04 December 2008

Petrol Prices Down by 10 sen!

December has come. And the good news is that petrol prices have fallen once again. At the petrol pumps, RON 92 and diesel are now priced at RM1.80 per litre. RON 97 is now priced at RM1.90 per litre. This however is still higher than the global price of petrol, which is about RM1.60 per litre. [Source: New Straits Times, 3rd Dec. 2008, 6th Reduction in Petrol Price]

The Government is considering either implementing a "managed float or floor price". The present reduction of 10 sen, as opposed to 15 sen, was necessary to ensure that petrol vendors could make a profit of 2 sen per litre. [Source: New Straits Times, 4th Dec. 2008, Lower Prices: Should We Float Or Fix Minimum Fuel Prices?]

Prime Minister YAB Abdullah Ahmad Badawi was quoted by Bernama stating: "If oil price continue to slide drastically, our revenue will be affected as the percentage of income from oil is high. If our revenue dwindles, it will lead to other problems." [Source: Bernama, 2nd Dec. 2008, Malaysia's Revenue May Suffer If Oil Prices Fall Sharply, Says Abdullah] The same article also stated: "Oil is the biggest revenue contributor to the country's coffers."

While it may be true that oil is the country's biggest revenue contributor, the oil being mined in Malaysia is not being sold in Malaysia. Therefore a floating price mechanism for oil vended at petrol stations may not harm Malaysia's revenues. It will, however, harm the revenues of petrol station owners (i.e. petrol dealers). 

It may be noted that the Opposition has called for the Government to allow petrol stations to set their own prices. Tony Pua was quoted saying that petrol pump prices in the United States were RM1.742 per litre, as opposed to Malaysia's RM1.90 per litre. [Source: New Straits Times, 4th Dec. 2008, Dewan Rakyat: Pua Wants Petrol Stations To Set Their Own Prices] He was also quoted saying:

"It is an anomaly that our country does not allow anyone to sell fuel at a lower price. The government should allow fuel operators to compete among themselves to sell fuel at a lower price as this can translate to move savings for consumers."

This suggestion by Tony Pua represents a new option for the Malaysian government that is more populist and will be well received by the Malaysian public. The options available to the Government, presently include: (a) managed floating price mechanism; (b) price floor (presumably in conjunction with a floating price); (c) free float (following international prices); (d) get petrol stations to fix their own prices. With options (a), (b) and (c), it is likely that the Government will allow for a profit margin so that petrol station owners will not suffer too much. With option (d), it would allow petrol station dealers the opportunity to compete for business, while marketing within their own margins of profit.

If Tony Pua's suggestion is implemented, there is the danger of stiff competition causing profits to plummet, therefore causing the bankruptcies of petrol dealers. This is especially true where there are many petrol stations located close to each other. These petrol stations could co-exist in the past because of fixed (similar) prices and heavy product differentiation -- although, truth be told, petrol is petrol, and is mostly the same from petrol station to petrol station. 

The flipside to Tony Pua's suggestion is that petrol stations located in the middle of nowhere, can probably charge high prices. It would not be illogical to assume that on a stretch of road, on which there is only one petrol station for the next 45 minutes, countless people will queue up to fill up before travelling the following 45 minutes. Petrol stations in new housing areas and new commercial areas, and even quiet industrial areas, would also be able to charge a few sen more per litre as the task of driving to a distant petrol station may consume more petrol than it saves. 

A possible development, if Tony Pua's suggestion is implemented, is that there may be websites popping up to list down the location and prices of various petrol stations. Examples may be found at WhatGas and PetrolPrices. Yet another possible development may be the introduction of automatic price signs, which are popular in Europe and are beginning to become popular in the USA. [Source: Service Station Australia, Winter 2008, Automatic Price Signs Slowly Arriving In The US]