Bloggin' Abt Oil/Petrol and Related Events/News from Kuala Lumpur, Malaysia.

2nd Fortnight Report November 2008

23 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.

    Kimanis-Bintulu gas pipeline project - On!

    09 November 2008

    Dear Reader,

    Thank you for dropping by PetrolMalaysia.com. In this article we examine the Kimanis-Bintulu gas pipeline project.

    Introduction
    On 1st Nov 2008, Prime Minister YAB Dato Seri Abdullah Ahmad Badawi announced at the 23rd UPKO congress that the Kimanis-Bintulu gas pipeline project was to go ahead. (Source: Malaysiakini, Abdullah's U-turn on gas pipeline project, 3rd Nov 2008) The Prime Minister had announced on 31st May 2008 that the project would be scrapped. However on 10th Oct 2008, Tan Sri Bernard Giluk Dompok noted that Petronas was proceeding with implementing the project, in disregard of the Prime Minister's earlier promise that it would be scrapped.

    Basic Facts
    What: The Government plans to build a pipeline from Kimanis (Sabah) to Bintulu (Sarawak). Prime Minister YAB Abdullah Badawi has stated that only surplus gas would be transported from Kimanis to Bintulu. (Source: Malaysiakini, ibid.) He also said that sufficient gas would be allocated to meet the needs of Sabahans.

    Length: Most reports state that the pipeline is planned to be 500 km long. (Source: Malaysiakini @ 3rd Nov 2008, Daily Express News @ 2nd Nov 2008, The Star Online @ 4th Nov 2008) However an article by The Star dated 30th June 2008, reproduced on the UPKO website, states that the pipeline will be 480 km long. (link) The planned pipeline would run approximately 90 km in Sabah and the remaining 422 km in Sarawak. (Source: The Star Online, Dialog JV gets RM1.6bil Sabah-Sarawak gas pipeline job, 7th Mar 2008)

    Price: Malaysiakini (3rd Nov 2008) states the cost will be RM3 billion whereas The Star Online (4th Nov 2008) states that it is "worth" RM1.5 billion. However the article on UPKO's website by the Star (30th June 2008) quotes Petronas vice-president of gas business Wan Zulkifli Wan Arifin that the project would cost RM390 million.

    Who: Tan Sri Bernard Giluk Dompok, president of UPKO, has been most vocal against the pipeline project. He wants the project to be scrapped so that Sabahans can partake in the oil and gas industry. (Source: The Star Online, Dompok to raise gas pipeline issue with PM, 4th Nov 2008).

    When: The project is expected to complete by 2011. (Source: The Star Online, ibid.)

    Nitty-Gritty
    Economics: The gas, after being processed at Bintulu, is expected to be sold to Korea and Japan. (Source: The Star Online, ibid.)


    Compromise
    Prime Minister Abdullah Badawi has promised that the state government would get royalties, and Petronas would build a natural-gas powered station in Kimanis. (Source: The Star Online, Upko determined to get gas pipeline scrapped, 6th Nov 2008)

    On 7th Nov 2008, Minister in the Prime Minister's Department Tan Sri Bernard Dompok agreed to the setting up of the pipeline as the Prime Minister had agreed to set up a full fledged petrochemical industry in Sabah at the same time as the construction of the pipeline. He was also assured that only "excess gas" would be sent to Sarawak via the pipeline. (Source: The Star Online, Petrochemical industry to be set up in Sabah, 7th Nov 2008) (Source: The Star Online, Controversy resolved, Sabah to get petrochemical industry, 8th Nov 2008)

    Not acceptable to everyone
    PKR (Parti Keadilan Rakyat) vice-president Datuk Dr Jeffrey Kitingan said the pipeline project should be scrapped and a real petrochemical plant set up. (Source: Daily Express Sabah, PKR claims Dompok achieved nothing, accessed 9th Nov 2008)

    Sabah UMNO leader Datuk Ghapur Salleh has also questioned whether the promise of setting up a petrochemical industry, would be delivered. He noted that the ruling coalition had reneged their promises before. (Source: The Star Online, ibid.) Vast areas of land had been allocated to federal agencies to be developed by settlers, but were ultimately awarded to private companies for timber logging.

