A Contribution to the Debate on Petroleum Subsidy and Its Removal in Nigeria: Positive Economics Perspective

This paper examines how Nigeria arrived at a controversial fuel subsidy, the implications of the subsidy on consumers, oil market, government expenditure and general economic performance. Simple tools of positive economics are used in the analysis. The analysis shows that: (i) complementing domestic shortage with importation despite the country has comparative advantage in fuel production is the initial policy error that put Nigeria into subsidy burden; (ii) there is consumption and welfare gains to consumers with subsidy and its removal negatively affect the two due income and substitution effects; (iii) subsidy creates inefficiency in the market, but its removal without liberalizing the market will generate hardship for consumers; (iv) expansion in domestic supply will lead to fall in price and subsidy will be eliminated naturally; and (v) subsidy constitute fiscal burden, but its removal would lead to better economic situation only if the revenue gain is spent on productive services which is function of level of political rent.