Deregulation of The Downstream Sector of the Nigerian Oil Industry (Part 3)

Feasibility | Contestability | Sustainability

Revenues from Nigeria's Oil resources has not
translated into substantial economic gains

Although the recent Occupy WallStreet is a major advocacy against corporate greed, the free market upon which this corporate organizations are built hold key values underpinning the modern economy. But we also need the government to play its own role in strengthening the operating environment thereby allowing a level playing ground for businesses. When some foreign firms make supernormal profits at the detriment of the common man, the common man is bound to revolt. Obviously, perfect market scenario create the efficient and welfare maximizing structure and behaviour for the common man particularly because allocative and technical cost considerations as well as pricing mechanisms are always favourable. Monopolists are not necessarily inefficient but our major concern is in terms of their pricing mechanism, their absolute freedom to set prices and the resultant supernormal profit is what raises concern. What we need to think about then is how do we ‘contest’ the monopoly powers in the downstream oil sector in Nigeria?

Contestability will ultimately result to Sustainability

A market is feasible (a usual condition for markets) when it clears (i.e. Total output=Total demand at price P) and firms that operate within the industry are not making negative profit.  More importantly a market is sustainable if above all it is feasible, no new entrant into the market can make profit (given incumbent price). If this is the case, it implies that marketers must set prices sufficiently low so much so that any further price reduction will lead to negative profit. But monopolist (especially the ones that operate in Nigerian oil market) will hardly ever bring their price that low. We can only attain an economically sustainable point in premium motor spirit (PMS/Petrol) and related product pricing when government encourages contestability rather than regulate (control-which brings about more corruption as will be discussed later) or renationalise (total government ownership- which is characterized by greater inefficiency, waste more corruption) is introduced. So let me stop making the term “contestability” a cliché, this is what it means in principle:

“A con-testable market is one into which entry is absolutely free, and exit is absolutely costless” Baumol (1982) [1] “The market price is independent of the number of firms currently serving a market because the mere possibility of entry suffices to discipline the actions of the supplier” (Browing and Zupan, 2009)

“The threat of entry is enough to cause the incumbent monopolist to price at the competitive level”

Let me demonstrate the idea with this diagram:

Click to enlarge

While the idea of contestability is very rare in real market scenario, it is a broader ideal which has a wider applicability based on the perfect market model and it is obviously an extension of Adam’s smith theory of the invisible hand.

This is what we advocate for in summary that government can promote sustainably low prices by encouraging contestability. As much as possible, government must ensure that barriers to new entrant into the oil market be removed. When the monopolist is contested, we can witness powerful optimal results: Prices will fall from Pm to Pc (see Diagram A), firms operate in a unique environment where zero profit is made; prices are equivalent to the average costs of the firm and best (second-best) pricing can be achieved. We also don’t need to regulate the industry as there will be a level playing ground for firms. No need for government to be involved. But we need to keep an eye on the fact that incumbent monopolists still have their way of erecting entry barrier upon which they still make their supernormal profit.

The Downside: Corruption

Just as I have always anticipated in previous posts that most of the figures available to us may be subject to inaccuracies, I am not at all surprised as a recent Sahara Report of the Ministry-of-Finance-aidedKPMG forensic report of the NNPC shows various levels of anomaly. We know that if government has truly been subsidizing as it claims our people should be better off; the hardship would not be this pronounced. it seem clear now that both the recent importers/marketers have questions to answer and the NNPC responsible for of paying the huge billions of subsidy money as well as handle all Nigeria’s oil transaction have develop mastery in diverting a portion of these money for personal benefit, leaving the masses struggling to meet their daily need. It’s a low blow for someone like me who claim Nigerian in overseas country when faced with such report of corruption.

The upside: Corruption will be dealt with

But we will not give up. As the global disparity become more pronounced - emerging economies becoming brighter (especially those in Africa) while the western world witness shortfalls (climaxed in the EU crisis and poverty spikes in the US) - we will continue to advocate for efficient optimal solutions for our dear country. We are optimistic that our nation is at a cross-road, where God fearing people have to take their stand in corporate and governmental arena. Not just Christians (many have failed us), we need sons and daughters of God who will not compromise God’s standard in their daily dealing. I believe you and I can bring that so much desired, long awaited change. But first, we must change ourselves. Now is the time for change.

Seun Oyeniran

---

[1] [‘freedom of entry’ is used carefully here. It does not mean that it is costless or easy, but that a new entrant suffers no disadvantage in terms of production technique or perceived product quality relative to the incumbent monopolist, and that potential entrants find it appropriate to evaluate the profitability of en-try in terms of the incumbent firms' pre-entry prices]

References

Smith, Adam (1977) [1776]. An Inquiry into the Nature and Causes of the Wealth of Nations. University Of Chicago Press

Baumol, W. J., (1982), Contestable Markets: An Uprising in the Theory of Industry Structure, American Economic Review, Vol. 72 No. 1, pp. 1-15

Baumol, W. J., Bailey, E. E., and Wil-lig, R. D., (1977), ‘Weak Invisible Hand Theorems on the Sustainability of Multiproduct Natural Monopoly’, American Economic Review, 67, 350-65.

