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Effects of fuel subsidy in Nigeria

The effects of fuel subsidy in Nigeria comprise both positive and negative effects. Fuel subsidy has been a long-standing policy in Nigeria, aimed at reducing the cost of fuel for consumers and promoting economic growth and development. However, the policy has been a subject of debate, with some arguing that it has more negative effects than positive ones.

Proponents of fuel subsidy argue that it has several positive effects, including promoting economic activity, benefiting the poor and vulnerable, stabilizing fuel prices, and promoting social stability. On the other hand, others point to the distortion of market forces, budgetary strain, increased inflation, and environmental degradation occasioned by the subsidy to advocate for fuel subsidy removal.

In this article, we will explore both the positive and negative effects of fuel subsidy in Nigeria, before then, let us gain a better understanding of fuel subsidy.

What is fuel subsidy in Nigeria?

Fuel subsidy in Nigeria refers to a government policy where the federal government provides financial assistance to fuel importers and marketers to enable them to sell fuel at a lower price than the prevailing market price. The subsidy is designed to cushion the effect of high fuel prices on the Nigerian populace, many of whom rely on fuel for transportation, power generation, and other economic activities. The subsidy program was introduced in Nigeria in 1973 and has been a contentious issue in the country’s political and economic landscape ever since. Nigeria’s fuel subsidy is funded through government revenue derived from oil exports and is administered by the defunct Petroleum Products Pricing Regulatory Agency (PPPRA).
Positive and Negative Effects of Fuel Subsidy in Nigeria
The effects of fuel subsidy in Nigeria

What is the effect of petroleum subsidy in Nigeria?

The effects of fuel subsidy in Nigeria are complex and multifaceted, with both positive and negative consequences. On the positive side, fuel subsidy has the potential to promote economic activity, benefit the poor and vulnerable, stabilize fuel prices, and promote social stability. However, fuel subsidy can also have negative effects, such as encouraging corruption and inefficiencies, distorting markets, and diverting resources away from other important sectors of the economy.

It is therefore important for policymakers to carefully consider the potential effects of fuel subsidy before implementing or reforming the policy. To maximize the positive effects and minimize the negative effects, policymakers should ensure that the subsidy program is efficient, transparent, and targeted toward those who need it most. Furthermore, efforts should be made to diversify the economy and reduce the dependence on oil revenue, so that the country can build a sustainable and resilient economy that benefits all Nigerians.

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Positive effects of fuel subsidy in Nigeria

  1. Reduced cost of living
  2. Increased economic activity
  3. Social welfare
  4. Price stabilization
  5. Political stability

The positive effects of fuel subsidy in Nigeria are listed above and shall be discussed in detail below:

Reduced cost of living

One of the positive effects of fuel subsidy in Nigeria is the reduced cost of living for many Nigerians. Fuel is a major component of the cost of living in Nigeria, as it is used for transportation and power generation. With lower fuel prices, Nigerians can save money on transportation costs and other expenses related to fuel. The reduced cost of transportation makes it more affordable for Nigerians to travel to work and conduct their daily activities. It also ensures cheaper transportation of goods and services.

This can help to reduce poverty and improve the standard of living for many Nigerians, particularly those in lower-income groups who are most affected by high fuel prices. Reduced cost of living can also improve the purchasing power of consumers, which can lead to increased economic activity, as consumers have more money to spend on other goods and services. This can stimulate economic growth and contribute to the development of the Nigerian economy. Overall, the reduced cost of living is one of the positive effects of fuel subsidy in Nigeria.

Increased economic activity

Another positive effect of fuel subsidy in Nigeria is the potential for increased economic activity. Lower fuel prices resulting from fuel subsidy can reduce the cost of production and transportation for businesses in the country. This can help to increase the competitiveness of Nigerian businesses in both local and international markets. The lower cost of production can also lead to increased output and employment opportunities, as businesses can afford to produce more and hire more workers. This can contribute to economic growth and development in the country.

Additionally, the increased mobility due to fuel subsidy grants more access to job opportunities and markets. This can also contribute to economic growth and development in the country. Therefore, lower fuel prices are a benefit of fuel subsidy which can stimulate economic activity, as businesses can reduce their costs of production and transportation leading to increased output, employment, and economic growth.

Social welfare

One of the advantages of fuel subsidy in Nigeria is its potential to benefit the poor and vulnerable in society. High fuel prices can disproportionately affect low-income households, as they may spend a larger percentage of their income on transportation. Fuel subsidy reduces the cost of fuel thereby making transportation more affordable for these households, thereby granting them access to cheaper mobility. In addition to reducing the cost of fuel, fuel subsidy can also help to improve access to energy and other services that require fuel such as grinding of grains and other food items.

This is because when the cost of fuel is expensive, the cost of grinding will also be high but due to subsidy, the cost of grinding is affordable. Thus, more households can comfortably grind their grains and other food items and additionally, the availability of fuel can help to augment the country’s poor electricity supply. These are some of the benefits of fuel subsidy to Nigerians.

