The High Cost of Cheap Gas

In his inaugural address, Nigeria’s new president Bola Tinubu said the fuel subsidy was “gone.”

Sometimes a cheap price can be rather costly.

Nigeria’s Gas Prices

While Nigeria is an oil producer, it lacks refining capacity. As a result, it has to import pricey processed products. Last year, the government bridged the gap between the elevated import expense and subsidized consumer prices, by spending 4.3 trn naira ($9.3bn; £7.5bn).

But now, knowing that fuel prices will soar once the subsidy is lifted, Nigerians have been lining up at petrol stations. Predictably, the price of fuel has doubled at some stations while others have closed altogether. At the same time, the private bus companies that transport most people are having difficulty filling their tanks.

As you might expect, Nigeria is trying to expand its own refining capacity. Whereas its state-owned refineries have underproduced, a new, privately owned complex in the Lagos economic hub will begin production during July. One of the world’s largest refineries, its projected output could be as much as 650,000 barrels a day.

The World’s Gasoline Prices

With Venezuela the cheapest and Hong Kong the most expensive, last week’s world gasoline prices ranged from $0.016 a gallon to $11.228. The 13th cheapest in the world, Nigeria’s regulated price was close to $2.08 a gallon.

Below, you can compare the US dollar price of a liter of Octane 95 gasoline (or a close equivalent) in 168 countries as of May 29, 2023:

We should note that affordability does not necessarily mean availability. In Venezuela’s central region, consumers report having to stand in line for hours and even for days to purchase some fuel. They say that, with 100 cars ahead of them, stations close before they get close to the pump. Repeated outages at Venezuela’s largest refinery is one reason for the shortages.

Our Bottom Line: What a Graph Can Say

As economists, we can graph all that is unfolding in Nigeria’s fuel markets.

First, displaying a price below equilibrium, we can draw a subsidy:

But then, reflecting how the new Nigerian President changed the future expectations demand determinant, Nigerians shifted their fuel demand curve to the right. However, I suspect that supply will decrease until the future is more predictable (and the new refinery is online). So you see that price is up and quantity down from the subsidy price and quantity:

Returning to where we began, we can see that the new Nigerian President stimulated a cascade of supply and demand changes. And he showed us the downside of cheap gas.

My sources and more: Because the BBC is ideal for world news, it was my destination for facts about Nigeria’s petroleum subsidy. Then, for global petrol prices, this website has it all. And finally, I needed to go to Reuters for the Venezuela story.