Political economy of domestic petroleum product subsidies in oil-exporting developing countries: The case of Nigeria

Nigeria is a large petroleum producer in Africa (among the largest producers in the world), as well as being an important member of the Organization of the Petroleum Exporting Countries (OPEC). These factors give the country great political and economic clout, yet the political economy story remains one of gross indebtedness, inefficiency and mismanagement(1) This paper focuses on the dynamics of poor resource allocation policies in Nigeria's downstream oil sector. It seeks to examine and evaluate the structural, institutional and political constraints which impede the implementation of market reforms in terms of petroleum products price liberalization and privatization of refineries and other supply infrastructure in this sector. Simply put, the paper seeks to analyze and evaluate the extent of market liberalization in this sector. In this regard, this paper provides a political economy overview of the dynamics of Nigeria's downstream petroleum sector within the broader context of the Structural Adjustment Program (SAP) introduced by the Nigerian government in mid-1986. The result of this study reveal that some factors work against achieving the objective of shifting this sector of the Nigerian economy away from direct government control to the market. Some of the factors are: (1) structural bottlenecks in the supply and distribution chain leading to unplanned refinery shutdowns, outbreaks of fire in refineries and industrial unrest among others, (2) political opposition to removal of subsidy from organized domestic special interest groups who are the main beneficiaries of the ''rent-seeking'' activities which the existing system of subsidized petroleum products provide, (3) depreciation of the local currency (i.e., the Naira) and high rate of inflation and, (4) the use of petroleum subsidy as a political instrument and bargaining weapon for negotiation with the IMF and the World Bank by the government. For policy reform to succeed in this sector, the government needs to address these issues.