Gasoline Pricing in an Oil Dependent Emerging Economy: The Subsidy Dilemma and Rationale for Policy Review

Abstract

The study investigates  gasoline market in Nigeria, with a view to determining whether or not the subsidy policy dominates other variables in determining the price of gasoline. This will provide an insight on the rationale for removing or retaining the policy. The investigation, covering the period 2010Q1-2023Q4, is carried out by employing appropriate econometric techniques. The estimation results reveal that subsidy is the most dominant variable determining gasoline price in Nigeria, compared to other key economic variables, thus portending severe implications for the economy. The other variables exerted upward pressure on gasoline price to reflect market forces, but their impacts remained less significant compared to subsidy. The findings clearly indicate a situation where enormous public funds are used to subsidize and reduce gasoline price below market-determined level, with severe implications. Such implications include the rich benefiting more than the poor, smuggling and diversion of the product to undesired end-users, drain on public funds needed to provide. social infrastructure, and inefficient allocation of resources in the economy. It is therefore worthwhile to remove the subsidy and invest the resources in social infrastructure. The policy change can enhance economic growth and improve welfare of the society. Although there are short-term adverse effects of the policy change, the economy is more likely to reap greater benefits in the long-run.