There is an old story about a rich gentleman who was walking down the street one day when he comes upon a homeless man. The rich man felt pity for the man and decided to help him. He asked the homeless man how much he collected in a good day. The homeless man replied $50.  The rich man told the homeless man that since he walked that way to work every day, if the homeless man were there on that street corner at 8:00 AM he would give him $50. And so that is what happened. Naturally the homeless man was happy to get the money. He no longer had to stand on the corner all day to get his $50.  This went on for quite a while, every day the rich man would give the homeless man $50. But one day the rich man became ill and could not go to work and the homeless man did not have his $50 for the day. The next day when he arrived the homeless man demanded $100. since he hadn’t received his $50 from the day before. After all he was there at the appointed time it wasn’t his fault the rich man was sick. The rich man refused saying, he hadn’t been able to work so he didn’t earn any money the day before either…
The homeless man became angry and hit the rich man and took $100 from him.
The rich man called the homeless man ungrateful and decided walked to work a different way from then on.
History tells us that once a subsidy is instituted there will be riots if you try to remove them. Once people become used to getting something they feel entitled to it. If you try to stop the “entitlements” people become angry and riots ensue. We saw this in Greece and more recently in Nigeria. And it may become more widespread as governments try to cut back on expenses. In the following article our friends at Casey Research shed some additional light on the subject.
Tim McMahon~ editor
The Telling Tale of Nigeria’s Fuel-Subsidy Riots
The series of events that just transpired in Nigeria makes for a familiar tale – and a telling lesson. The tale tells of a poor, developing nation endowed with oil riches that, on the advice of international economists, tries to eliminate gas subsidies. The lesson is that the populations of oil-producing nations will inevitably erupt in rage against any such notions.
Nigeria is the biggest oil producer in Africa, pumping out 2.2 million barrels of crude oil a day to sit 10th in the global crude-production standings. But the average Nigerian gets little benefit from his country’s oil riches. There is an enormous gap between rich and poor in Nigeria, mostly because 80% of the economic benefits from producing all that oil flow to just 1% of the population. Politicians in the country’s infamously corrupt government have pocketed billions in oil profits, while three-fourths of Nigeria’s 160 million people live on about a dollar a day.
For the poor, a fuel subsidy provides the direct benefits of cheap gas plus an important indirect benefit: a small sense of ownership in a national resource. That statement is true from Venezuela to Nigeria, from Indonesia to Ukraine. And if ever a politician – undoubtedly a member of that elite group who has felt the benefits of a thriving domestic oil industry – tries to take those benefits away, there will be hell to pay.
Nigerians have been enjoying subsidized fuel since 1973. Subsidized gasoline not only reduces transportation costs, it also lowers food costs and fuels the millions of small generators that provide homes and shops with power in a nation with a failed power grid.
The subsidy was eliminated on January 1. Within a week fuel prices had more than doubled, shooting up from $1.70 a gallon to at least $3.50. Demonstrations against the dramatic price increase soon turned into riots. By January 8, Nigeria’s labor unions had launched an indefinite, nationwide strike in protest. Then police shot three people dead and wounded 24 others while dispersing protestors in the commercial hub of Lagos. The next day the strike gained momentum, with banks, gas stations, and airports closed down. Oil workers did not join the strike, though they threatened to do so, immediately adding a premium to the Brent benchmark price of oil.
On January 16, President Jonathon reduced the subsidy cuts in a terse announcement, saying he recognized that people were rightfully angry about the suddenness of the change but adding that “other interests beyond the implementation of the deregulation policy have hijacked the protests.” In response, the Nigeria Labor Congress and Trade Union Congress told workers to return to work. It seems the crisis has abated.
Subsidies will now reduce the price of gas to about US$2.27 a gallon, still more than 50¢ a gallon higher than it was 16 days earlier. With fuel prices still elevated and the government having deployed troops into the streets to quell what many viewed as valid demonstrations in a young democracy with a sensitive history of military coups, many Nigerians are not appeased. And President Jonathon insinuated that the partial subsidies reintroduced on Monday are temporary and will be phased out in perhaps April, at which point the riots could well start again.
