23 November 2008

2nd Fortnight Report November 2008

Dear Reader,
Thank you for dropping by PetrolMalaysia.com, again. As usual, we will cover a run-down of recent events pertaining to petrol, in Malaysia.

The price of petrol has slipped in recent weeks. On the 17th of November, the Government of Malaysia announced that the price petrol has now dropped 15 sen per litre. Accordingly, the prices of petrol in Malaysia are now:
  1. RM2.00 per litre forRON 97;
  2. RM1.90 per litre for RON 92; and
  3. RM1.90 per litre for diesel.
(Source: New Straits Times Online, 17 Nov. 2008, Fuel Prices Drop By 15 Sen Per Litre)

The Government has stopped subsidising petrol price at petrol stations. (Source: New Straits Times Online, 20 Nov. 2008, Another Fuel Price Cut? Gov't To Decide Next Month, says Shahrir) This removal of price subsidy at the petrol pump is probably a good idea for now, as it will save the Government some money. The current price of petrol is not burdensome on the rakyat. However, when prices of petrol shoot up again, will the Government refuse, or selectively forget, to implement the petrol price subsidy?

The international price of petrol has slipped. The price of petrol, as of today, has reached USD$44.06 per barrel. (Source: OPEC price basket) Reuters reports that Virgin America is considering the possibility of hedging fuel purchases for the next four years, given the presently depressed price of petrol. The present dip in the oil price represents a "unique opportunity" given that the price of petrol has been volatile in recent months. (Source: Reuters, 22 Nov. 2008, Virgin America Sees Fuel Hedge Opportunity) A hedge allows prices of commodities, including energy, to be locked in for an extended period of time. (Source: New York Mercantile Exchange, A Guide To Energy Hedging, accessed 24 Nov. 2008 -- incidentally, quite an excellent explanation!) Could this possibility be exploited by Malaysia as well? Only time will tell if our policy makers can spot this golden opportunity.

A possible explanation of the current situation is that OPEC, and oil producing nations, are simply responding to the call from the international community to ease petrol prices, in view of the looming financial turmoil. (Ref: OPEC, October 2008, Rebuilding Trust In The Global Economy, accessed 24 Nov. 2008) According to OPEC:
The oil industry must do everything it can to limit the impact of the financial turmoil and to accommodate, in a timely and effective manner, any changes to the banking system that may emerge. (Source: ibid.)

Petrol prices are likely to rise again next year given the counter-measures taken by various oil-exporting countries, namely OPEC, GCC (Gulf Cooperation Council), Iran and Venezuela. As crude oil exports form the majority of revenue for these countries, it is necessary to stem the tide in the drop of their profits. Accordingly, these countries are cutting production, the figures of which are not official but reported to be 5% per year. (Reference: Al-Bawaba Jordan, 22 Nov. 2008, Global Investment House "Global" Date: November 2008) Global Investment House (Kuwait) forecasts that petrol prices in 2009 could average about USD70.00 to USD76.80 per barrel. (Source: ibid.)

Interestingly, the cost of oil extraction in various countries was also listed in the Global Investment House (Kuwait) report at Al-Bawaba Jordan:
  1. Middle East region - USD$5.30 per barrel (average)
  2. North American region - USD$7.60 per barrel (average)
  3. Kuwait - USD$2.50 per barrel
  4. Saudi Arabia - USD$2.00 per barrel
  5. Iran - USD$1.50 per barrel
  6. Iraq - USD$1.50 per barrel
  7. Canada - USD$8.30 per barrel
  8. USA - USD$6.80 per barrel
Given the low cost of oil production, there really is no reason for oil exporting countries to complain about the fall in petrol prices. A prolonged bout of economic turmoil, coupled with skyrocketing petrol prices, would do much to sabotage various economic stimulus programmes that various governments have sought to implement. (USA has approved a USD$700 billion fund to stimulate and revitalize the economic situation, leading others to follow suit. China has implemented a USD$568 billion stimulus fund and Malaysia, a fund to the tune of RM7 billion.)

It may also be useful to quote Global Investment House (Kuwait) on factors behind the rise of oil price in recent months, and their prospects for the future:
The increase in crude oil prices over the period of 5 years were mainly due to the following reasons:

  • Global political uncertainty
  • High global economic growth
  • Lack of refining capacity which caused a shortage of refined products.


    Going forward, we expect crude oil prices to ease down from the current level (3Q2008) to US$65.0-70.0 per barrel in 2011. This assumption is based on the following factors:

  • Slowdown in economic development and shifting towards gas base industries.
  • New refining capacity will come online by 2011, which will fulfill the shortage of refined products.

  • A more regular review of Malaysian petrol prices may be on the cards to take advantage of the falling price of petrol. Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad has announced that the Malaysian Government may implement a floating price mechanism after the National Economic Action Council meeting on 1st December 2008. (Source: Malaysiakini, 22 Nov. 2008, Floating Mechanism To Manage Fuel Prices). This move may put Malaysians at the mercy of the market with no price ceiling in sight.

    The same Minister also announced that the same Council also would consider implementing a price floor for petrol. (Source: New Straits Times, 22 Nov. 2008, Fuel Floor Price In December?) He mentioned that if petrol prices continued to slide, a floor price would enable the Government to reap profits.

    Just two days earlier, the same Minister informed Parliament that the price of fuel could not be fixed by direct reference to the international price of crude oil as many other factors were involved in converting crude oil to petrol. (Source: Malaysiakini, 20 Nov. 2008, Fuel Prices Not Solely Dependent On Global Crude Oil Prices) Two days later Minister Shahrir Abdul Samad would go on record that the present price of RM2.00 per litre was 40 sen above the actual price, which was RM1.60. (Source: New Straits Times, 22 Nov. 2008, Fuel Floor Price In December?)

    The various announcements by Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad can be seen as a response to a call by Dr. Lim Teck Ghee to reveal the petrol price mechanism, amidst gripes by various parties that petrol being sold in the country may be overpriced.
    "The government should reveal the actual figures as to how much they are subsidising and how the present price was arrived at. The figures should be out there in public." -Dr. Lim Teck Ghee, 19 Nov. 2008
    (Source: Malaysiakini, 19 Nov. 2008, "Reveal Fuel Price Mechanism"

    RON 95 unleaded petrol will be made available at the petrol pump. Presently, Malaysian motorists have the option of filling up with RON 92 or RON 97. (Source: New Straits Times Online, 20 Nov. 2008, Gov't To Encourage Sales of RON 95 and RON 97 Petrol Next Year) Minister Shahrir Abdul Samad said that RON 95 was unleaded but cheaper than RON 97 and would be of advantage to the Malaysian public. He also said that the price of RON 95 would match that of RON 92 if he remained as Minister next year. However a day later he would go on record that RON 95 would replace RON 92 entirely. (Source: New Straits Times Online, 21 Nov. 2008, RON 95 Grade Of Petrol To Replace RON 92 Next Year) It was a good decision as given the choice of two grades of petrol with the same price, the reasonable man would select the higher grade of petrol (with higher octane). Further, if petrol dealers were to offer all RON 92, RON 95 and RON 97, as well as diesel, it may mean that petrol stations would need bigger floor space, and enlarged storage tanks.

    Finally, I was gratified to learn that the margin of profit in Malaysia is RM0.12 per litre of petrol sold. (Source: New Straits Times Online, 21 Nov. 2008, RON 95 Grade Of Petrol To Replace RON 92 Next Year) Minister Shahrir Abdul Samad said that the profit margin was the same regardless of whether it was RON 97 or RON 92 that was purchased.