Examining Income Inequality and the Burden of Rising Petroleum Prices in Low-Income Households in Nigeria -By Kehinde Emmanuel Oladele

Abstract 

This research investigates the differential impact of rising petroleum prices on low-income households in Nigeria, with a particular focus on the exacerbation of existing income inequality. It posits that escalating fuel costs disproportionately burden low-income families due to their higher expenditure share on energy. This, in turn, significantly constrains their ability to afford basic necessities such as food, education, and healthcare. Additionally, the research examines the influence of Nigeria governmental policies by drawing comparative analyses from petroleum pricing practices in select African nations. Ultimately, the research culminates in policy recommendations aimed at mitigating the adverse effects of rising fuel prices on low-income households in Nigeria. 

Keywords: Income Inequality, petroleum Prices, Households, Low-Income Households, Nigeria, Burden 

Introduction

It is apposite to state that income inequality is detrimental to economic growth and development. As it was reported by the World Bank, Nigeria’s Gini index (income inequality) sits at 35.1% in 2018. Meanwhile it was the view of the OECD that income inequality stands as an indicator of how material resources are distributed across society. While a Research confirmed that income inequality causes inequality of opportunity, undermines individuals’ educational, occupational choices, dampens growth by fueling economic, financial and political instability, it is regrettably submitted that the effect of income inequality would be grievous when Petroleum prices fluctuations and burden is added. 

In this context, it is important to highlight that over the past thirty years, Nigeria has generated approximately US$300 billion from crude oil sales. Despite this substantial revenue, the country remains one of the poorest in the world based on basic social indicators, as reported by the NBS in 2010. Atkinson’s research identified that inequality is stemmed from an explicit social welfare function and this might be directly attributed to the government and its policies. Additionally, the research explores how rising petroleum prices disproportionately burden low-income households in Nigeria, a country with high income inequality despite its richness in oil wealth. Consequently, this writer will examine how these price increases impacts on the selected households’ African countries spending, their consumption patterns, and coping mechanisms. 

However, given how highly skewed the distribution of wealth is in Nigeria, income inequality is unquestionably a major problem. Low-income households are more susceptible to economic shocks as a result of this imbalance, especially when such shocks affect necessities like petroleum and this makes this research to investigate how rising petroleum costs affect low-income households in Nigeria and the relationship between income inequality and these factors. Thus, its goal is to conclusively steer policy development toward lower expenses to aid higher living standards and the broader implications for society and politics, most particularly among an average Nigerian.

Statistical Overview of Income Inequality in Nigeria

Inequality is a complex idea. It refers to the way things are spread out, like income or resources, across a population. It is a bigger picture than just poverty, which only looks at those below a certain income level. Inequality considers the entire distribution, showing the gaps between rich and poor. Nigeria faces a significant issue with income inequality, as the wealth gap between the rich and poor has widened over the years. According to an Oxfam report, the combined wealth of the five richest Nigerians, nearly $30 billion, could easily cover the $24 billion needed to eradicate extreme poverty in the country. This stark disparity highlights the concentration of wealth at the top, while a large portion of the population struggles with basic necessities. Low-income households face significant difficulties, further exacerbated by the persistent increase in the cost of petroleum. 

Moving further, for reiteration purpose, an investigation into income inequality before and after democracy was conducted in Nigeria. It was discovered that there was a 6% drop in income inequality following the democratic transition after using a variety of data analysis techniques. There was 1.35% growth in the middle class. It’s interesting to note that the largest factor impacting income inequality was education (23.5%). Remarkably, a household with additional dependents experienced a tiny reduction in inequality (-15.3%). Age, the size of the home, and marital status were other criteria that had no effect. Despite having the largest economy in Africa and a richness of human capital, Nigeria suffers severe inequality, this culminated into a burden for low-income households and justifies the rising rates of poverty. 

Nonetheless, tackling income inequality continues to be a crucial economic necessity. According to the 2019 NBS reports, with the exception of Borno state, 40.1% of Nigerians are classified as poor, and nearly 82.9 million of them make less than 137,430 Naira annually than the poverty level. Even if the combined wealth of the five richest Nigerians is $29.9 billion, enough to end severe poverty, 5 million people still go hungry and over 112 million live in poverty. Meanwhile, the wealthiest man in Nigeria could spend $1 million a day for 42 years before running out of money, and his yearly income alone could bring 2 million people out of poverty for a year, the country’s social welfare system is sadly in dismal shape. It therefore follows that the effects of income inequality on low-income households are already severe and become much more so when an increase in the price of petroleum is added.

