Why Is PMS Consumption Rising in Nigeria Despite Subsidy Removal and Rising Inflation Rates?

Data from NMDPRA shows that the 2024 daily average consumption of PMS continued to rise, from January to December, despite its rising costs and high inflation.

In a bold move, President Bola Ahmed Tinubu, post-inauguration in 2023 decided to remove fuel subsidies, a policy aimed at fiscal rectification and economic restructuring. This decision led to an immediate increase in the price of Premium Motor Spirit (PMS), commonly known as petrol.

Despite the anticipated decrease in consumption due to higher prices, data from the Nigerian Midstream and Downstream Regulatory Authority (NMDPRA)  shows that in 2024 the daily average consumption of PMS continued to rise, from 43,775,636 liters in January 52,301,526 liters by December. This article explores this phenomenon in context with rising inflation rates, which escalated from 24.66% year-on-year in 2023 to 34.80% year-on-year in 2024, investigating the economic implications and consumer behavior in Nigeria.

The Decision to Remove Fuel Subsidies

President Tinubu’s administration faced a daunting fiscal challenge with fuel subsidies, which were draining government resources and were often cited as inefficient and prone to corruption. The removal of these subsidies was intended to redirect funds towards more productive sectors, stabilize the economy, and reduce dependency on imported fuel by encouraging local production. However, this policy led to an immediate surge in fuel prices, affecting transportation costs and, by extension, the prices of goods and services across the economy.

Trends in PMS Consumption Post-Subsidy Removal

Contrary to economic forecasts, the data provided by the NMDPRA reveals an upward trend in PMS consumption throughout 2024. Starting at 43,775,636 liters in January, the daily average consumption increased each month, reaching 52,301,526 liters in December. This growth in consumption, even with the price of PMS rising significantly, indicates a strong inelastic demand for fuel in Nigeria. Several factors might contribute to this trend, including the lack of viable alternatives to petrol for transportation, the necessity of fuel for generators due to unreliable electricity, and the cultural attachment to personal vehicles.

Inflation and Economic Strain

The removal of fuel subsidies has had a profound impact on inflation, which has seen a 10.14% increase from 2023 to 2024. This rise in inflation has led to a higher cost of living, affecting everything from food prices to housing costs. The increase in PMS prices has a multiplier effect on the economy; as transportation costs rise, so do the costs of goods, contributing to the overall inflation. Despite these economic pressures, the consistent increase in PMS consumption suggests that Nigerians are adjusting their spending in other areas to maintain their fuel usage, highlighting the essential nature of petrol in daily life.

Economic Implications and Consumer Behavior

The resilience of PMS consumption amidst economic hardship provides a fascinating insight into consumer behavior in Nigeria. On one hand, it points to the critical role of fuel in mobility and power generation, where alternatives are either not available or not as cost-effective. On the other hand, it raises questions about the effectiveness of subsidy removal in reducing consumption or altering energy use patterns. Economically, while the government might save on subsidy costs, the increased fuel prices could dampen disposable income, potentially slowing down economic activities if not offset by wage increases or other economic stimuli.

Policy Considerations and Future Directions

Given this scenario, several policy directions could be considered:

• Enhancing Public Transportation: Improving public transport could reduce the reliance on personal vehicles, thereby potentially decreasing PMS consumption.
• Alternative Energy Promotion: Investing in renewable energy sources and promoting alternatives like LPG or electric vehicles could diversify energy consumption.
• Economic Relief Measures: Implementing targeted subsidies or direct financial aid to mitigate the impact of inflation on the most vulnerable could help maintain economic stability.
• Local Refinery Efficiency: The slight increase in local refinery output from September onwards suggests the potential to boost local production to reduce import dependency and stabilize prices.

The removal of fuel subsidies by President Tinubu has led to an unexpected rise in PMS consumption, despite significant price increases and rising inflation. This trend highlights the complexities of economic policy implementation in Nigeria, where immediate fiscal benefits might not align with consumer behavior or economic realities. As Nigeria continues to navigate these challenging economic waters, the government’s strategy will need to balance fiscal discipline with the socio-economic welfare of its citizens, ensuring that growth in consumption does not come at the expense of broader economic health or public well-being.

 

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