Browning, E. K.,  and  M. A. Zupan, (2009), Microeconomics: Theory and Applications, John Wiley & Sons Inc.

Wrong Family Up-Bringing in Nigeria - Its Long-Run "Negative Y-Index Cost" and Externality

Young Nigerians in the UK

I don’t know if you have received one of those highly forwarded messages with strings of e-mail addresses attached to it? I actually received one of such e-mails recently from an elderly friend titled: “Letter to Nigerian Parents”. Quiet unusual of me, I made effort to read through the entire message whose author remains anonymous; it became the main idea behind this particular writing.

This work starts by lamenting on the idea of not allowing children to have work experience in Nigeria. While many of UK-born, white, English undergraduate go on holiday especially during the summer, they all get jobs to keep themselves running. In fact many of them as early as 18 have become so self-sustaining and ready to leave their parents to begin their own life. These are issues I have experienced through my stay in the UK. The case is otherwise for the Nigerian child who absolutely dependence on parents for food, clothing, housing and shelter. The anonymous writer criticizes this and I share a similar view too.

“I also watched Richard Branson (owner of Virgin Airline) speaking on the Biography Channel and, to my amazement, he said that his young children travel in the economy class -even when the parents (he and his wife) are in upper class. Richard Branson is a billionaire in Pound Sterling. A quick survey would show you that only children from Nigeria fly business or upper class to commence their studies in the UK. No other foreign students do this. There is no aircraft attached to the office of the prime minister in the UK – he travels on BA. And the same goes for the Royals. The Queen does not have an aircraft for her exclusive use…Kate Middleton (lady who married Prince William) drives a VW Golf or something close to it. But there's one core difference [between] them and us (generally speaking). They (even the billionaires among them) work for their money, we steal ours!”

 The anonymous author may sound rather ‘hard’ on his choice of words but he makes absolute sense.

It’s not that parents should hands-off their children affairs but rather, they should tailor it towards them attaining independent economic sustainability in life. Parents in Nigeria, especially the wealthy ones are used to giving their children pocket money that sometimes beat top executive’s salary. Many young people from Nigeria that I have personally met in the UK are living the Jenniffer Lopez, Victoria Beckham, or Parris Hilton kind of lifestyle.

“we have Nigerian children who have never worked for 5 minutes in their lives insisting on flying "only" first or business class, carrying the latest Louis Vuitton ensemble, Victoria 's Secret underwear and wearing Jimmy Choo's, fully paid for by their "loving" parents”

Even the average and middle-class parents are following this trend. You now see many Nigeria campuses flooded with expensive cars driven by young boys and girls who have not worked for five minutes in their lives (the yahoo + syndrome is another issue on its own). Many of them go out with security escorts not because they need them for protection but for someone to be able to carry them into the car when they are overdrunk from parties. What kind of a life is that? And what is the implication of this for our country Nigeria?

First is that it piles up cost for the future. I’ll just call it “negative y-index cost” [i.e. cost to society created by young people which is similar to marginal social cost created by marginal private benefit] emanating from wrong family up-bringing. It leads to a generation, as we are now seeing in our society, that is half-baked academically, physically and mentally. With absolute dependence on parent for livelihood, young adults are liable to become a minus rather than a plus to the nation. While this is the first problem that will emanate from this trend, a second issue is a systemic one that leads to poor productivity in the Nigerian state. So, what happens within the family creates an external, lon-run cost that will be very difficult for us as a nation to recover from if something urgent is not done about this current trend. Space cannot allow me to talk about the poverty we will be carrying on into the future since our competitive value as a nation will drop drastically. This goes first to parents. Spiritual leaders: Pastors and church leaders also have a lot to take home from this. 


Seun Oyeniran.

A copy of the anonymous e-mail "Letter to Nigerian Parents" can be found here

Nigeria: On The Road To 50 #5

#5. We must eradicate poverty and revamp the calamitous state of our social and physical infrastructure. Poverty eradication means economic revitalization which subsequently leads to job creation and income generation for the people. Our local manufacturing industries must be overhauled and this can only happen when there is adequate physical infrastructure such as good roads networks. The need for power to run processing machinery can’t be overemphasized.
The Transparency International* currently ranks Nigeria 130 among 180 countries using its corruption perception index (CPI**) (i.e. 50th most corrupt country in the world, holding the same position with seven others: Honduras, Lebanon, Libya, Maldives, Mauritania, Mozambique and Nicaragua). The CPI is based on 13 independent surveys.
As we come of age and on the road to 50, it’s never too late to implement reforms. The government must do more to ensure equilibrium in income and wealth distribution among the citizens. Effort should be made to implement policies and programmes that mitigate corruption while simultaneously and concurrently promulgating those that serve to uphold the dignity of labour as well as provide mechanism to rewards good conduct in public offices.

Seun Oyeniran.

*Transparency International Corruption Perceptions Index: A country or territory’s CPI Score indicates the degree of public sector corruption as perceived by business people and country analysts, and ranges between 10 (highly clean) and 0 (highly corrupt) http://www.transparency.org/cpi/index.html#cpi, www.transparency.org/surveys/#cpi
** The CPI is based on 13 independent surveys. However, not all surveys include all countries.