Why Nigeria Should Sell Its Oil Refineries: Understanding the Invisible Hand

Image by Talpa from Pixabay

By

Chimere Iheonu, Ohie Akwuma Egboja

Date Published

August 11, 2022

Category

Insight

Nigeria’s oil sector has performed woefully in recent years. The three major refineries currently produce no output, even though they have continued to consume funds. Between June and August 2021, the Kaduna, Port Harcourt, and Warri refineries recorded a total operational deficit of ₦11.8 billion. During this period, crude oil was not processed in the refineries, leaving Nigeria to rely majorly on imports for refined products. Between June 2019 and July 2020, these refineries produced less than 40,000 metric tons of refined oil products, costing the country about ₦148 billion, despite the fact that the refineries have a combined capacity of about 25,000 metric tons per day.

Production in the refineries has been stalled, as they undergo rehabilitation. The operational inefficiencies of the refineries mean that Nigeria imports the bulk of its petroleum products. This amounts to a substantial import bill that puts a strain on the scarce forex available to finance imports, contributing to the naira’s depreciation with severe negative effects on the economy and public welfare. 

Several stakeholders have advocated for the sale of these refineries to increase their efficiency. However, this has been met with strong public opposition. The perception has been that the government will sell the country's common wealth to their cronies, potentially exacerbating economic inequality. However, we suggest that it has become vital to sell these refineries and fully liberalize the Nigerian oil industry's downstream sector in order to allow for greater private sector participation. Our premise is based on Adam Smith's 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations, which proposed the classical economic theory of the Invisible Hand.

What is the Invisible Hand?

“It is not for the benevolence of the bread makers that they make bread, but for their own self-interest, which is to make profit”.

These were the words of Adam Smith, who is widely regarded as the father of modern economics. In layman’s terms, the intuition behind the statement is that producers do not produce goods and services because they love us or because they care for us, but they produce because they intend to make a profit from their production activities, and in doing so, they end up providing for society. This means that selfish interest drives economic activities, spurs efficiency in production, and enhances the growth of an economy. Smith referred to this as an "invisible hand."

How can the Invisible Hand improve the Productivity of the Oil Refineries?

The goal of private businesses is to make profit. In doing so, they try to be as efficient as possible, avoiding waste and utilizing more efficient labor and capital. We emphasize that if the private sector controls the oil refineries, and as they strive to make profit, they must employ the most qualified labor, and utilize the most efficient of other resources in the production process. Efficiency will increase output, thereby raising domestic production levels, which would cut import bills, prop up the value of the naira, lower the rate of imported inflation, and increase overall productivity, resulting in more jobs in the economy as well as other positive spillover effects.

Arguments against the Sale of Nigeria’s Oil Refineries?

Those who argue against the sale of the oil refineries often cite the United Arab Emirates and Saudi Arabia as two oil-producing countries that have state-owned oil refineries that are efficient. In their words, if these countries can do it, then Nigeria should be able to as well. However, proponents of this argument fail to consider the quality of institutions in these countries vis-à-vis Nigeria. For instance, using data from the World Bank, it is revealed that Nigeria scores very low in controlling corruption when compared to Saudi Arabia and the UAE. On a scale of (weak) -2.5 to 2.5 (strong), Nigeria has a score of -1.1, while Saudi Arabia and the UAE have a score of 0.27 and 1.1, respectively. In general, the quality of institutions in Nigeria is very low, which makes it almost impossible for the government to run state-owned businesses efficiently. This makes it important for the Nigerian government to fully liberalize the oil industry and allow for market forces to determine equilibrium prices and quantity levels. However, the government can act as a regulator of the market to avoid monopoly practices and cartels.

Other arguments often cite corruption and embezzlement of funds from the sale of the refineries. The reality remains that while this is a worry, the importance of liberalizing the oil industry cannot be overemphasized. While the close monitoring of such funds is important to ensure that they are not embezzled, the need for the private sector to participate in the downstream sector of the oil industry is important for the country to optimize the benefits of the oil industry. A good example is Nigeria's telecommunications industry, which was fully liberalized in 2001. Prior to this, the state-owned Nigerian Telecommunications Limited (NITEL), the industry's dominant player, was notoriously inefficient. Following the sector's liberalization, private investment increased, resulting in greater efficiency and better customer services. While these investors have continued to make a profit, they have increased output levels in the industry and satisfied the wants and needs of consumers. However, modalities must be put in place to avoid errors in the reform process that could result in an inefficient downstream oil industry even after the liberalization process, as is currently evident in Nigeria's power sector.

Conclusion

The Nigerian oil sector remains key to driving economic growth and development. However, the country has not been able to optimize the benefits of the sector. Within the framework of the invisible hand, we have argued for the need for the sale of the oil refineries and the need to fully liberalize the downstream sector of the oil industry. Our argument is based on the premise that the aim of businesses is to make a profit, and when they pursue their goal, they improve production efficiency, leading to higher output levels, which will lead to positive spillover benefits for the Nigerian economy.

Risk Warning: Trading leveraged products such as Forex and Cryptos may not be suitable for all investors as they carry a degree of risk to your capital. Please ensure that you fully understand the risks involved, taking into account your investments objectives and level of experience, before trading, and if necessary seek independent advice. Read More Here-

Disclaimer: This information in this article is NOT investment advice. It is intended for information and entertainment purposes only.

More Stories from Kwakol

Is a University Degree Still Important?

I had a conversation with a friend recently. He is the founder of a successful sneaker retailing business, which he started after...

Kwakol Markets empowers traders to achieve financial freedom

Views on what constitutes financial freedom differ across generations. The generation that grew up in the aftermath of the 2008 Global...

Why boredom is good...for you

In these days of hustle culture, constant connectivity via social media, and instant access to unlimited entertainment, moments of...