An Economic Idea Lacking in Social Graces
The government of Nigeria spends about $8 billion a year on fuel subsidies. Getting rid of this financial burden would be an “important first step” in stabilizing the country’s finances, according to a 2009 International Monetary Fund report. The IMF and other global financial institutions are opposed to fuel subsidies in general because the biggest benefits do not go to the poor, but to the owners of large cars and big generators.
To look only at the absolute size of the benefit, however, misses a major point. For the poor, the fraction of their income that goes to pay for fuel is much greater than it is for those who own the big cars and generators. As such, it’s the poor who feel the elimination of subsidies the most, and it was the poor who rioted in Lagos.
Of course, erasing an $8-billion drain from Nigeria’s balance sheet would allow the government to spend money on badly needed public projects, and that is precisely how the government explained its move. But to the poor – whether rural or urban – the subsidy is one of the only benefits they glean from their nation’s strategic oil wealth. Corruption has stolen most of the other benefits: Nigeria’s roads are cratered with potholes; many live without access to clean drinking water; and electricity is unreliable where access to the grid even exists. Why should they believe the money the government would save by not subsidizing fuel would actually pay for infrastructure, when so much of Nigeria’s wealth simply disappears down the black hole of corruption?
More generally, taking away ingrained fuel subsidies from a developing country is like taking a crutch away from a cripple. After years of subsidies, Nigerians are completely reliant on cheap gasoline, from nationwide economic systems all the way down to personal needs. Even if taking away the crutch is the only way to force a patient to use his injured leg, it is nevertheless going to make him hopping mad (pun intended) because it will hurt like hell.
Don’t blame Nigeria for trying: failed attempts to remove fuel subsidies are written in the histories of many oil-producing nations. In Bolivia, protestors burned photos of President Evo Morales and vandalized government buildings in late 2010 after he tried to cut fuel subsidies; Mr. Morales backed down within days. In 1989, Venezuelans incited days of riots in which hundreds of people died, to protest a rise in fuel prices. Now, even though he has openly criticized his country’s subsidy program, President Hugo Chavez presides over one of the most generous fuel subsidies in the world.
The examples go on. In Jordan, widespread demonstrations forced the government to rescind its proposal to eliminate fuel subsidies. In Indonesia, a 30% increase in fuel prices led to bloody riots, even though the government sweetened the shift with direct cash-support programs for the poor. Such tactics can work: Iran has eliminated its fuel subsidies but cushioned the blow with cash payments of roughly $45 a month. Other Middle Eastern countries stuck paying fuel subsidies they can barely afford, such as Egypt, are looking at Iran’s plan as a model.
Nigeria’s Struggles Run Deep
Most situations are more complicated than they first appear, and such is certainly the case with Nigeria’s fuel subsidy riots. The country is also facing a surge in religious violence: at least 85 people have been killed in bomb and gun attacks since Christmas Day. An Islamic group named Boko Haram is behind the attacks and is targeting the country’s Christians, who primarily live in the north. The group’s name translated from the Hausa language means “Western education is a sin.”
These attacks are threatening to fracture the country’s sensitive north-south, Muslin-Christian divide, a religious fault line that has sparked sectarian violence responsible for killing hundreds of thousands in the past. While sectarian stresses rise, the fuel-subsidy protests provided an outlet for Nigerians, emboldened by the Arab Spring, to vent their grievances against a deeply corrupt ruling class and an incompetent government.
Whether Nigeria – a dynamic but troubled country encompassing a wide range of ethnic and religious groups – can hold together is becoming a pressing question not only for Nigerians but also for the world. It would be devastating to see Nigeria descend back into the sectarian violence that killed a million people between 1967 and 1970. On a more banal level, another civil war would almost certainly disrupt the country’s oil machine, a possibility that is adding yet another premium to current oil prices. Of the 2.2 million barrels of oil produced in Nigeria every day, 1.9 million are exported; 800,000 of them are sent to the United States. It is yet another example of how relying on oil produced in unstable countries on the other side of the world is not a recipe for US energy security.
So here’s to hoping against hope that Nigeria’s leaders can dig themselves out from the pressing weight of sectarian divisions, endemic corruption, and massive infrastructure needs and keep their country together. Just one piece of advice: leave the fuel subsidies alone.
[Petroleum-producing nations will increasingly be forced to keep more of their oil to fuel their economies. Coupled with production numbers falling in almost every country that exports crude, $5/gallon gas is a fait accompli.
This article is provided by Casey Research.
