Oil Price and Us…

It was reported today that the oil price surged to a record high of USD70.90 per barrel after Hurricane Katrina. Hurricane Katrina had halted the US Oil Production on Tuesday. At least 50 people were killed, shut nearly all the Gulf of Mexico oil production and 88% of the Gulf of Mexico Natural Gas Output.
In view of the current price hike in Oil, will the Malaysia Government further reduce the Petrol Subsidy? If yes, why?
This is Q & A session between Bernama and Minister in the Prime
Minister’s Department Datuk Mustapa Mohamed back in 31st July 2005.
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Q: What are subsidies?
A: Subsidies are money paid to producers or retailers of a given product by the Government in order to lower the retail price. It is a form of assistance for a given industry or segment of society.
Q: How long will subsidies be maintained? Should they be abolished?
A: The Government will continue to provide fuel subsidies but the
Amount would be determined by the state of Government finances.
The Government is devising a more effective method to ensure that fuels Like diesel and LPG are enjoyed by those truly requiring it such as fishermen, public transport operators and operators of river transportation in Sabah and Sarawak.
Q: What are “taxes forgone”?
A: Diesel and petrol are subject to sales taxes of 19.64 sen per litre and 58.62 sen per litre, respectively. These taxes are revenue for the Government in addition to being a means of maintaining stable petroleum product prices. But the Government has decided to forgo this tax so that the retail price of petroleum products remains reasonable. This actually results in a loss of revenue for the Government.
Recently, the amount of taxes forgone has increased. For example, in
1993, RM190.8 million was forgone, while in 1999 it amounted to RM2.6 billion. This year, it has rocketed to RM7.9 billion. Sales tax exemptions for diesel began in October 1999 following increasing prices, while for petrol it began in June 2004.
Q: How much would fuel and petroleum products cost without subsidies?
A: Without subsidies, premium petrol (RON97) would cost RM2.45 per litre, and not RM1.62 that we are paying now. In fact, when a consumer buys a litre of premium petrol in Peninsular Malaysia, the Government bears 82.82 sen that is 58.62 sen in the form of taxes forgone and 24.20 sen in subsidies.
The actual cost of diesel in Peninsular Malaysia is RM2.07 per litre.
Consumers pay RM1.28 per litre because of the 59.13 sen subsidy and
19.64 sen tax forgone per litre.
The unsubsidised retail price of cooking gas (LPG) in Peninsular Malaysia is RM2.39 per kg. However, consumers buy LPG at RM1.45 per kg. This means that there is a subsidy of 93.92 sen per kg. For example, a 12 kg cylinder of cooking gas costs RM17.40 when in fact, the actual cost is RM28.67. In other words, for each cylinder of cooking gas purchased, the Government subsidises the consumer RM11.27.
Q: How much does the Government spend on fuel subsidies?
A: The more fuel consumers use, the higher the amount borne by the
Government for subsidies.
Subsidies in 2001 were RM2.4 billion based on an average WTI (West Texas Intermediate – a reference price used in the United States and
globally) crude oil price of US$25.24 per barrel. In 2004, the subsidies increased to RM4.8 billion based on the average international oil price of US$41.60 per barrel.
This does not factor the loss of revenue from taxes which has also been increasing. Losses in 2002 of RM3.3 billion rose to RM4.8 billion in 2003 and reached RM7.2 billion in 2004.
By increasing the retail prices of diesel and petrol on July 31 2005,
the Government will save RM1 billion on subsidies. For 2005, subsidies are now expected to be RM6.6 billion compared to RM7.6 billion before the price increase (2004 subsidies totalled RM4.8 billion).
Large subsidies are “opportunity costs” as the substantial amount of
Money could be better used to benefit the rakyat, for example, by building schools or public amenities.
Q: The country benefits from increased oil prices. Why can’t the
Government increase its subsidies?
A: When oil prices rise, the Government’s revenue increases accordingly.
However, subsidies borne by the Government also increase from RM4.8
Billion in 2004 to a projected RM6.6 billion in 2005. It is true that as oil prices on the global market increase, the country’s export earnings from oil goes up. However, the Government chooses to spend this additional income responsibly. It would be unwise of the Government to utilise the additional income earned to fully subsidise fuel prices.
We must remember that gains from the increase in oil prices will only
benefit us in the short term. In the medium term, subsequent increases in oil prices will adversely impact the world economy and being an open economy Malaysian exports would reduce and consequently national income contracts. As such, in the medium term an increase in oil prices does not benefit us.
Furthermore, we still have to import to meet some of our domestic oil
needs. While it is true that we gain from exports of oil at higher prices, we still have to pay more for the oil that we import.
Q: Should the Government use up contributions by Petronas to pay for
subsidies?
A: In fact, contributions by Petronas are sufficient to fully cover
Fuel subsidies.
However, spending on subsidies are one-off expenditures which do not
generate further income for the nation and its people. Although the
Government could fund increased subsidies, it would not be the most
prudent course of action as it would adversely affect funding for other Productive projects.