In Nigeria, the scale of inequality is quite extreme. Oxfam particularly noted that the paradox of growth in Nigeria is such that as the country gets richer, only a few benefits, while the majority continue to suffer from poverty and deprivation. In the writer’s opinion, the majority of Nigerians for the purpose of this research are largely comparable to the biblical children of Israel who were forced into slavery in Egypt rather than enjoying the abundance of the Promised Land because of households low-income; the better-off Nigerians are at the higher ranks, while the poorer ones struggle with poverty, this is more of a huge burden, how burdensome would it be when the price of petroleum changes endlessly?.

Analyzing the Extant Statutory and Regulatory Framework on Petroleum in Nigeria 

The oil and gas particularly the petroleum (in specific) sector has a significant role in the Nigerian economy. Following fifty years of research in Nigeria, Shell-BP made the initial oil discovery in the country in Oloibiri in 1956.The discovery of oil created the need for legislations and regulations to oversee the exploration of oil in Nigeria. As an item in the Exclusive Legislative List, the government at the federal level is vested with the responsibility of regulating the Oil and gas sector in Nigeria. the Constitution of Nigeria is the supreme law of the country and provides the framework for governance and the distribution of powers among various arms of government. It also sets out the rights and responsibilities of citizens and institutions within the country of which petroleum sector is not expunged.

The PIA, signed into law by President Muhammadu Buhari on August 16, 2021, is now the principal legislation regulating Nigeria’s oil and gas sector. While a notable step forward, the PIA of 2021 marks a significant advancement. However, it still faces criticism for not adequately addressing persistent issues like gas flaring. Nigeria being a significant producer of gas and oil, hence the constitution discusses the regulation of this industry. Moreover, PIA aims to give the Nigerian petroleum industry a legislative, administrative, regulatory, and financial framework. Even though it generates a lot of money, the oil industry contributes less to GDP than other sectors. 

The Act is a comprehensive legislation comprising 5 chapters, 319 sections, and 8 schedules. It covers various aspects of the petroleum industry including rights of preemption, joint ventures, pricing frameworks, allowances, fees, and royalties. The Act repeals about 10 existing laws such as the Associated Gas Reinjection Act and Motor Spirit Act, while amending others like the Pre-Shipment Inspection of Oil Exports Act. Certain provisions of older laws remain in effect until relevant licenses and leases expire. Additionally, the Act establishes the Ministry of Petroleum Incorporated to oversee these regulations and operations in the petroleum sector.

While the Nigerian Midstream and Downstream Petroleum Regulatory Authority oversees midstream and downstream operations, the Upstream Regulatory Commission oversees upstream petroleum operations. For the sake of this research, PIA creates these two regulatory agencies in Nigeria.These bodies are exempt from taxation laws related to companies or Trust Funds. Additionally, the Act imposes a levy of up to 1% on the wholesale price of petroleum products sold in Nigeria, split between the Authority Fund (0.5%) and the Midstream Gas Infrastructure Fund (0.5%). Chapter 2 of the Act focuses on the general administration of petroleum resources in Nigeria. Its objectives include promoting the exploration and exploitation of petroleum resources for the benefit of Nigerians and ensuring the efficient and effective development of the petroleum industry and Section 67 of the Act outlines that the administration and management of petroleum resources are to be conducted in accordance with the Act and principles of good governance, transparency, and sustainable development in Nigeria.

However, the writer contends that while the Act has brought much-needed stability to Nigeria’s petroleum industry, there is a requirement to overhaul it further to enhance protection for host communities. This includes enabling state governments to co-own petroleum resources. Additionally, there should be regulatory measures to reasonably control petroleum costs in the market by government policies, particularly by ensuring the interests of Nigerian households with lower incomes are safeguarded.

Effects of Rising Petroleum Price in Nigeria: African Countries Comparative Analysis 

Crude oil price fluctuations are a typical occurrence in the global oil market since the price of crude oil has changed several times over the course of the global economy. These price fluctuations, which are frequently called “oil price shocks,” are typically explained by the circumstances that precede them. According to Hamilton, The Suez Crisis of 1956–1957, the OPEC oil embargo of 1973–1974, the Iranian Revolution of 1978–1979, the Iran–Iraq War that began in 1980, the first Persian Gulf War in 1990–1991 and the oil price surge of 2007–2008 are the main post–World War II oil shocks. In 2008, the price of oil reached a historic high when it was sold for $140 per barrel, which was roughly the highest price ever seen in the market. 