    SAPP (Sabah Progressive Party) president Datuk Yong Teck Lee has also suggested that the pipeline be routed from Kimanis to Tawau to allow Sabahans to reduce reliance on coal as a source of industry. The pipeline would be shorter. He said, "It does not make sense for Petronas to pipe Sabah’s natural gas 500km to Bintulu via a RM3bil pipeline and make Sabah import hydroelectric power from Sarawak." (Source: The Star Online, Yong: Better energy options for Sabah, 9th October 2008)

    Report: 1st Fortnight November 2008

    Dear Reader,

    Thank you for dropping by PetrolMalaysia.com. You will notice that a new gadget has been added to the middle column, displaying the latest price of petrol. I was inspired by Jeff Ooi who placed a slightly bigger widget (but from the same source) on his website.

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    Malaysians heaved a sigh of relief on November 1st, 2008, when petrol prices were reduced by 15 sen. This was in response to the price of petrol, which dropped to USD$62 per barrel. (Source: Malaysiakini, Gov't cuts petrol, diesel prices by 15 another sen, 1st Nov 2008) Several things must be discussed in this article.

    The latest prices of petrol effective November 1st, 2008, are as follows:
    1. RON 97 petrol is RM2.15 per litre;
    2. RON 92 petrol is RM2.01 per litre; and
    3. Diesel is RM2.05 per litre.
    (Source: Bernama, Another Fuel Price Cut Soon, Says Shahrir, 9th Nov 2008)

    Light aircraft fuel goes up
    In the Bernama article referred to above, it was stated that fuel for light aircraft has risen from RM6.20 per litre, to RM9.53 (Kuala Lumpur) and RM9.80 (Langkawi) because of fuel shortage. In Singapore, the price of light aircraft fuel is RM6.00 (S$2.61) per litre. Domestic Trade and Consumer Affairs Minister, Datuk Shahrir Abdul Samad indicated that the government might consider letting a company other than Petronas purchase such fuel.

    Oil price to be reviewed fortnightly
    In the Malaysiakini article referred to above, Datuk Shahrir Abdul Samad was quoted saying that the price of petrol would be reviewed every two weeks. Accordingly, the next price revision will be on 15th Nov 2008. The Star quoted Datuk Shahrir Abdul Samad as saying, "If the price is changed once a week, it will be too short a time for any effects to be felt." (Source: The Star Online, Govt expected to reduce petrol price by 15 sen a litre Saturday, 31st Oct 2008)

    Who determines the price of petrol?
    On this question, the proper answer seems to be the Finance Ministry. In The Star Online article referred to above, it was quoted that:
    Petrol Dealers Association of Malaysia (PDAM) president Abdul Wahid Bidin said they expected the new prices to take effect early tomorrow although they have not received a directive from the Finance Ministry.
    Therefore it is clear that the Petrol Dealers Association of Malaysia set their prices according to the directives of the Finance Ministry.

    Factors in setting the price of petrol
    In the Malaysiakini article referred to above, Datuk Shahrir Abdul Samad mentioned that the Government had to consider the price of crude oil at the point it stocked up about a month ago (in October 2008). Crude oil was more expensive in October 2008. To quote the article:
    The minister said the government had stocked up crude oil a month ago when the price was still high and the reduction must be based on the price at the purchasing time.

    "It takes about a month to process crude oil to petrol and when the government bought them, the price was not US$62 per barrel so we cannot say the price is this so this is how much you have to reduce it," he said.
    I have some questions: (1) Why does the Government need to stock up on crude oil? and (2) Why does the one month required to process crude oil to petrol, affect the price of the petrol we buy? Unless the Government were selling the crude oil to us, directly, it should not matter.

    Fuel rebate scheme may be scrapped
    For those Malaysians who forgot, the Government generously allowed a fuel rebate of RM625 (cars below 2000cc) and RM150 (motorcycles below 250cc) for Malaysians to ease the pinch caused by the petrol price hike in June 2008. They could claim it upon settling their road taxes. (Source: Malaysiakini, Gov't to revamp fuel rebate scheme, 1st Nov 2008)

    According to Datuk Shahrir Abdul Samad, "Not many like the rebate system and feel that it should not have been implemented." (Source: ibid.) My response is that I should claim my fuel rebate before they scrap it. But honestly, many of us working individuals are unable to find the time to claim our fuel rebate at the post office. Over time, we tend to forget. And therefore the RM625 does not get claimed. Perhaps, the Government can help by putting up posters at post offices, reminding people to claim their fuel rebate.

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    I look forward to the next price revision on 15th Nov 2008.