1. Crude oil (oil from the ground) is processed and converted to petroleum products.
2. The conversion process is called refining
3. The products are many (diesel, jet fuel, kerosene, petrol etc), but the most relevant one here is petrol
4. Nigeria has abundant crude oil
2. The conversion process is called refining
3. The products are many (diesel, jet fuel, kerosene, petrol etc), but the most relevant one here is petrol
4. Nigeria has abundant crude oil
5. But it is not the crude oil you use to power your cars, generators and other machines. It is these products.
6. Nigeria has 4 government-owned crude processing plants (refineries) but they are not working
7. So we need to sell the crude to foreign buyers who in turn process
6. Nigeria has 4 government-owned crude processing plants (refineries) but they are not working
7. So we need to sell the crude to foreign buyers who in turn process
8. We then buy the products and bring them to Nigeria
9. This means the cost of the product in Nigeria will include
- cost of the product as bought from the overseas seller
- cost of transporting to Nigeria & clearing at ports
9. This means the cost of the product in Nigeria will include
- cost of the product as bought from the overseas seller
- cost of transporting to Nigeria & clearing at ports
- cost of distributing within Nigeria because (storage, movement, wholealers, retailers etc etc)
- margin ie the profit by the persons doing this business because it is not charity (the guy that bring to Nigeria, the guy that sells in bulk, the transporters that own those tankers, the station owners that buy in bulk and sell to you and I)
- margin ie the profit by the persons doing this business because it is not charity (the guy that bring to Nigeria, the guy that sells in bulk, the transporters that own those tankers, the station owners that buy in bulk and sell to you and I)
Putting some numbers to it
Per litre
A. Product cost N150
B. Transport to π³π¬ & port clearing charges N50
C. Distribution cost within π³π¬ N25
D. Margin N55
Total N280
A+B is called landing cost, the N280 is pump price.
Per litre
A. Product cost N150
B. Transport to π³π¬ & port clearing charges N50
C. Distribution cost within π³π¬ N25
D. Margin N55
Total N280
A+B is called landing cost, the N280 is pump price.
The government now says, βbut this N280 is going to be difficult for my people, sell it to them at N180, I will pay you the N100 differenceβ
The N100 difference government is paying per liter is called subsidy
Effectively, if you import 1 million liters, govt pays you N100m
The N100 difference government is paying per liter is called subsidy
Effectively, if you import 1 million liters, govt pays you N100m
And it becomes illegal to sell above 280, but you may sell below if you wish.
Now, subsidy removal means, the government is saying, Iβm no longer paying you any differential. Sell at the price you wish.
Now, subsidy removal means, the government is saying, Iβm no longer paying you any differential. Sell at the price you wish.
You may stop there.
But if you are a 15 year old and wants to go further, continue reading
The reason why some economists argue that subsidy removal is good is that
- it makes you as a businessman to be more efficient since you are now on your own, you do everything to
But if you are a 15 year old and wants to go further, continue reading
The reason why some economists argue that subsidy removal is good is that
- it makes you as a businessman to be more efficient since you are now on your own, you do everything to
bring your cost down because you know if your final selling price is too high, people will go and buy from the guy that is more cost-efficient and can afford to sell at lower orice (since all of you can now sell at prices you wish)
-ways to bring your cost down could include negotiating good deals with your importers, or local supplier, or transporters, depots etc
-as everyone is now competing (no more uniform pricing), you may even reduce your own margin to get more customers in the now competitive market
-as everyone is now competing (no more uniform pricing), you may even reduce your own margin to get more customers in the now competitive market
Government will still have oversight to make you guys donβt collude in pricing (& artificially fix higher prices).
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