The petroleum sector is an indispensable body in Nigeria economy. It has remained the Nigerian biggest revenue earner. It still brings in more than 80% of the foreign exchange earned by the country. However, this resulted in the shortage of the quantities of petroleum products consumed locally in the country. Hence, the problem of development is generally faced in Nigeria. This work will as well go to show what actually constitute the petroleum subsidy in Nigeria. It will analyze the cost to the government if not removed and the welfare of the local consumers. It will also reveal to a greater extent what effect it has on the GDP of the economy, at its full sustenance, partly to be taken in the issue of petroleum subsidy in Nigeria. The research work used a dummy variable to explain its finds(1 when there is subsidy and 0 when there is no subsidy).The research work however, looks into the impact of petroleum subsidy on the consumption of petroleum products in Nigeria and it was found that there are more consumption of petroleum products with subsidy than without. Among other recommendations the study opines that government should diversify the economy as quickly as possible and direct its positives to other sector of the economy that have been overlooked.