Impact of Fuel Price Increase on the Nigerian Economy

It is likely that both increases in demand and fears of supply disruptions have exerted upward pressure on oil prices. Global demand for oil has been increasing, outpacing any gains in oil production and excess capacity. A large reason is that developing nations, especially China and India, have been growing rapidly. These economies have become increasingly industrialized and urbanized, which has contributed to an increase in the world demand for oil. In addition, in recent years fears of supply disruptions have been spurred by turmoil in oil- oil-producing countries such as Nigeria, Venezuela, Iraq, and Iran (Brown 2006).

One of the main drivers of fuel prices is supply and demand. If there’s an oversupply, as in there’s more oil on the market than people are consuming, this lowers the price right through to the pump. Conversely, if there’s an undersupply in the market caused by increased demand, for example, prices are likely to rise. Also value of the dollar is one of the reason that back increase in fuel pricing, Petrol, Diesel and LPG are priced according to the international benchmark, which is in US dollars. That means that the strength of our local currency can affect petrol prices. That said, petrol prices can remain high even if the Aussie dollar is strong.

Supply and demand
One of the main drivers of fuel prices is supply and demand. If there’s an oversupply, as in there’s more oil on the market than people are consuming, this lowers the price right through to the pump. Conversely, if there’s an undersupply in the market caused by increased demand, for example, prices are likely to rise.

Value of the dollar
Petrol, diesel and LPG are priced according to the international benchmark, which is in US dollars. That means that the strength of our local currency can affect petrol prices. That said, petrol prices can remain high even if the Aussie dollar is strong.

Location factors
In regional or rural areas, fuel will often be priced at a higher rate as there is often a lower volume of fuel sold compared with metropolitan sites. Fewer sales can mean a lag in price movement too, especially as stocks may not be replenished as frequently.
It is also useful to remember that both the demand for and the supply of petrol react sluggishly to changes in prices in the short run, so very large changes in prices can be required to restore equilibrium if demand should move even modestly out of line with supply.

Oil price increases are generally thought to increase inflation and reduce economic growth. In terms of inflation, oil prices directly affect the prices of goods made with petroleum products. Increases in oil prices can depress the supply of other goods because they increase the costs of producing them.

I therefore recommended that Government should retain fuel subsidy while expediting the construction of the three proposed refineries; Fuel subsidy should be retain as soon as these new refineries are commissioned; the proposed rehabilitation of the existing refineries should be expedited; Government should vigorously pursue the revitalization of the railways. If only Nigerians had alternative to road transport, all this noise about fuel subsidy removal and increment would not have been there and Private companies should be encouraged to start building refineries now with the assurance that subsidy would be retained before they start production.

Muhammad Sani Muazu