Price stabilization

An additional positive effect of fuel subsidy in Nigeria is price stabilization. Fuel prices in Nigeria, as in many other countries, are subject to fluctuations in international oil prices since the country depends on importation to meet the country’s fuel needs. This means that if market forces are left to prevail, the price of fuel will be unpredictable and volatile based on changes in crude oil price as well as the naira to dollar exchange rate. Therefore, fuel subsidy can help to stabilize petrol prices and reduce the impact of price fluctuations on the economy and the populace.

Price stability can provide certainty and predictability for businesses and consumers, which can help to promote investment and economic growth. It can also help to reduce inflationary pressures in the economy, as higher fuel prices can lead to higher transportation costs, which can in turn increase the prices of goods and services. Hence, fuel subsidy benefits Nigerians through price stabilization.

Political stability

One of the benefits of fuel subsidy in Nigeria is its potential to promote social stability. Fuel prices are often a source of social tension and unrest, particularly in developing countries where a large proportion of the population depends on fuel for transportation and cooking. High fuel prices can lead to protests and unrest, which can be disruptive to the economy and social order. Fuel subsidy can help to prevent or mitigate these social tensions by reducing the cost of fuel for consumers.

This can help to alleviate some of the economic pressures that contribute to social unrest and promote social stability. Furthermore, the subsidy can also provide a sense of security and stability for households that depend on fuel for their daily activities. Knowing that fuel prices are relatively stable can help to reduce anxiety and uncertainty, particularly for low-income households that may have limited financial resources to cope with sudden price increases. Overall, promoting social stability is an advantage of fuel subsidy in Nigeria.

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Disadvantages of fuel subsidy

  1. Budgetary strain
  2. Corruption and fraud
  3. Inefficiency in the oil sector
  4. Increase in inflation
  5. Distortion of market forces
  6. Environmental degradation

Although fuel subsidy has considerable positive effects on the citizens which we have earlier discussed, it also has several disadvantages too as listed above which we shall discuss below:

Budgetary strain

One of the negative effects of fuel subsidy in Nigeria is budgetary strain. The Nigerian government provides subsidies to reduce the cost of petroleum products for consumers, which means that it has to bear the financial burden of this program. This can result in a significant strain on the country’s budget, as a large portion of the government’s revenue is spent on fuel subsidies. As a result, there may be a reduction in spending on critical sectors such as education, healthcare, and infrastructure, which can negatively impact the quality of life for Nigerians.

Furthermore, the budgetary strain caused by fuel subsidies can lead to government debt, which can have long-term negative effects on the economy as the government often borrows large sums to keep up with the payment of subsidies. Overall, the budgetary strain caused by fuel subsidies in Nigeria is a significant concern and requires careful consideration of the costs and benefits of the program.

Corruption and fraud

Another negative effect of fuel subsidy in Nigeria is corruption and fraud. The fuel subsidy program has been plagued by corruption and fraud, which has led to the diversion of funds meant for subsidies into the pockets of corrupt officials and fuel importers. This has resulted in a loss of revenue for the government and an increase in the cost of fuel. Corrupt officials and fuel importers have taken advantage of the lack of transparency in the subsidy program to inflate the amount of fuel imported and claim subsidies on products that were never imported or sold in Nigeria.

The corruption and fraud associated with fuel subsidies in Nigeria have had a significant negative impact on the economy and society. It has resulted in a loss of revenue for the government, increased the cost of fuel for consumers through the creation of artificial scarcity by marketers, and undermined the trust of Nigerians in the government. To address this issue, there is a need for greater transparency and accountability in the administration of the fuel subsidy program, as well as stricter penalties for those found guilty of corrupt practices.

Inefficiency in the oil sector

Inefficiency in the oil sector is one of the disadvantages brought about by fuel subsidy, these inefficiencies are evident in several ways. First, the subsidy has encouraged the smuggling of petroleum products, as some unscrupulous importers take advantage of the price differences between Nigeria and neighboring countries to smuggle subsidized fuel across the borders. This has led to a shortage of fuel in Nigeria and caused artificial scarcity as the smuggled fuel is sold at much higher prices in neighboring countries for selfish individual gain while Nigerians suffer artificial scarcity and the Nigerian government bears the brunt of the subsidy payments.

Secondly, the subsidy has also led to a lack of investment in local refineries. Nigeria, despite being an oil-producing country, has relied heavily on imported fuel due to the inefficiencies in its local refining capacity. The fuel subsidy program has further exacerbated this dependence on imported fuel, leading to a drain on the country’s foreign exchange reserves. The existing refineries in the country continue to operate far below their capacities and private individuals who have gotten licenses to set up refineries fail to do so.

This is because importers have no incentive to refine petroleum products in Nigeria when they can import at a lower cost due to the government subsidy when compared to refining in the country. Third, the subsidy has created a disincentive for the development of alternative energy sources such as solar, wind, and hydrothermal as subsidized fuel is cheaper than these alternative energy sources. These inefficiencies in the oil sector have had negative impacts on the Nigerian economy.

