Sallah holiday were bound to put some strain on fuel supplies. It was probably nothing to worry about...

Little did I know that this scarcity was in fact wholly artificial; a political creation, made possible by the convoluted and fragile process by which petrol reaches the pump in Nigeria. The first source of complication is that, although it is a leading producer of crude oil, the country lacks sufficient oil refineries to satisfy its domestic demand for refined petroleum products, despite decades of heavy investment in the sector. This places Nigeria in the ironic position of importing most of its refined petroleum, most notably gasoline for cars. This imported "premium motor spirit" is then subsidized by the government, with the aim of maintaining a pump price of N97 (60 cents) a litre.

Subsidize this

The decision to subsidize petrol was originally a populist gesture by the government - a quick and easy way to lower the cost of living for the populace, and pacify complaints that all of Nigeria's oil money was disappearing. However, the distorted prices created by the subsidy are also an easy avenue for criminal behavior. Fuel tanker ships would "arrive" in Nigerian ports, only to mysteriously vanish after the subsidy payment was made, reappearing in neighboring countries where the fuel could be sold at full price. In other cases, they might not have existed at all. Paperwork known as "bills of lading" would be falsified to indicate that a ship had left port on a day in which petrol prices were especially high, guaranteeing maximum subsidy payment. Or Nigerian petrol stations would simply sell fuel at prices above the official rate, especially outside urban areas where desperate buyers have no choice but to pay. When it comes to manipulating the subsidy, the angles are practically endless.

The second wrinkle in the fuel supply is that, due to inadequate gas pipeline infrastructure, the bulk of Nigeria's imported fuel must be carried from the port to its final destination on the backs of fuel tanker trucks. This has two significant implications:

1. The combination of bad roads and reckless driving makes the tankers a frequent party to Nigeria's most horrific and deadly traffic accidents
2. The petrol tanker drivers - and their union - wield enormous power.

Those in search of a crude but effective way to bring Nigeria's economy to a halt and foment an instant political crisis need look no further than "NUPENG", the Nigerian Union of Petroleum and Natural Gas Workers. The mere threat of a strike by these critical individuals is enough to stop fuel deliveries, prompt gas hoarding, and send prices skywards. Any President worth his salt must be able to effectively "negotiate" with NUPENG.

So it was that the oil marketers, facing public humiliation and the prospect of being weaned off of their cash cow, quietly arranged with NUPENG to disrupt the Sallah period, targeting Abuja, the seat of government, to make sure their message reached its intended audience. After first allowing a few days of confusion about the cause of shortage, the conspirators revealed themselves and laid out their demands: Pay us "our" subsidy money, and halt any indictments from the corruption probe, or there will be no fuel. Even in a country where politics is a dirty, dangerous game and expectations are low, such an obvious attempt at intimidation is playing hardball.

A shortage of Goodluck

The irony for President Goodluck Jonathan, who is constantly described as "embattled" these days, is that this is one battle that he actually chose. His initial attempt to bring the subsidy to an end appears to have been well-intentioned, even if the implementation was heavy-handed. Although he was eventually forced into a compromise, managing to raise the official price to N97 from N65 was a major accomplishment in an area where many politicians would not dare to tread. It signalled his intention to combat corruption, and to reduce the fiscal burden of a program that was threatening to bankrupt the country. There is even talk of a "Subsidy Reinvestment Program" - to channel the money saved from subsidy payments into infrastructure and development projects - which was later subjected to drastic budget cuts. Goodluck also set about replacing the board of directors of the Nigeria National Petroleum Corporation in the hope of consolidating his power and eventually bringing the graft under control.

Maybe he misread the political environment or over-estimated his own strength, but since then Jonathan has appeared to lack the political backbone to confront the shadowy underworld of corruption in Nigeria. From the public's point of view, the President seems to have raised their cost of living and weakened one of the few government programs that actually impacts their daily lives, without substantially addressing the criminality plaguing the system. Under constant criticism for his inability to control the increasingly deadly attacks of the loosely-organized, politically-driven Boko Haram terrorist group, and now apparently unable to stabilize fuel supply, the President is between a rock and a hard place.

The range of possibilities in front of Jonathan now are unappealing. The first option is to stay the course: the government has budgeted N888 billion for subsidy payments this year, a major reduction compared to the more than N2 trillion ($12.5bn) paid out in 2011. This sum was put forward by Minister of Finance Ngozi Okonjo-Iweala, whose reputation for reform and fiscal prudence made her a serious challenger for president of the World Bank  earlier this year.

The N888 billion figure was arrived at using a model which rather optimistically postulated a "zero corruption" scenario, and derived the amount of subsidy that should be paid from assumptions about underlying market conditions. Unfortunately, this technocratic solution was quickly undermined by the need to pay a substantial amount of arrears, owed to the oil marketers from previous years' deals. The arrears, combined with the slim likelihood of attaining zero corruption in the subsidy scheme overnight, meant that the budgeted money was always bound to run out prematurely.

Ms. Okonjo-Iweala will probably encourage the president to stick to his guns, and refuse to make further subsidy payments this year. However, the oil marketers have now made clear what their response will be, and the weary President will be supremely reluctant to risk further crippling fuel scarcities to fight the subsidy removal battle all over again.

Kicking the can down the road

It is far more likely that the President will instead decide to "settle" NUPENG and the oil marketers by resuming subsidy payments and finding some means by which to stall or "step down" the subsidy probe, hoping that it will eventually fade from public memory.

However, giving his adversaries the golden handshake will not be without a political and economic cost. Firstly, it will represent yet another embarrassing reversal of policy, exacerbating Goodluck's reputation for fragility at a time when he can ill afford it. Secondly, it represents a short-term solution to a growing fiscal problem. Part of the motivation for trying to remove the  subsidy was simple necessity: In spite of Ms. Okonjo Iweala's efforts to reign in spending, Nigeria is running persistent deficits at a time when the price of crude oil, which provides roughly 80% of government revenue, has been consistently high. The last few budgets have repeatedly raised the "benchmark" price of crude oil, above which the proceeds of oil taxes are saved in the "Excess Crude Account". Simply put, the government is saving less and less oil revenue each year, and increasing its bet that oil prices will stay high. A drop in the world market could easily wipe out Nigeria's paltry savings, leaving the government unable to pay its debts, which are primarily held by domestic banks. The effects on the national economy would be swift and painful.

Removing the subsidy, or at least decreasing spending on it, was meant to stop the bleeding. If the controlled approach fails, it's probable that the subsidy will instead be removed all at once, with little warning, when the treasury finally runs out funds to satiate its seemingly limitless appetite for cash. This is the kind of event that could spell the end for Goodluck, and severely damage the electoral prospects of the ruling People's Democratic Party.

If Nigeria's present rulers wish to remain in power in future, they may have to finally turn and face the embedded institutions and mindsets that drive corruption in Nigeria. For now, it is the ordinary people who must cope with the consequences of their intransigence. As the proverb goes, "When two elephants fight, it is the grass that suffers."