Conditions For Deregulation Of Petroleum Products Prices

Conditions For Deregulation Of Petroleum Products Prices

Marwan Haruna Abdulkarim

In the Investor glossary, deregulation is defined as an act by which the government regulation of a particular industry is reduced or eliminated in order to create and foster a more efficient marketplace. The creation of efficient market is therefore one reason why the Nigerian Government wants to deregulate the oil sector. But the questions that ought to be answered are; what are the other reasons for deregulation? In what environment is it made? What are the consequences that follow after deregulation and how can those consequences be contained?

The regulation of petroleum products has been dated back to 1909 in the United States of America (specifically in Oklahoma) and was said to focus on quantity by limiting the production of wells, then to gradual price deregulation as put forth by Alexei V. Ovtchinnikov in his paper on capital structure decision. Alexei explained that the discovery of new reserves and, in particular, the East Texas oil field in 1930, coupled with a reduction in demand caused by the Great Depression, increased the supply of oil and resulted in significant oil price declines. Following Oklahoma, Texas began limiting the production of oil in 1930 and Kansas followed in 1931. In addition to restricting the domestic production, oil imports became regulated in 1959 with the Mandatory Oil Import Program (MOIP) instituted by President Eisenhower in the wake of rising oil imports. By the early 1970s, however, the regulation of quantity had become extinct. States had stopped restricting domestic oil production and the MOIP was ended in 1973. In the wake of rising inflation, regulation shifted from quantity to price. In November 1973, the Emergency Petroleum Allocation Act was passed that instituted oil price ceilings. Control over oil prices shifted from the Cost of Living Council to the Federal Energy Administration in May 1974. Under President Ford, the Energy Policy Conservation Act went into effect in December 1975. The Act rolled back some oil prices, but called for gradual decontrol starting in early 1976. President Carter put forth a new plan for gradual decontrol of oil prices from June 1979 to September 1981; however, concerned with the possible wealth transfer from consumers to oil producers under decontrol, the President instituted the Crude Oil Windfall Profits Tax of 1980. President Reagan lifted all remaining oil price controls in January 1981, ahead of the schedule outlined by President Carter.

On the deregulation of natural gas price, Alexei explained further that the empirical evidence suggests that prices were regulated below their competitive levels, so by the late 1960s, shortages began to emerge in natural gas markets in the Midwest and the Northeast. In addition, the oil price shocks of 1973–1974 hit, which resulted in significant disequilibrium in the natural gas market. The government responded with the passage of the Natural Gas Policy Act of 1978. The Act called for the gradual decontrol of prices for new gas, defined as gas produced by wells discovered after 1977. Old gas prices remained controlled under the Act. In addition, price control was extended to the intrastate market for the first time. Government jurisdiction over the natural gas market moved from the FPC to the Federal Energy Regulatory Commission (FERC). According to the plan, prices for gas produced from deep wells were fully decontrolled in November 1979 and new gas prices were decontrolled in January 1985. Old gas prices were effectively decontrolled in 1986 when the FERC issued Order 451. In July 1989, President Bush signed the Natural Gas Wellhead Decontrol Act of 1989, which fully deregulated gas prices.

It is evident therefore from the forgoing that the emergence of petroleum price deregulation in the USA is consequent upon four main factors; discovery of new reserve, reduction in demand, and shortage in natural gas due to regulated price below the competitive levels and the oil price shock. Many other reasons can be attributed to deregulation of petroleum products, but these reasons can be argued to be among the core reasons that can call for the deregulation petroleum products prices.

The discovery of new reserves of oil has lead to an increased in the supply of oil consequent upon which there was significant oil price decline. The decline in oil prices will in no doubt have negative effect to any country, especially if the country’s main revenue generator is oil. Comparing this scenario, of the discovery of oil reserves in Nigeria with America, we will find out that the opposite is the case in Nigeria. From year 1999 to date, the numbers of new oil reserves discovered in Nigeria are many, but that has not in any way impacted positively on the ordinary citizen. Unlike in America, where the effect was felt with an increased supply in oil, such is not the case in Nigeria.

Demand of petroleum products in Nigeria is increasingly high, because the supply of the products is still at the lowest due to mainly inefficient refineries and the reliance of importation by some few groups. As such this can not be comparable with America where the refineries are in excellent conditions and the increase in supply due to new reserves.

There was relatively price shock of petroleum products between 2007-2008, but this ‘’price shock’’ will have a minimum or no effect to Nigeria due to the fact that the budget was done on a barrel value of less than $30 and more so that it can be cushioned with the reserve of oil windfall from the last administration which has not benefited the ordinary citizen.

As the sixth largest oil producer in the world and one of the top countries that has abundant natural gas, Nigeria is in no way in shortage of gas or petroleum reserves. Nigeria is an exporter of both. The West African gas pipeline project for the supply and distribution of gas to West African countries and Europe is evidence of the abundance and/or availability of natural gas in Nigeria. Yet Nigeria is still importing petrol and selling what the poor man has never enjoyed. It is an open secret that very few homes use gas for cooking, and even some that use it, sometimes resort to firewood because of non availability of this product in the market. What then is wrong with my country? Is my country mature for the deregulation of prices of petroleum products?

Experts argue that the rationale for deregulation is often that fewer and simpler regulations will lead to a raised level of competitiveness and as a result, there will be higher productivity, more efficiency and lower prices overall. No doubt, the Federal Government of Nigeria wants us to believe in that, but the problem is that this has been said about the deregulation during Obasanjo administration. When the price was high, we all felt it badly, but as it declines, no body talked about bringing down the prices of petroleum products. Why then will the ordinary citizen believe that it will bring availability and price reduction?

In the light of this, other experts assert that the latter consequences of deregulation are; elimination of small companies, elimination of convenience and comfort, reduced wages, laying off of workers and elimination/reduction of environmental safeguards among others.

These consequences are inevitable in a country like Nigeria where the economy is not as strong as in the developed world, where corruption is high and where there is relatively no freedom of information. Since this Administration want to apply certain regulation(s) similar to what is obtained in the developed countries, what is wrong therefore if Nigerians asked for a similar standard of living, effective refineries, elimination of corruption, constant supply of petroleum products and electricity like the developed countries?

Peace is a major element for the development of any Nation. We must therefore applause the Government’s effort in restoring peace in the Niger Delta region, but more need to be done as Niger Delta region is just one of many regions in Nigeria. Security is obviously porous in all the regions, as such Government have to as a matter of urgency beep up security situation in the country.

Corruption is still endemic in Nigeria, but it is believed that with the current effort by the Economic and Financial Crimes Commission (EFCC), continuous support from both Government and citizens more can be done to make Nigeria great.

The recent condition of building refinery before issuance/renewal of oil licence is a good one, but Government must wake up to resuscitate our ailing refineries that has become an embarrassment to Nigeria otherwise we will go back to slavery in our own land as the refineries will be owned by multi-national companies. Government should therefore fish out those saboteurs that wouldn’t want our refineries working.

There is no doubt that deregulation has some advantages and not applicable to all kinds of environment. As such, what the ordinary citizen is clamouring is for the government to first of all fix all the problems discussed here, provide social security, make our living like in the developed countries and then gradually deregulate.