Some of these negative impacts include causing artificial scarcity, reducing the competitiveness of locally produced goods, and leading to a drain on foreign exchange reserves as more fuel is imported than produced locally. Addressing these inefficiencies requires investment in local refining capacity, effective regulation of the fuel importation process, and a shift toward alternative energy sources to power homes, schools, businesses, and industries. Hence inefficiencies in the Nigerian oil sector is one of the negative effects of fuel subsidy.

Increase in inflation

An additional disadvantage of fuel subsidy in Nigeria is an increase in inflation. The fuel subsidy program has led to an increase in the demand for petroleum products, which in turn drives up the cost of other goods and services that rely on fuel, such as transportation, manufacturing, and agriculture. With the increasing demands for fuel, and the country’s inability to adequately provide the needed quantity of fuel from its refineries, the importation of petroleum products has become the alternative.

This imported fuel is bound to fluctuations in international market prices and has led to increases in the price of fuel despite the subsidy payments. This has been a major contributing factor to the increasing inflation in the country because, once the price of fuel increases, the price of goods and services that are dependent on fuel prices gets increased too. Additionally, the fuel subsidy program has created an unsustainable fiscal deficit that puts pressure on the government to print more money in order to keep up with the subsidy payments as well as other government spending requirements such as recurring expenditures on salaries.

Furthermore, the printing of more money often leads to a decline in the value of the Nigerian currency. When the value of the currency declines, it also affects the naira to dollar exchange rate which can lead to higher prices for imported goods. Consequently, inflation caused by fuel subsidy can have negative impacts on the economy, such as reducing the purchasing power of consumers, increasing the cost of doing business, and making it more difficult for Nigeria to attract foreign investment.

All these are negative effects of fuel subsidy in Nigeria. To mitigate these inflationary effects resulting from subsidizing fuel, the Nigerian government can implement measures such as gradually phasing out the subsidy, investing in local refining capacity, and pursuing sound macroeconomic policies that will be beneficial to Nigerians and curtail inflation.

Distortion of market forces

Another effect of fuel subsidy in Nigeria is the distortion of market forces. Fuel subsidy has distorted market forces in several ways, such as creating an artificial demand for imported fuel, reducing the incentives for local refining and production of petroleum products, and limiting the competitiveness of locally produced goods. It has also led to rent-seeking behavior among fuel importers, who often engage in corrupt practices to obtain subsidies. These distortions can have negative impacts on the Nigerian economy, such as reducing the efficiency of the market, limiting economic growth, and increasing the cost of doing business.

To address these distortions, the Nigerian government can implement policies that promote market-based solutions, such as deregulation of the downstream petroleum sector, reducing import barriers, promoting local refining and production of petroleum products, and fostering a competitive business environment.

Such policies can help to increase the efficiency of the market, encourage the establishment of new businesses in the oil and gas sector, improve the competitiveness of Nigerian businesses, and promote economic growth. This will in turn increase revenue through business taxation and increase job opportunities for Nigeria’s teeming population.

Environmental degradation

The use of petroleum products has significant environmental implications, such as air pollution and climate change which contribute to environmental degradation. Fuel subsidy encourages the use of fossil fuels to power cars, generators, and motorcycles which increases air pollution and contributes to climate change.

This is because the price of fuel is often cheaper than alternative power sources such as solar panels and electric cars. Additionally, the exploration of fuel often results in oil spillage and other damaging activities which negatively affect the environment. This includes land and water pollution which makes it impossible for farmers to grow crops and kills aquatic life rendering the water bodies unsafe and inhabitable for aquatic species.

These adversely affect households that are dependent on farming, fishing, and other related activities for their livelihoods. Additionally, the pollution of land, air, and water can lead to the extinction of certain flora and fauna leading to a significant reduction in the diversity of plants and animals found in the country.

Erosion and flooding could also result in the displacement of individuals from their homes. These pollutants are also harmful to humans and could result in higher spending on health-related challenges resulting from environmental degradation. Thus environmental degradation caused by fuel subsidy can have negative impacts on the health and well-being of Nigerians, as well as the country’s natural resources and ecosystems.

To address these environmental concerns, the Nigerian government can promote the use of alternative energy sources, such as solar and wind power, and invest in green technologies. The government can also promote sustainable forestry practices and implement policies that discourage the dumping of used petroleum products in the environment. By taking these measures, the government can promote sustainable development and protect the environment for future generations.

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As we have discussed so far, a fuel subsidy is a government intervention that aims to regulate the price of petroleum products by providing a subsidy to reduce the cost of these products to consumers. This subsidy has had positive effects in Nigeria including reduced cost of living, increased economic activity, social welfare, price stabilization, and political stability. However, despite these advantages brought about as a result of fuel subsidy, its negative effects often outweigh the positive effects as the program has contributed to inefficiencies in the oil sector, corruption, inflation, market distortions, and environmental degradation, amongst others.

There is therefore a need to balance the advantages and disadvantages of the fuel subsidy regime in Nigeria even as the government plans towards fuel subsidy removal. The development and provision of alternatives to fossil fuel usage in the country are also important to mitigate the negative environmental impacts on the county that have been prevalent for decades.