24 November 2014

Removing Subsidies

Dear Reader

It's been more than 5 years since Mr. Paul Tan wrote his article "How Fuel Prices Are Calculated in Malaysia". Other blogs have also covered this issue. To recap, the oil automatic pricing mechanism (applied in Malaysia since 1983) was based on the following:
  1. Cost of Product - Based on Mean of Platts Singapore (MOPS)
  2. Alpha
    • petrol - 5 sen / liter
    • diesel - 4 sen / liter
  3. Operational Cost
    • Peninsular Malaysia - 9.54 sen / liter
    • Sabah - 8.98 sen / liter
    • Sarawak - 8.13 sen / liter
  4. Oil Company Margin
    • petrol - 5 sen / liter
    • diesel - 2.25 sen / liter
  5. Petrol Dealer Margin
    • petrol - 12.19 sen / liter
    • diesel - 7 sen / liter
  6. Sales Tax / Fuel Subsidy
    • petrol - 58.62 sen / liter
    • diesel - 19.64 sen / liter
    • subsidy if price higher than retail price
    • tax if price lower than retail price
As we can see, the subsidies are quite substantial compared with the alpha, the margins and the operational costs. PerakToday noted that MOPS is based on refined oil rather than crude oil; this causes MOPS to be higher than NYMEX.

Philippines and Indonesia have similar oil pricing mechanisms.

Removing fuel subsidies will help the economy, by freeing up resources that can be used for other purposes. Here are some slides from a presentation about "Fiscal policy related to fuel subsidy and climate change program in Indonesia."

Source: OECD

The move to partly eliminate fuel subsidies has been implemented recently in neighbouring Indonesia. Economists have known that fuel subsidies are wasteful, but politicians who do away with fuel subsidies will face the wrath of voters.

From the Economist, 22 November 2014:
Indonesia’s fuel subsidies are wasteful, expensive and poorly targeted—benefits overwhelmingly accrue to the country’s middle and upper classes, rather than the car-less poor. Between 2009 and 2013 Indonesia spent more on fuel subsidies (over 714 trillion rupiah) than it did on infrastructure and social-welfare programmes combined. Subsidies threatened to eat up more than 10% of total government spending next year, imperilling the country’s ability to pay for the ambitious and necessary health-care, education and infrastructure programmes that Jokowi promised in his election campaign. The price rise, modest though it may be, is forecast to save the government roughly 120 trillion rupiah next year.

From Fortune, 18 November 2014:
The move, which fulfils a key pledge of Widodo’s election, will raise domestic gasoline prices by around 31%, and diesel prices by 36%. ... it will handily reduce both the government’s budget deficit and, by reducing demand for imported fuel, the current account deficit, which have been the country’s two biggest macroeconomic weaknesses in recent years.

Widodo is following the lead set by Indian Prime Minister Narendra Modi in taking advantage of the sharp drop in global oil prices to eliminate subsidies that have swallowed up vast amounts of public money in recent years.

One funny thing is that in Indonesian websites the discussions about fuel subsidy frequently discuss "BBM". It stands for "Bahan Bakar Minyak". (Source)

Here are some pages from a brochure from Jabatan Penerangan Malaysia, on rationalization of fuel prices.


I hope that the subsidies recouped will be used to benefit all communities in Malaysia, irrespective of race, religion and region.