A CRITICAL EXAMINATION ON THE EFFECT OF 2023 FUEL SUBSIDY REMOVAL ON TRANSPORTATION IN NIGERIA

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

The transport industry is a prominent element of globalization, exerting a substantial influence on both daily activities and the economy. Therefore, the cost of transportation is a significant factor to consider while evaluating various factors, particularly in relation to the price of fuel.The reliance on costly and limited fossil fuels, particularly diesel or petrol, continues to be a significant factor in the operation of most transportation modes. However, Harring, Jönsson, Matti, Mundaca, and Jagers (2023b) contend that the primary determinant influencing the retail cost of diesel or fuel is the price of crude oil. Ude (2023) asserts that crude oil, as an energy source, plays a crucial role in shaping the global economy. Hence, the price variations of this entity have a significant influence on several industrial sectors, both directly and indirectly. These sectors include banking, energy, retailing, and transportation industries.

Unarguaably, Nigeria is recognized as a nation possessing abundant mineral resources, with particular emphasis on its substantial reserves of oil and gas. According to Okwanya, Moses, and Pristine (2023), it is evident that the nation holds around 28% of Africa's confirmed oil reserves, ranking second only to Libya. Furthermore, the country stands as the primary producer of crude oil within the area, with a production rate of 2.4 million barrels per day in 2020, accounting for approximately 24% of the continent's total petroleum output. One of the current controversial matters in Nigeria pertains to the elimination of fuel subsidy on Premium Motor Spirit (PMS). Despite the substantial wealth generated by Nigeria's oil industry, there is a notable disparity between the benefits accrued and their impact on the livelihoods of the general populace. Furthermore, this discrepancy has not resulted in a commensurate enhancement of the nation's economy. According to Houeland (2020), the supply of refined crude oil in the country has significantly declined due to several factors such as inefficiency, corruption, abuse of natural monopoly rights, mismanagement, smuggling, bureaucratic bottlenecks, and excessive subsidies.

Notably, the reform of fuel subsidies is becoming more widely seen as a potential avenue for strengthening public finances and promoting sustainable economic growth.According to Antimiani, Costantini, & Paglialung (2023), a fuel subsidy refers to a policy implemented by the government that primarily focuses on the oil business. Its main objectives are to lower the cost of energy production, raise the price received by energy producers, or decrease the price paid by energy consumers. According to Ovaga and Okechukwu (2022), a fuel subsidy is a strategy implemented by the government that entails reducing the market price of fossil fuel, hence enabling customers to pay less than the current market price for gasoline. The use of subsidies enables consumers to acquire petroleum products at a per litre price that is below the current market rate. According to Ozili and Ozen (2021), it may be argued that although the government's provision of welfare is commendable, its   economic ramifications may be constrained.

 Conversely, the pivotal concerns pertaining to the energy market in developing nations that export oil is the notable prevalence of subsidies on petroleum goods and the suboptimal efficacy in energy utilization. Despite the collective endeavours of consecutive administrations, the matter of oil subsidy continues to persist as a complex socio-economic policy concern in Nigeria. Therefore, it is widely acknowledged and supported by a significant number of Nigerians that the elimination of fuel subsidy represents a more feasible economic approach. This perspective is influenced by the government's failure to refine crude oil domestically, as well as the evident inefficiencies, corruption, mismanagement, and smuggling prevalent within the oil sector. Consequently, despite the potential adverse consequences for the general population, the removal of fuel subsidy is deemed an acceptable course of action even though it comes with unforeseen implication to common man.

1.2 Statement of the problem

Recently the  removal of the fuel subsidy in Nigeria marks a pivotal moment in the nation's economic, social, and environmental trajectory. In a recent study conducted by Ovaga and Okechukwu (2022), he aforementioned policy change possesses several repercussions that need thorough examination in order to fully grasp its extensive ramifications. The fundamental issue central to this study pertains to the exploration of the complex network of effects – encompassing positive, negative, direct, and indirect consequences – that emerge as a result of the elimination of subsidies. Furthermore, it requires analysing the implications of these effects on both the Nigerian economy and society. The decision to eliminate subsidies, motivated by the goal of conforming to international efforts to reduce fossil fuel subsidies and improve fiscal stability (Al Jazeera, 2023), poses a multitude of difficulties. One of the primary concerns in this context is to the possible amplification of socio-economic disparities. This is due to the fact that the elimination of subsidies may result in higher fuel prices, therefore leading to an increase in transportation costs.

