My Say: Need to explain the fuel subsidy story well

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WHEN oil is cheap and supply abundant, energy conservation and development of alternative fuels are the last things on the minds of many people, including Malaysians. What’s more, in Malaysia, the prices of petrol and electricity are subsidised. Consumers have been getting cheap electricity and petrol for their homes and to power their cars so much so that we have forgotten to use these resources efficiently. When it comes to energy (and now, water), a lot of us have forgotten the word “conserve” or the need to jimat.

“If there is a need to subsidise petrol and diesel, it should be targeted, for example, at the public transport sector, the poor, farmers and fishermen. A blanket subsidy that benefits all consumers — including the rich and those who own two cars or more or drive expensive oil-guzzling vehicles — should be avoided.”

These two quotes were from articles I wrote in this column in 2004 — 10 years ago — when the price of crude oil was around US$40 a barrel, the pump price of petrol was RM1.37 a litre and Maroon 5 and Adam Levine were just beginning to make their presence felt in the pop charts.

The fuel subsidy — for petrol, diesel and liquefied petroleum gas (LPG) or cooking gas — was only at RM4.8 billion, but even then, it was obviously not sustainable, as subsidies just don’t work in the long run. They breed complacency. The cost of subsidy almost always increases and makes the economy inefficient. The message this column carried then was that we needed to re-inculcate the jimat culture and shed the subsidy mentality.

The warnings that subsidies were not sustainable were already there. While the government argued that the fuel subsidy would only be removed gradually as public transport improved, there were signs then that the price of crude oil was entering a new phase — a rising price environment that had never been seen before in the industry.

From 2004, the price of crude oil had risen steadily to break the US$50 a barrel barrier in 2005, breach US$60 in 2006, then average US$70 a barrel in 2007. It passed the much-dreaded US$100 a barrel level for the first time in January 2008 before reaching a peak of US$145 in July 2008. As the property market collapsed in the US, followed by the global financial crisis, the world entered into recession in end-2008 and 2009. During this period, as well as in 2010, the crude oil price hovered around the US$60 to US$80 level.

As the world economy recovered, prices have consistently stayed above US$100 since 2011. Demand shot up from 82 million barrels per day (bpd) in 2004 to the current 92 million to 93 million bpd. Contributing to the high price environment were constant supply interruptions in the troubled Middle East, notably from big producers and exporters such as Iraq;  lack of spare capacity, including refining; lower investments in exploration, development and production; failure to produce alternative fuels at favourable prices; and the weak US dollar.

This environment, however, made the previously high cost of production of shale oil and gas, notably in the US and Canada, commercially viable, paving the way for the US — the largest consumer of energy —  to drastically cut its crude oil imports. Not only that. With the shale oil and gas boom, the US is expected to surpass Saudi Arabia as the world’s top producer by 2016 and be energy self-sufficient by 2020. Such projections caused the price of crude oil to drop to below US$90 a barrel recently.  

While this scenario could see the crude oil price head southwards, it was during the high price environment of the last 10 years — when  the government was not willing to bite the bullet — that saw the fuel subsidy shoot up from a manageable RM1.65 billion in 2002 to RM24 billion in 2014. What was initially an annual sum of about RM2 billion has ballooned to RM2 billion a month, with the bulk of the subsidy used to keep the retail price of petrol and diesel low.

The government, and rightly so, is now sticking to its script of subsidy rationalisation by reducing the subsidy for petrol and diesel by 20 sen early this month, pushing the pump price of RON95 and diesel to RM2.30 and RM2.20 per litre respectively. At these pump prices, the government still subsidises RON95 at 28 sen and diesel at 32 sen a litre.

In the recent budget presentation, the government says further rationalisation will continue and that it will announce a new petroleum subsidy mechanism. It is hoped that the new mechanism will be more targeted — disallowing the rich and even foreigners to benefit from a blanket subsidy — and the government will explain thoroughly to the people how the subsidy works and how the retail pricing is derived.

How different will the new mechanism be from the current automated pricing mechanism (APM) that has been in place since 1983? The APM was introduced to promote price stability for consumers as well as a predictable (or guaranteed) margin for the oil companies and dealers.

Basically, the pump price is derived after taking into account product costs (based on the market price of crude oil), operational costs (which include refining, transport and marketing), margin for oil companies and commission to the petrol station owners.

Should the total cost be higher than the pump price (which is determined by the government), then the subsidy element would take effect. Here, the government will use its revenue to subsidise the petroleum products to make them cheaper than the market price for consumers and motorists. The government may also forgo its duty revenue when prices are high.
 
It should also explain under the new mechanism, if prices drop further, at what price level it  will no longer subsidise the pump price. Some say the no-subsidy threshold level is US$80 a barrel of crude oil. And if this happens, will the Goods and Services Tax be  imposed on RON95, diesel and cooking gas, presently exempted under Budget 2015?

The government must continue explaining why prices need to be based on the market and why the fuel subsidy needs to be reduced if it wants more people to understand, apart from telling them that the money saved can be used to finance development projects, notably for the needy and lower income groups.

As it is, the arguments against subsidy cuts seem to have remained the same as 10 years ago, ranging from the government can afford it to Malaysia is a big producer (which we are not) and exporter of crude oil (we are just a small exporter). Other arguments include  Petronas is making a lot of money and that petrol is comparatively cheap in other oil-producing countries.

This shows that there is a lack of understanding among the people — or some just refuse to understand  — but the government has to continue to explain.

A friend that I met recently, who incidentally drives an Audi, is still of the view that the government could afford the subsidy and that petrol should be cheaper.

How can it be, I asked. Go to the supermarket and check out the price of Evian mineral water. At Tesco, a 1.5 litre bottle of Evian costs RM8.59. A similar sized bottle of Spritzer, a local product, Spritzer, costs only RM2.70. And one can buy a 1.5-litre bottle of Coca Cola for RM2.79. But the cost of manufacturing these bottled mineral water and fizzy drinks — a straightforward process — is just a fraction of the multi-billion-ringgit investments needed to produce petrol or diesel

Exploring and producing crude oil in the deep seas alone can cost billions of dollars in investment. After finding the oil — which is not guaranteed — and depending on its distance from the shore, it still needs to be shipped or piped to the shore. Then, it goes through a refining process, which costs billions in investments, before it can be marketed as petrol or diesel.

So, how can Evian mineral water, which quenches your thirst, be priced at RM8.95 per 1.5-litre bottle while the same volume of RON95 petrol — which powers the economy — is priced at just RM3.45?

Azam Aris is senior managing editor at The Edge

This article first appeared in The Edge Malaysia Weekly, on October 20 - 26, 2014.