If the rakyat and Government can share the cost of rising fuel prices,
thus reducing the need for subsidies, a part of the contributions from Petronas can instead be directed to generate new sources of income.
Q: Petronas profits have increased due to rising oil prices. Shouldn’t
Petronas contribute more to absorb the cost of rising fuel prices?
A: Since its establishment in 1974 Petronas has made significant contributions to the nation’s development. During the financial year
2004/2005, it contributed RM31 billion in the form of taxes, dividends and royalties. This was an increase of 47 per cent over the previous year’s contribution. This amount represents 53 per cent of Petronas’ gross profits of RM59 billion for the year 2004/2005.
Petronas only controls 30 per cent of the Malaysia retail petroleum Market while the remainder is held by competitors like Shell, Esso, Caltex,BP, Mobil and Projet. This means that if Petronas were to subsidise fuel prices in full, it would effectively be paying these foreign companies too.
In Malaysia, Petronas owns three refineries with a combined capacity of 256,000 barrels per day (bpd), or 47 per cent of the total national output. The remaining 53 per cent is provided by refineries owned by Shell (155,000 bpd), Exxon-Mobil (88,000 bpd) and ConocoPhillips (48,000 bpd). As Malaysia consumes 520,000 barrels of oil per day, it is obvious that in order to meet this demand, we need to rely on refineries belonging to international oil companies too.
Petronas also subsidises natural gas in this country. This subsidy Amounted to RM25 billion since May 1997. For the power sector, the price of gas is fixed at RM6.40 per Million British Thermal Unit (mmbtu) compared to the commercial price of RM25.70 per mmbtu. This low price has enabled Malaysia to maintain electricity tariffs at reasonable levels.
Q: What would happen if Petronas were to use all its profits to provide subsidies?
A: Petronas is a business entity with domestic and international
operations.
If a substantial portion of its profits were used to provide subsidies, it might be perceived as an irresponsible company, thus affecting its credibility. This could result in it being downgraded by international rating agencies.
Petronas’ primary role is to manage and preserve our country’s oil and Gas resources. In order to achieve this, profits must be reinvested into exploration activities, both domestically and internationally. In addition, profits should also be spent on research and development.
In the financial year 2004/2005, Petronas spent 61 per cent of its
Total investments or RM10.7 billion in exploration activities. If there are no new oil discoveries, Malaysia will become a net importer of oil by 2009.
Such investments in exploration have resulted in annual increases of
Oil reserves by 2-3 per cent annually. Clearly, this would not be possible if Petronas uses all its profits for subsidies.
Q: What options are open to the Government in addressing the increase
in oil prices?
A: The Government has three options:
+ To maintain the retail price of petroleum despite rising
international market prices. This would require the Government to increase subsidies and taxes forgone to match the rise in product cost, resulting in an even larger gap between subsidised and market prices of fuel. This would result in less money available for development and would impose severe strains on the Government’s financial position; or
+ To completely remove subsidies and reimpose sales taxes; thus allowing fuel prices to be determined solely by market forces. If this is done, there will be no disparity between retail prices in Malaysia and world market prices. This option would allow the Government to use savings from subsidies to fund development. However, consumers would have to bear the full brunt of price increases and the Government might be perceived as being insensitive to their needs; or finally
+ To gradually reduce subsidies; as has been done in recent months.
This middle path involves the sharing of burden between the Government and consumer. In this option, consumers pay slightly more for fuel while the Government continues to provide subsidies. By increasing prices gradually, consumers will be able to adjust their expenditures accordingly.
The Government is of the view that the gap between domestic retail and World prices should be reduced gradually. From the three options listed above, the third is the best. The Government will continue to provide subsidies while the consumer contributes by sharing some of the burden.
Q: As consumers, what role can the rakyat play?
A: Following oil price increases, certain traders may take the
Opportunity to profiteer. As such, the rakyat must be prudent and smart in their spending.
It is also good practice for shoppers and customers to compare prices
And the quality of goods between shops prior to making purchases. Such Buying habits will contribute directly to improved family finances.
Through prudent planning and spending, consumers will also prevent
wastage.
The transportation sector constitutes 41 per cent of energy
consumption. With prior planning of trips, car pooling and the use of public transport, the expenditure on fuel could be reduced.
Q: What measures need to be taken by the rakyat?
A: The rakyat should realise that Malaysia could be completely without
Oil in 19 years. Therefore, we must be prudent in our use of oil resources. We must find ways to reduce our dependency on oil and should be prudent in its use and avoid wastage. We should consider using alternative energy sources such as biofuel.
Some countries have already implemented radical energy conservation
measures. Malaysians have to be prudent in their consumption of energy and should support the Government’s actions in energy efficiency and saving measures.
The Government will go down hard on irresponsible traders who profiteer from the current situation. Consumers can play a crucial role by reporting unethical practices by traders to the relevant authorities. Traders and businessmen on their part must be responsible and not exploit the public by raising the price of goods and services indiscriminately.
This article was published by Bernama on 31-07-2005