It is apparent that petrol prices impose expenses on transportation businesses and directly impact consumers. The cost of fuel is a significant determinant of transportation expenses, constituting about 50 percent of the overall operating costs in the contemporary transportation sector.  According to Greve and Lay (2023), the effects of fuel subsidy elimination on the transportation industry are contingent upon three factors: the significance of oil prices in relation to the energy costs associated with each mode of transportation, the extent to which changes in oil prices are reflected in transportation fuel prices, and the proportion of energy costs relative to total operating costs for each mode.  The impact of changes in oil prices on transport operating costs differs greatly among various transport modes, making the elimination of subsidies a crucial consideration in determining freight mode preferences. Moreover, it has been stated that a significant proportion, namely three-quarters, of the gasoline supplied in Nigeria is utilized by private corporations, public transportation services, government agencies, and other commercial entities. The majority of vehicles employed for the transportation of substantial quantities of individuals and commodities, such as the molue, are currently fueled by diesel fuel, a form of energy that has previously undergone deregulation. Furthermore, it is worth noting that the subsidy for household paraffin, mostly utilised by individuals with lower socioeconomic status, has been discontinued. Consequently, the economically disadvantaged population is now largely responsible for bearing the market costs of their fuel. As the price of gasoline increases, automobile owners are compelled to either raise prices or incur financial losses. The impact of gasoline costs extends beyond the general population, as it significantly affects both transportation businesses and commercial drivers.

In the literature, several studies have probed into the impacts of subsidy removal ( Osunmuyiwa & Kalfagianni, 2016 and Harring et al., 2023). In the context of assessing the impact of subsidy removal on the poor, Nwafor, Ogujiuba, and Asogwa (2016) employ a computable general equilibrium analysis. Their study digs into the question of whether subsidy removal disproportionately affects the economically vulnerable segments of the population. According to Omotosho (2020), the elimination of fuel subsidies in Nigeria results in increased macroeconomic instability due to the escalation of energy costs and inflation. Despite these evidence in the literature, there is little or no discussion on 2023 fuel subsidy removal in Nigeria effect on transportation. Upon this premise this research illuminates the the effect of 2023 fuel subsidy removal on transportation in Nigeria.

1.3  Objectives of the study

The objective of this study is focused on a critical examination on the effect of 2023 fuel subsidy removal on transportation in Nigeria.  Other specific objectives includes:

i.          To examine whether fuel subsidy removal affects the average cost of transportation.

ii.        To find out whether removal of fuel subsidy will reduce the usage of pubic transportation by citizens.

iii.      To ascertain whether rise in transport costs as a result of subsidy removal  create direct constraints for households.

iv.      To ascertain whether rise in transport costs as a result of subsidy removal has caused citizen to become more efficient and strategic with their movements, curtail unnecessary travel or combine similar ones.

1.4       Research Questions

i.          Does  fuel subsidy removal affects the average cost of transportation?

ii.        Does removal of fuel subsidy reduce the usage of pubic transportation by citizens?

iii.      Does the rise in transport costs as a result of subsidy removal  create direct constraints for households?

iv.      Has the rise in transport costs as a result of subsidy removal caused citizen to become more efficient and strategic with their movements, curtail unnecessary travel or combine similar ones.?

1.5       Research hypotheses

Ho: There are no significant effect of 2023 fuel subsidy removal on transportation in Nigeria

Hi:  There are  significant effect of 2023 fuel subsidy removal on transportation in Nigeria

1.6       Significance of the study

The overarching aim of this study is to address these complexities and provide insights that contribute to a holistic understanding of the impacts of subsidy removal on the Nigerian economy and society. Understanding these complexities is paramount for policymakers, enabling them to make informed decisions that balance the short-term impacts with the long-term benefits and minimize disruptions to the vulnerable population. The study's holistic analysis and nuanced insights into the diverse dimensions of subsidy removal offer a comprehensive foundation for informed decision-making, fostering equitable economic growth, social welfare, and environmental sustainability. By providing a comprehensive analysis across economic, social, and environmental dimensions, the study equips policymakers with a nuanced perspective to navigate the complexities of subsidy reform. The findings offer valuable insights into potential challenges, opportunities, and the need for holistic approaches that balance economic development, social welfare, and environmental stewardship.

In addition, this study would enhance the policy formulation of the government especially in the downstream oil sector of the economy and help reduce the ignorance of some on the fuel subsidy issue/ study will further serve as an eye-opener to the general public to know that when ever there is a fuel hike in the country, transportation tends to be expensive. Finally, it would contribute to existing literature on the subject matter and serves as an invaluable tool for students, academic institutions and individuals who would like to know about the issues of fuel subsidy in Nigeria.

1.7       Scope of the Study

Owing that making an investigation like this on   the effect of 2023 fuel subsidy removal on transportation in Nigeria is broad, there is need  to delimit the study to measurable scope hence the researcher selected  resident of Ib as the respondent for the study.

1.8 Limitation of the Study

During the course of the research,  few minor obstacles while conducting the study, just as in every scientific endeavour. It is worthy to note that the accuracy of the result will totally base on the data provided to the researcher by the  resident of Federal Capital Territory Abuja and the results of this study cannot be generalized for other states in Nigeria. Time restrictions were also an issue because the researcher had to complete this research while still going to classes and performing other necessary educational tasks.  However all aspects were minimized in order to deliver the best results possible and ensure the success of the research, despite the limitations that were faced during the study.

1.9 Definition of Terms

Subsidy: subsidy (subvention) is an amount of money paid by government to suppliers (providers or producers) of a product or service to enable them to sell their products or services to final consumers at a price determined by the government which is less than the true supply cost.

Fuel Subsidy: Fuel subsidy is a government discount on the market price of fossil fuel to make consumers pay less than the prevailing market price of fuel.

Transportation: transportation is the movement of humans, animals and goods from one location to another