OIL SCARTY: A Chosen Option For The Masses

By AbdulRazaq Ibrahim.

Given the prevailing economic condition, Neither Oil Subsidy Nor Oil Price Increase is feasible option.
The government is emphasizing on these two options to divert the attention of the masses from the most feasible option.
The genesis of the problem is the inter-play between Exchange Rate and increases in the International Oil Prices which make the Landing Cost of Oil to rise to around N171 per liter ($0.56) at the official exchange rate of N307/$. This suggests that the Independant Oil Marketers can no longer import and sale oil at N145 per liter.
In my opinion, the best option is to Revaluate Naira. If naira is to be revaluated to say, N250/$:
The Landing Cost will fall to:
$0.56 * 250 = N140 per liter,
and if Naira is to be revaluated to N200/$ the landing cost will be:
$0.56 * 200 = N112 per litre
Because government receives its revenue in dollar (from sales of crude oil) it sees this option as reduction in its revenue by N57 or N107 respectively, from each dollar received. It fails to factor other advatages in its analysis:
Firstly, the crude oil price benchmark for the budget is $44.5 pb, the curreny price is $62.09pb, thus, gaining excess of $17.59pb. This difference can help compensate for the lose revenue.
Secondly, the appreciation of naira will be translated in to higher purchasing power for the naira there by resulting in:
i) Reducing the cost of running the government. Recurrent expenditure (except payment of salary) will fall significantly.
ii) The cost of Capital projects will also fall as prices of raw materials, tools, and probably all other inputs will fall in the market
iii) More importantly, there will be reduction in the cost of living, improvement in welfare of the citizens and poverty reduction.
I think government and the policy makers should start looking deeper with a view to appreciate how the short run decrease in revenue would be compensated by both short run increase in crude price and long run decrease in prices.

Dr. A. Ibrahim
Department of Economics,

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