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Chapter One: Introduction 1.1 Background of the Study
Nigeria is Africa’s most populous country, with a 2011 population of 162.5 million.It has 28% of African proven oil reserves, second only to Libya, and is the largest producer of African crude oil, accounting for 24% of 2010 African oil production, or 2.4 million barrels per day (bpd) (UN, 2011).

At the same time, Nigeria’s proportion of global production remained relatively stable at roughly three percent. Nigeria was among the top 12 global oil production in 2011 (BP, 2012).

Nigeria began subsidising its petroleum industry in the 1980s, after the state-owned Nigerian National Petroleum Corporation (NNPC) announced plans to align crude oil prices with world markets.

However, the then-incumbent president, Olusegun Obasanjo, stated that typical Nigerians could not buy a gallon of gas at the pump. Instead, President Obasanjo implemented a subsidy programme to keep the price of petrol low.

A subsidy is a type of financial help or support provided to an economic sector (or institution, firm, or individual) with the goal of advancing economic and social policies.

Although the phrase subsidy is generally used to refer to government assistance, it can also refer to any sort of support, such as that provided by NGOs or implicit subsidies.

Subsidies take many forms, including direct (cash handouts, interest-free loans) and indirect (tax advantages, insurance, low-interest loans, depreciation write-offs, rent rebates).

Furthermore, they may be broad or narrow, lawful or illegal, ethical or unethical. The most prevalent types of subsidies are those to producers and consumers. Producer/production subsidies ensure that producers benefit by providing market price support, direct support, or payments to factors of production.

Consumer/consumption subsidies frequently reduce the price of goods and services for consumers. For example, in Nigeria, it was cheaper to buy petrol a few years ago due to gasoline subsidies. Subsidies are usually classified as positive or negative based on normative criteria.

Subsidies, as a kind of economic intervention, are fundamentally opposed to market needs. However, they can also be used to facilitate political and business cronyism. Although subsidies are useful, many are ‘perverse’.

To be considered ‘perverse’, subsidies must have demonstrable and significant negative consequences on both the economy and the environment. A subsidy seldom, if ever, begins to be perverse;

but, a legitimately effective subsidy might become perverse or illegitimate over time if it is not withdrawn after attaining its aim or when political goals change.

Despite being Africa’s greatest oil production, Nigeria remains heavily reliant on imported refined oil. Its four refineries, Port Harcourt I and II, Warri, and Kaduna, have a total capacity of approximately 445 thousand bpd, meeting 63 percent of domestic demand.

However, these refineries are operating at considerably below capacity due to operational failures, inadequate maintenance, sabotage of crude oil pipelines feeding refineries, theft, and fire (EIA, 2012; Businessday, 2013).

In 2009 and part of 2010, especially low refinery runs prompted the country to purchase almost 85 percent of its refined oil requirements. According to other estimations, home refineries can supply up to 25% of domestic demand (Rice, 2012).

With the stated goal of reducing poverty, the Nigerian government subsidises private usage of imported refined fuels in order to keep consumer prices stable.

The dollar value of the subsidy rises with rising refined oil prices or import quantities. Rising global gasoline prices have forced this subsidy to rise dramatically in recent years, threatening the country’s economic health and economy (Rice, 2012; BBC 2012a, 2012b).

The Nigerian Petroleum Products Pricing Regulatory Agency (PPPRA) determines daily and monthly subsidy rates in the following manner: the subsidy is determined daily and monthly by PPPRA based on the difference between the expected price of imported fuel, including margins, and the pre-established, regulated domestic price.

Though the subsidy benefits the poor by keeping Nigerian prices lower than global prices, the primary beneficiaries have been importing companies and local wholesalers (The Economist, 2011),

who smuggle some of the subsidised fuel into neighbouring countries and sell it at higher prices (The Economist, 2012). Illegal commerce is poorly documented in official trade statistics, making it difficult to analyse.

According to the BBC (2012a, b), the Nigerian government paid the subsidy on 59 million litres of petrol per day in 2011, despite the fact that Nigeria’s domestic usage was around 35 million litres per day.

Thus, fuel importers were paid hundreds of millions of dollars for petroleum that was never delivered to Nigerians. For the past 30 years, governments have worked to eliminate gasoline subsidies due to their negative budgetary impact (Adenikinju, 2009).

From a political economy standpoint, subsidy elimination is challenging because it affects a wide range of Nigerian households. Despite the fact that the majority of subsidies go to wealthier households, lower and less variable fuel prices appeal to all demographics.

For these reasons, consumer opposition to subsidy removal has always been strong. Furthermore, there is the assumption that every price increase will exacerbate inflation and impair economic welfare (Adenikinju, 2009).

1.2 Statement of the Problem
When it comes to refined fuel subsidies, Nigeria is no exception. Other countries’ governments spend billions of dollars on subsidies for various sectors. However, fuel subsidies have been shown to disproportionately favour wealthier individuals, who use more fuel to power their cars and residences.

For several years, gasoline subsidies have been demonstrated to fraudulently syphon billions of dollars from Nigeria’s treasury. As a result, the study looks at how fuel subsidies affect Nigeria’s economy.

According to the World Bank (2009), if gasoline were not subsidised, Nigeria’s government should encourage investors and businesses to invest in unproductive activities.

1.3 Objectives of the Study
The aims of this investigation are as follows:
1. To investigate the effect of gasoline subsidies on the Nigerian economy.
2. Identify the benefits of fuel subsidies to Nigerians.
3. Identify the downsides of fuel subsidies.

1. What effect do fuel subsidies have on Nigeria’s economy?
2. What are the advantages of fuel subsidies for Nigerians?
3. What are the downsides of fuel subsidies?

1.5 Hypothesis.
HO: Fuel subsidies do not stimulate the Nigerian economy.
HA: Fuel subsidies do benefit the Nigerian economy.

1.6 Significance of the Study
The following are the implications of this study:
1. The outcomes of this study will inform the Nigerian general public about the impact of gasoline subsidies on the Nigerian economy. It will also educate the public on the advantages and disadvantages of fuel subsidies.
2. This study will contribute to the body of literature on the effect of personality traits on student academic achievement, hence establishing the empirical literature for future research in the subject area.

1.7 Scope and limitations of the study
This study focuses on the economic repercussions of gasoline subsidy payments in Nigeria.

Limitations of the study
Financial constraints- Insufficient funds tend to restrict the researcher’s efficiency in accessing relevant resources, literature, or information, as well as in data collecting (internet, questionnaire, and interview).

Time constraints: The researcher will conduct this investigation while also working on other academic projects. This will reduce the amount of time spent on research.

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