How Much Fuel Hike Will It Be – 5 sen, 20 sen, 40 sen or None?

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May 25 2011
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Next month will be the Judgement Day for both consumers and the Malaysian government. The petrol price hike is almost certain. The only question is by how much will the government increase RON95 after its brother RON97 was increased by RM0.20 a liter early this month. Another interesting event is whether the government would lower the price of RON97 considering the global crude oil has consolidate to below $100 per barrel.

The government has given multiple warnings that the RON95 will increase by painting how painful the government is surviving by subsidizing the fuel. Gosh, some Malaysian ministers almost cry as if this country is the only one subsidizing fuel prices. While the government was having easy time in deciding the 20 sen increase on RON97, the same cannot be said about RON95 because an estimated 80% consumers are using this type of fuel, which accounted for 30% of the total fuel subsidy.

If history were to repeat itself, the total fuel subsidy in 2008 was about $17.5 billion and now Najib’s administration is set to carry the burden of about $18 billion, if current fuel price remains. This is more than the initial budget of RM10 billion subsidy based on the assumption the global crude oil will not go above $90 a barrel. Guess God has his funny way of playing jokes on the current government.

Fuel Price Hike

Fortunately PM Najib’s predecessor, Abdullah Badawi, has shown a classic example on how to lose a general election, well, almost. Badawi hiked the fuel price by a whopping 40.62% from RM1.92 a liter to RM2.70 a liter back in 2008, and the rest is history. However one has to remember that while Badawi did the unthinkable, consumers were reimbursed in cash amounted to RM625 rebate for cars below 2,000 cc and RM125 for motorcyclist.

Almost instantly the food prices and inflation spiked thereafter. Last month, the government claimed the actual price of RON95 was RM2.77 a liter against the current pump price of RM1.90 a liter. To increase from RM1.90 a liter to RM2.77 a liter or about 45% increase will push Najib on top of “Bravest Souls” chart. Of course Najib won’t perform such a heroic act, not that he dares in the first place.

How does the government determine or calculate petrol prices? It is using something called APM (automated pricing mechanism) formula of which the core is MOPS (Mean of Platts Singapore) – referring to the mean price of oil traded through Singapore as per the data from Platts, a provider of energy and metals information. Add other variables such as oil company margin, station dealer profit, sales tax, operation cost and alpha; and you’ll get the fuel price.

How Petrol Prices Are Determined or Calculated

In short, it was said that an increase of $10 a barrel would result in a 19 sen a liter price hike of RON95. The government phased out RON92 and introduced RON95 on Sept 2009 when the crude oil was at $70 a barrel. The price of RON97 was then increased from RM1.80 to RM2.05. So using the same arithmetic and Sept 2009 fuel price as benchmark, the price of RON97 should be at about RM2.62 (19 sen x 3) when the crude oil hit $100 ($10 x 3) a barrel. Will the government reduce RON97 to RM2.65 or RM2.60 a liter next month since the crude oil is below $100 a barrel?

We know the price of RON95 will go up next month but we won’t know the quantum. Heck, even the government is scratching their heads now in determining the amount to be hiked. AmResearch predicted RON95 and diesel would go up as much as 20 sen next month, a fair prediction I would say. If the increase is minimal of between 5 sen to 10 sen a liter (of which the government can save RM650 million to RM1.3 billion) then you can put all your money that Najib is going to call a snap election next month (*grin*). At RM2.10 (20 sen increase) a liter, people would grumble but not to the extent of taking it to the street.

Still, this provides sufficient ammunitions to the opposition in the coming snap election. One has to remember that ever since the petrol price was increased from RM1.92 to RM2.70 in 2008, the prices of food, transportation, raw materials and whatnot escalated to new height and never came down thereafter, even though the petrol price had been reduced subsequently to the lowest of RM1.80 on Dec 2008. If the inflation remains the same even after a 20 sen hike on RON95, then Lady Gaga is still a virgin.

Malaysia Petrol Price vs Crude Oil

Government’s argument that it can’t continue to subsidise the fuel price has its logic and makes perfect sense. But it doesn’t explain why the government was silent on the gigantic subsidy of a whopping RM19 billion currently enjoyed by IPPs (Independent Power Producers), most of them cronies who contribute to the government’s war-chest. Spin as you like but a subsidy is still a subsidy and you can’t call it another animal because Petronas was obviously selling gas way below market price to the IPPs.

And what would stop the government from hiking fuel price RON95 at all? The only obvious answer is the snap election will definitely be this year and it will be so near you can smell it. If there’s no price hike at all, including electricity, water, gas and so on, then you’re possibility looking at a snap election before the 2012 Budget. The fact that Goldman Sachs predicts that the crude oil would escalate to $140 a barrel from earlier projected of $120 a barrel for the year 2012 is a strong concern enough to trigger Najib’s camp into panic mode.

The game is getting riskier as Najib administration is juggling between refilling its empty coffer from subsidies (and corruptions) without hiking fuel price (as the crude price fluctuates every day) and determining the best date to call a snap election. It seems his lucky date of 11-11-2011 is so near yet so far. Isn’t it fun looking at how artificial pricing in the name of subsidy and corruption are slowly eating into a corrupt government itself?

Update: Government has decided to maintain the prices of RON95 petrol, diesel and gas. Snap Election before October 2012 Budget?

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All the hush hush about RON95. What about the diesel price hike up (announced on May 17) that will be in effect on June 1. It is being used by the commercial vehicles (11 types). The quantum of hike is huge from 1.48 to 1.80 per litre. Most of the commercial vehicle types are related to transporting goods.

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