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.

Source

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.

Source

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.

Source

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

RON95 and Diesel Prices To Be Based on Managed Float

Dear Reader

The retail price of RON95 and diesel will be based on a managed float from now on. Here is the press statement for the announcement, which I received from a friend:

KENYATAAN AKHBAR
PELAKSANAAN PENGAPUNGAN TERKAWAL (MANAGE FLOAT)
BAGI PETROL RON95 DAN DIESEL

Dimaklumkan bahawa Kerajaan melalui Mesyuarat Jemaah Menteri hari ini telah memutuskan bermula dari 1 Disember 2014, penetapan harga runcit bagi petrol RON95 dan diesel adalah mengikut kaedah pengapungan terkawal (managed float). Kaedah ini adalah sebagaimana pelaksanaan penetapan harga runcit RON97 sedia ada sejak Julai 2010.

Harga runcit produk petroleum di Malaysia ditentukan melalui kaedah Automatic Price Mechanism (APM) sejak tahun 1983. Melalui APM, Kerajaan akan menetapkan harga runcit pada satu paras tertentu dimana perubahan kos produk tidak akan mengubah harga runcit. Walau bagaimanapun, melalui pengapungan terkawal (managed float) ini, purata perubahan kos produk akan menentukan penetapan harga bagi bulan berikutnya. Ini bermakna jika harga pasaran minyak mentah dunia meningkat, harga runcit RON95 dan diesel juga akan meningkat. Begitu juga sebaliknya.

Sebagai contoh daripada 1 hingga 19 November 2014, purata harga RON95 di bawah APM menurun kepada RM2.27 seliter yang mana lebih rendah daripada harga runcit RM2.30 seliter. Dalam hal ini, Kerajaan akan memantau harga pasaran pada 20 hingga 31 November 2014 dan jumlah sebenar akan menentukan purata harga runcit pada bulan Disember. Jika trend ini berlarutan, adalah dijangkakan harga runcit RON95 bagi bulan Disember akan dikurangkan sewajarnya berdasarkan formula APM.

Pada masa ini harga runcit RON95 di stesen minyak adalah pada harga RM2.30 seliter dan diesel pada harga RM2.20 seliter. Mulai pada 1 Disember 2014, penetapan harga di stesen minyak akan bergantung kepada kaedah yang disebut di atas. Kerajaan akan mengikuti perkembangan pasaran harga produk kos setiap masa dan kadar pertukaran matawang untuk menetapkan harga runcit petrol dan diesel.

Keputusan pengapungan terkawal harga petrol RON95 dan diesel dibuat berikutan kejayaan pelaksanaan pengapungan terkawal harga petrol RON97. Langkah ini membuktikan hasrat Kerajaan untuk memastikan rakyat menikmati manfaat sepenuhnya berikutan penurunan harga minyak mentah dunia.
Kajian bagi pelaksanaan pengapungan terkawal harga petrol RON95 dan diesel ini telah dilaksanakan oleh Kerajaan sebelum memutuskan pelaksanaan kaedah ini.

YB DATO’ SRI HASAN BIN MALEK
21 NOVEMBER 2014

 According to The Star's report dated 21.11.2014,

• All subsidies for RON95 and diesel would be stopped starting December 1, 2014;
• The retail prices would follow a managed float, similar to the mechanism for RON97 in the country; and
• The price of RON95 and diesel for any single month would be calculated based on the monthly average price of the preceding month.

Source 

According to The Malaysian Insider on 18.11.2014, the price of RON97 went down 20 sen, to RM2.55 per liter. This is because of the effect of the managed float, which fixes the price of RON97 according to the market price of petrol.

Source

Thus, if the managed float is implemented, the price of RON97 and diesel will go down in the near future.