09 August 2008

The New System Starts On September 1st, 2008.

An AFP report quotes Prime Minister Abdullah Badawi saying on 2nd August 2008 that Malaysia will, commencing September 2008, "introduce a new system linking domestic fuel prices to the global market, but will cap prices at their current levels". This is in keeping with the falling cost of petrol. Global petrol prices peaked at USD140 per barrel but have since fallen. (To be sure, OPEC records that the world price of petrol stood at USD140.73 on 3rd July 2008 and is presently USD114.64 per barrel as of 6th of August 2008. This figure is debateable because OPEC calculates the price of petrol based on a basket of prices. The AFP report, in fact, states that the prices of petrol hit a high of USD147/= in July 2008.)

To summarize, Prime Minister Abdullah Badawi stated:

  1. Petrol prices would continue to be subsidised at the rate of RM0.30 per litre
  2. The price of petrol would be fixed on the 1st day of each month based on the monthly average
  3. This price would not exceed the present price of RM2.70 per litre
  4. Petrol prices would reflect the global prices of petrol of the preceding month

Simple arithmetic will show that the price of petrol should be adjusted for its retail on Malaysian soil.

  1. 1 barrel of oil is 159 litres
  2. The price of USD114.64 per barrel translates to RM378.77 per barrel (USD1 = RM3.304)
  3. RM378.77 per barrel translates to RM2.38 per litre of petrol.
  4. If this amount was subsidised by RM0.30 per litre, it would translate to prices of RM2.08 per litre.

Is this necessarily a good thing? There have been mixed reactions to the announcement. Among some of the notable reactions:

  1. Housing and Local Government Minister Datuk Seri Ong Ka Chuan, apparently approving, stated: "We cannot have a situation where petrol prices go up only and not go down" (Source: Fuel Prices Likely To Drop, The Star, 4th Aug. 08 )
  2. Independent energy consultant Dr. Pola Singh opines that petrol prices should be maintained at RM2.70 per litre of petrol, because consumers had gotten used to it, and petrol prices may further increase. (Source: Mixed Reaction to Petrol Price Float, The Star, 5th August '08)
  3. CIMB Research opined that "a fuel price reduction may lower the cost of doing business, with savings passed on to the masses". (Source: ibid.)
  4. RAM Holdings Bhd group chief economist Dr Yeah Kim Leng stated that Malaysians would become more competitive and more efficient as they became sensitive to changes in global oil prices. He was of the opinion that the Government should have made at least one adjustment to the price of petrol last year. The impacts would have been more gradually felt. When the Government could no longer subsidise the price of  petrol, petrol prices jumped from RM1.92 per litre to RM2.70 per litre. (Source: Floating Oil Prices, The Star, 9th August 08.)
  5. Aseambankers Malaysia Sdn. Bhd. chief economist Suhaimi Ilias is skeptical that the prices of goods and services will come down even if the price of petrol is reduced. (Source: ibid.)
  6. Tan Teng Boo, CEO of iCapital group, opined that petrol prices would continue to increase in the long term as demand from developing nations was strong. (Source: Petrol Price May Stay High On Demand From Developing Nations, The Star, 6th August '08.)

In my humble opinion, we can only gauge the impact of the new floating price system after one or two months of its implementation. The main question is how will prices of goods and services be affected by the constantly changing price of petrol: Would prices rise one month and fall the next, in line with the changing price of petrol? Contracts for works and services are usually carried out over extended periods of time -- months, sometimes even years. Usually there needs to be some certainty in the price of the contract. However, to be fair, contracts for services and works need to insert a clause to provide for the changing prices of raw materials and operating costs. My simple opinion is that as long as the Government maintains a price ceiling (presently RM2.70 per litre) for the price of petrol, there should not be any need to increase the price of goods and services.


Shah Jehan said...

What ever the fluctuation is going to be like, I really hope the price of RM2.70 will stay for some long time before it increases any further. People need to adjust to the consequence of the latest petrol price hike. The price of Dutch Lady small packet milk is now RM1.80. Milk lovers are suffering here.

Muhammad Ikhbal said...

Well, if you ask me:-
1. Leave the current price as it may be. Why?
Well prices of goods / services / parts and what nots have been itching to go up even before the petrol price went up. Dont expect these people to lower their prices (ever!).
The fuel price will eventually go up in the future. Use the savings to subsidize it (but please spare the us the fuss of drumming up of setting up a special fund of this and that. Just do it!).

2. Some kind of mechanism should be set up to prevent hogging of petrol supply by petrol kiosk operators (as would be in the case of a petrol price hike). Also it's to avoid them from losing out if there is a decrease in current market price since their petrol supply was bought at a much higher price.

3. Again, its all about adequate monitoring and enforcement from the government (although it will be tough with the current manpower and logistics issues). Additionally it's time for the people to think and act kiasu if they see somebody is profiting unethically and not close one eye thinking it's no skin of theirs. If the monitoring burden is shared by the public, I think the government can concentrate more on enforcement.

4. Whatever and however deep and thorough their proposal is, I really hope the government would pilot test it somewhere in a locality before nationwide implementation. Of course the petrol rebate is quite an uncommon instance where such implementation is smooth but then again it was done by the private sector (Posmalaysia is private isn't it?).

Well all the best Malaysia.