WHO IS AFRAID OF DEREGULATION?

Who is afraid of deregulation? If anyone should be afraid of deregulation I believe it is the government and not the people. The crux of the matter is that government is not deregulating the petroleum sector, but they are about to deregulate the IMPORTATION of petroleum products. Deregulation is the removal of government regulation and control thereby easing rigid structures, but what we are about to witness is only the removal of subsidy because Government is not in control of the petroleum sector. If The Nigerian Government was in control of the sector, they will not be complaining of a powerful cabal. Will the government have found it this difficult to stamp out corruption in the sector if they were in control? By the way who are the players in this sector if not fronts and cronies of the Government? I believe that the sector has long been deregulated; the sector has since been outside the control of the government officially. What has been going on in that sector is that the government has been using their fronts and cronies to import juicy oil products. This does not speak of a regulated sector. The regulation has only been a burden on the average citizens, but for the parasitic power brokers; it does not exist. Subsidy is a form of subvention paid to a business or economic sector. Most subsidies are made by government to producers or distributors in an industry to prevent the decline of that industry or to prevent an increase in price of a product. The problem with Nigeria's subsidy on petroleum products is two fold. Firstly, our successive governments have been paying subsidies to selfish middle men and importers because we do not have producers in the downstream sector, we only have rent seekers. Secondly in truth it is only the ordinary Nigerians that have been subsidizing the petroleum sector in real terms. The masses have been going without the necessities of life for government to pay subsidy to shylocks. I have always opined that the only thing government really subsidizes is corruption. Why then is government who is powerless to sanitize the rot in the petroleum sector so bent on withdrawing subsidy paid by the people if the people do not want it withdrawn? The present structure of the Nigerian Economy makes it inevitable for the petroleum sector to be subsidized to avoid a crowding out effect on the poor. The prices of petroleum products have far reaching implications on all the facets of our national lives. Ordinarily since petroleum is a natural resources found in Nigeria, we are supposed to have a three sector economy when dealing with local consumption of the product Y= C+I+G. Where Y= National Income, C= Consumption, I= Investment and G= Government Expenditure. Since our various governments over the years have failed to invest effectively and efficiently, we have been forced to operate a four sector economy of Y=C+I+G+(X-M) where X-M is the net of exports over imports. Unfortunately since we depend on imported refined petroleum products for almost all our consumption of oil products, we are faced with a different model unique to only Nigeria among Oil exporting countries of Y= C+I+G+ (M-X). To this end the removal of subsidy on importation of petroleum products will further result in a fall in the already fallen standard of living of our people. The primary economic function of any serious minded government is to ensure a macroeconomic stability through controlled inflation, equitable distribution of income, ensuring a stable price regime, provide employment opportunities or the enabling environment and at least a balance of payment equilibrium. For a country like Nigeria with over 70% of the people living below the poverty line, removing subsidy on a critical commodity like Oil without analyzing the purchasing power parity and the par capita income of the people is very obnoxious. The Global economic crisis brought to fore the shortcomings of the free market economic system propounded by Adam Smith the Father of Classical Economics. In his work, The Wealth of Nation published in 1776, Smith argued that collective prosperity will follow when individuals seek profits for themselves with minimal interference from government. But we have seen where greed and irrational economic decisions have led the global economy to a near collapse. The question however is what collective prosperity will follow when our government deregulates and allow selfish individuals seek excess profits at the detriment of a generality of the populace. Is it at this sensitive period of economic melt down where even government of capitalist countries are pumping in more funds to support their economies that the government of a starving nation will be withdrawing subsidy? The demand for petroleum products by Nigerians is perfectly inelastic, meaning no matter how much the price goes up, demand will not reduce because our lives depend on petroleum products and the marketers know it. Consequently once government withdraws subsidy the prices will keep going up because it is proven economically that prices are rigid upwards in underdeveloped economies. All the petroleum marketers need to do is to continually induce artificially scarcity. The first law of demand and supply states that when demand exceeds supply, the price of that commodity rises. The proponents of deregulation will argue further that the second law states that when price goes up demand will fall or supply will rise resulting in a glut which will further reduce prices. But perfect competition does not exist in Nigeria and the market is not adequately developed due to lack of information and the infrastructure needed to guide us towards a pure economy. Knowing these imperfections and the dynamics of distribution of products in Nigeria coupled with the evil activities of middle men, we will not attain equilibrium. The case of deficit supply is further exacerbated by lack of local refining capacity. We can further decompose consumption to C= α+by. Where α is the autonomous consumption and b is the consumption dependent on income. Based on the infinite inelasticity of the demand of petroleum products by Nigerians, the product will be consumed irrespective of whether income is earned or not, we assume that α= 100. Therefore: α =C. Meaning the whole consumption may be independent of income. As such the consumption of petroleum products (CPP) will tend towards infinity: ∞ And holding the purchasing power parity (PPP) constant We have : CPP/PPP = ∞/1 = ∞, where infinity =∞ CPP/PPP is reduced by government subsidy to have ∞+ G S = CC (CPP/PPP) = ∞ Where G S = Government subsidy, CC = controlled cost. Withdrawing subsidy will give us a model of ∞+ G S – G S= U C where U C = Uncontrolled cost Therefore :CPP= U C= ∞ So with deregulation of the sector the cost of petroleum products will always rise and tend towards infinity and it will cause a spiral rise in inflation Based on the above model, when we factor in the deflated income which is DY/I Where DY= disposable income (Income – Tax) And I= inflationary rate The higher the levels of taxation and inflation, the lower the disposable income left for individuals and households to spend. When this limited deflated income is now spent on petroleum products and their derived demands, nothing or just a little will be left to save or invest in other spheres of life like education, housing, health etc. If the government really wants to deregulate the petroleum sector, they must be strong enough to sanitize the oil sector, invest in the local petroleum industry, and build more refineries in all the six geo political zones. They must provide adequate transportation network and ensure we have stable sources of power to reduce dependence on oil as alternative sources of generating domestic and industrial energy. It is appalling for a government to be talking of a cabal in the oil sector or corruption. That is a confession of failure. As a producer of crude oil we ought to benefit from the comparative advantage but only a few have benefited all along, what the majority is faced with is a comparative disadvantage. The fundamentals of the petroleum sector are too delicate an issue for government to toy with. We are not afraid of deregulation; I am only ashamed of the excuses government is offering as the justification for full deregulation of the petroleum sector. Credo World- Media. http://credoworld.blogspot.com [email protected]

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