Fuel subsidy in Nigeria: Fact or fallacy Maxwell Umunna Nwachukwu a, * , Harold Chike a, b,1 a Department of Urban and Regional Planning, University of Nigeria Enugu Campus, 400006 Enugu, Enugu State, Nigeria b Centre for Environmental Management and Control, University of Nigeria Enugu Campus, 400006 Enugu, Enugu State, Nigeria article info Article history: Received 28 June 2010 Received in revised form 15 February 2011 Accepted 16 February 2011 Available online 23 March 2011 Keywords: Fuel Subsidy Price Nigeria abstract Opinions have differed sharply in Nigeria on the continued existence of fuel subsidy. The opponents of Government-planned removal of fuel subsidy argue that the existence of fuel subsidy is a fallacy. On the other hand, the proponents opine that the existence of fuel subsidy is a fact. The objective of this study is to empirically examine these claims and counter-claims. It is therefore hypothesized that there is no significant relationship between fuel demand and fuel subsidy factors. Multiple linear regression was used to test the research hypothesis. The result suggests that there is a significant relationship between the fuel demand and fuel subsidy factors (fuel subsidy, and price of fuel), at 0.01 level (R 2 ¼ 50.4). This implies that fuel subsidy factors accounted for 50.4 percent changes in demand for fuel. This result is empirical evidence that fuel subsidy is a fact and not a fallacy. This study recommends a gradually controlled withdrawal of fuel subsidy at the level it will be minimally harmful to the economy. Ó 2011 Elsevier Ltd. All rights reserved. 1. Introduction Fuel subsidy is one of the most contentious issues on the agenda of public debate in Nigeria. The opponents of fuel subsidy argue that it does not exist any longer in Nigeria. They observe that the government-planned removal of the purported subsidy on fuel would lead to a spontaneous increase in the general price level and subsequent decline in the general standard of living of already over- stressed Nigerians. The Guardian Newspaper [1] describes recom- mendation of removal of fuel subsidy by the World Bank and International Monetary Fund to the Federal Government of Nigeria as a mischievous attempt to compound the already serious eco- nomic and social problems confronting the nation. Newswatch [2], and Alexander Gas and Oil Gas Connections [3] argue that there is no more subsidy in the prevailing official prices of fuel in Nigeria because the prices cover the cost of producing the crude oil. Alexander Gas and Oil Connections [4] was skeptical about the existence of fuel subsidy in Nigeria. It disagrees with government’s intention of removal of subsidy for the purpose of reviewing the domestic price level upwards as the panacea required to restoring supply-demand equilibrium. It observes that previous upward price reviews have not done the magic expected; rather, they caused the government considerable loss of credibility. It described the argument of supporters of removal of fuel as not only persua- sive, but fallacious. Similarly, Ola [5] totally disagreed with the government on the existence of fuel subsidy; he described the claim as a decoy for upward review of fuel prices. He argues that upward review of prices will not achieve efficiency in supply of petroleum products. According to him “it is wrong to consider removal of purported fuel subsidy when the nation’s refineries are operating far below their installed capacities. The low production cannot be used to determine prices as the advantages of economy of scale will be missing. Until the nation’s refineries are repaired and made to work at full capacity, one should not talk of appro- priate pricing of fuel”. On the other hand, the proponents of removal of fuel subsidy argue that fuel subsidy exists. They opine that fuel scarcity and wide variation in fuel prices across the country suggest that subsidy measure has not been effective and hardly benefits the target group. In response to critics of fuel subsidy removal, the Nigerian National Petroleum Corporation [6] asserts that the issue does not require sentimental arguments, but, a close look at the major facts and figures both in domestic economy and comparative economies of other countries of the world. It suggests that there is need to remove subsidy on fuel price so as to minimize the excruciating effects of fuel scarcity by improving the supply and delivery system. It opines that fuel subsidy is not fair to all because it favours the rich who own cars and use more of fuel. According to it “the subsidy that would be beneficial would be in health care, mass transit and education”. Soyode [7] disagrees with the argument of the oppo- nents of fuel subsidy removal that there is no longer subsidy since official prices of fuel cover the cost of production. He asserts that * Corresponding author. Tel.: þ234 (0)8052812171. E-mail addresses: maxchukwu1@yahoo.com (M.U. Nwachukwu), chikemba@ yahoo.com (H. Chike). 1 Tel.: þ234 (0)8054844149. Contents lists available at ScienceDirect Energy journal homepage: www.elsevier.com/locate/energy 0360-5442/$ e see front matter Ó 2011 Elsevier Ltd. All rights reserved. doi:10.1016/j.energy.2011.02.020 Energy 36 (2011) 2796e2801