Thus, the price and subsidy of petroleum products in Nigeria Since the government replaced the private oil corporations in 1973, it has controlled the price of petroleum on the domestic market. Nigeria boasts substantial natural resources, being Africa’s largest oil producer and ranking 13th globally. It holds significant reserves, including 37,062 million barrels of crude oil and 5,284.3 billion cubic meters of natural gas, making it the world’s 10th largest and Africa’s second largest reserve base. Despite its wealth from oil exports, Nigeria’s economy is vulnerable to fluctuations in oil prices, which disproportionately affect low-income households and increase their tax burden. To mitigate this vulnerability, the Obasanjo administration created a savings account to buffer against market volatility. While this initiative initially succeeded, successive administrations depleted these reserves, leaving the country without a financial safety net during economic crises.

According to the scholarly studies by Saari and Sheng learn that the US and Malaysia’s separate problems with wealth disparity were exacerbated by rising oil prices. Indirect and direct effects of rising oil prices are seen in real family incomes. The estimated average expenditure effect of oil price in Mali falls in the range of findings that have emerged from other country studies. A 20 percent increase in oil prices leads to 1 percent rise in household expenditures in Mali. The impact of rising oil prices varies across nations’ economies. Pakistan experiences a minimal expenditure effect of 0.85 percent, contrasting with Ghana’s higher 3.4 percent. Ghana’s greater oil subsidies and higher household consumption of oil products, such as a 3.5 percent budget allocation for kerosene compared to Mali’s 1.45 percent, explain this disparity. 

Meanwhile, diverse results are found in studies that look at how rising oil prices affect different socioeconomic groups and countries. It is discovered that these increases have a progressive effect in South Africa and Indonesia. Studies conducted in Ghana, Pakistan, and the Islamic Republic of Iran, on the other hand, show regressive consequences. Mali and Mozambique have a distinct pattern in which the quintile with the lowest income has a marginally higher influence than the quintiles with the highest income. This is probably because some oil goods, like kerosene, have seen large price increases. The poor are impacted more severely since their households commit a larger portion of their budget to these products. On the other hand, the Pakistan case study is confusing as, while the price of kerosene remains constant, the increase in oil prices is regressive.

It is submitted that more research shows that rising food prices (for milled grains, vegetable oils, wheat, and other items) that are dependent on transportation costs have an impact on the impoverished, this undoubtedly stands as an evident effect of rising prices of petroleum on low-income households. To sum up, compared to Ghana, where it accounts for 20% of the total effect, Mali experiences a 50% direct impact from higher oil prices. The reason for this discrepancy is that families in Ghana utilize 6.2 percent less petroleum products directly than households in Mali (20%). 

Conclusion and Policy Recommendations

Addressing income inequality alongside the impact of petroleum price fluctuations is crucial for fostering resilience and promoting inclusive development in Nigeria. it is observed by this writer that ensuring that all households withstand economic shocks and achieve sustainable livelihoods should be of imperative concern in this country. However, on this basis, the writer argues that there is a need to reduce household size, as this would significantly increase per capita income and decrease income inequality, although, In most cases, it is the poor who tend to have a high propensity for larger family sizes. 

Also, according to a finding by Anthony opined that policymakers should introduce measures to control domestic oil prices. However, this could result in significant revenue loss, as oil is a major income source for the Nigerian government. Economic diversification is necessary, focusing on promoting agriculture, technology, and manufacturing. Meanwhile, the introduction of GDP per capita will benefits income inequality in Nigeria. The government needs to grow the economy and this could be done by providing and enabling environment for the private sector to thrive and it is suggested that the basic social amenities such as good roads and electricity must be provided, also, this writer also  recommends that the government should deregulate the downstream sector of the petroleum industry to allow for the participation of private individual who has the wherewithal to invest in the establishment of refineries. Finally, the poor are disproportionately impacted by rising oil prices, particularly in the short run. It is imperative to establish targeted social safety nets financed by subsidy reforms in order to mitigate this damage.