What are the risks of oil price caps?
Oil Price Caps. Source: Stears

Nigeria’s petrol subsidy has become the bane of our economy’s existence.

Last year, it cost us about ₦1.5 trillion, 35% of our ₦4.26 trillion oil and gas revenue for 2021; an average of ₦125 billion a month. This year, between January and April alone, the NNPC spent ₦950 billion on petrol subsidies; an average of ₦240 billion a month and almost double last year’s average. What’s worse is that the cost is rising every month. In July, the NNPC spent 100% of its oil and gas revenue on the subsidy.

 

 

Key takeaways:

  1. The Nigerian government has price caps on petrol, electricity, domestic gas, university education and even the dollar. G7 countries are also implementing a price cap on Russian oil.

  2. Governments use price caps to control inflation, but price caps can cause detrimental side effects on a country’s economy.

  3. Nigeria’s price cap on petrol has become unsustainable, an example of government failure.

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The IMF has warned that the petrol subsidy could cost the government up to ₦6 trillion this year as both market petrol price and our consumption continues to rise. With our low oil production, the NNPC definitely can’t afford to keep bankrolling Nigeria’s subsidy habit, leaving the government to take on more debt than it can afford. Even when the government tries to remove the subsidy, it doesn’t have the willpower to make it stick.

So, at this point, we must take several steps back to understand subsidies and why governments use them. But a subsidy is money paid by the government to keep the price of a commodity low. It’s essentially the difference between the market price of petrol (the NNPC says this should be about ₦460/litre now) and the price the government wants us to pay (₦190/litre), also known as the price cap. So, the question we’ll be exploring is why governments resort to price caps and their inevitable effects on an economy.

Luckily, we have a recent price cap we can look at

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Noelle Okwedy

Noelle Okwedy

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