Scrapping RON95 & Diesel Subsidies – Why It Will Do More Harm Than Good

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Nov 24 2014
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Najib administration has done the unthinkable – to scrap the fuel subsidy of RON95 petrol and diesel altogether. Starting next month, December, the prices of RON95 petrol and diesel will be based on a managed float system. Note that this is based on “managed” and not “freely” float system. Thus, unlike in U.S. where one can hunts for a particular petrol station offering lowest fuel price, you can’t do so in Malaysia.

Petronas Primax 95

At the moment, subsidised RON95 petrol retails at RM2.30 a litre, while subsidised diesel is priced at RM2.20 a litre. Cousin RON97, on the other hand, is selling at RM2.55 a litre, un-subsidised. Of course, for as long as Malaysians can remember, nobody knows “precisely” how the fuel prices in the country are determined or calculated, let alone any guarantee made or independent studies done that motorists were actually getting the “real” RON95 or RON97.


For all you know, Malaysian government together with its suppliers could be supplying RON92 as RON95, or RON95 as RON97. Anyway, under the new managed float system for RON95 petrol, pump prices would be determined by a 10-day average of fuel prices in international traded markets plus fixed profit margins for refineries and retailers. So, every month, pump prices will change.

Najib Razak Scraps Petrol Subsidy - Play with Cat

Indeed, with the present tumbling global oil prices, it provides a tiny window of opportunity for PM Najib Razak to erase the remaining fuel subsidies. While supporters rejoice the action as a way to reduce national’s debt and eliminate subsidy mentality, many are worry that this could lead to skyrocket inflation. Sure, the subsidy shouldn’t be there in the first place. It was put there by Mahathir administration to create an artificial low cost of doing business.


In the United States, the price of a gallon of gasoline is determined by costs of crude oil (63%), refining (8%), distribution and marketing (15%) and taxes (13%). Gasoline prices also differ across U.S. states, primarily due to different taxes. For example, petrol prices in Wyoming and California are higher than that in Illinois. Coincidently, gas prices in U.S. also increase every summer – the infamous summer travel season.

USA - Components That Determines Gasoline Prices

Najib administration is reportedly toying with Mean of Platts Singapore (MOPS) benchmark as the method to determine the monthly RON95 and diesel prices. Interestingly, Malaysian Domestic Trade, Cooperatives and Consumerism Minister Hasan Malek said if there is a significant change in prices in the first 19 days of each given month, then the average of the last 10 or 11 days of the month will be taken to calculate the final retail price.


However, one shouldn’t get too carried away with Hasan Malek’s mumbo-jumbo about MOPS. Besides using Platts data, Malaysian’s version of petrol prices calculation has nothing to do with Singapore’s methodology. For example, Singapore Esso’s pump prices had been lowered 4-times in the past four weeks in the month of October 2014, to take into account global crude oil prices. This means changes are made on weekly basis.

How_Fuel_Petrol_Prices_Determined - Resized

And since Malaysian’s new managed float system fluctuates only on monthly basis, it’s still too early to tell if it will benefit motorists, or simply another grand rip-off system (*tongue-in-cheek*). The fact that all the variables in determining the new RON95 and diesel pricing are not transparently revealed, the proposal is opened to speculations and rumours. As of now, people do not know how much of profits Najib administration is guaranteeing petrol providers.


As of 17 November this year, the top five countries with cheapest gasoline per litre are Venezuela (US$0.01), Syria (US$0.05), Libya (US$0.12), Saudi Arabia (US$0.16) and Turkmenistan (US$0.22). On the other hand, the top five countries with the most expensive gasoline are Norway (US$2.26), Italy (US$2.17), Netherlands (US$2.15), Malawi (US$2.13) and Turkey (US$2.11). So, there’s a huge gap (difference of US$2.25) between Venezuela and Norway in terms of one single product.

USA Example Gasoline Prices Different Across States

During the same period, U.S. gasoline averaged about US$0.83 per litre. And with this price, retail dealers earn approximately 14 cents on every gallon (or 3.7 cents every litre) of gasoline sold. The question is: how much does Malaysian government plan to reward the local retail dealers in a new deal, most of whom are politically connected? Caltex Singapore has a tax rate of 32% on every litre of petrol sold in that tiny island, so what’s Malaysian’s new rate?


Most importantly, now that Najib administration will realise savings of between RM10 billion to RM20 billion annually in the abolishment of petrol subsidies, it’s only fair for the government to scrap the blood-sucking import taxes and excise duties on vehicles. Taxed at a rate of between 85% to 135%, Malaysian cars are the world’s second most expensive, after Singapore. Thanks to low currency rate and soon-to-be-GST, the high costs of spare parts, tyres, batteries, labour charges will be other burdens ready to explode.

Duties and Taxes - Malaysia Motor Vehicles

To say that government “cares” about average Joes and Janes by taxing basic cars up to 135% while taking away subsidy altogether in one shot are not only cruel, but also an insult to the peoples’ intelligence. Economists and analysts may have their reasons praising the scrapping of petrol subsidies. Their simple justification – it helps to pay or reduce nation’s external debt. But heck, who was the genius who borrowed like crazy to the tune of close to RM1 trillion in the first place?


Another problem with scrapping of gasoline next month is the lack of proper public transportation system. The public transportation system sucks for decades and most citizens have no alternative but to own private cars. At 86.8% (as of March 2014), Malaysia’s household-debt-to-GDP level is not only highest in ASEAN but also Asia, thanks primarily to housing and car loans.

Najib Razak - Malaysians Are So Dumb

It seem Malaysians are a bunch of poor folks who are being ripped off left, right, top, bottom and centre. The cost of car ownership is crazily high – taxes up to 135%, endless tolls, road taxes, parking, traffic jams, escalating maintenance and labour costs, and now un-subsidised petrol. If the above are not enough to spook consumers, there’s another serious problem – the oil prices will reverse ultimately and head to the north.


What’s genius Najib Razak plans to do then? Does the government plan to let RON95 and diesel prices fluctuate limitless, even if the global crude oil prices shoot up to US$150 or US$200 a barrel? Nevertheless, middle income groups have one deadly known problem – prices of consumer goods will go up with skyrocketing fuel prices, but will never come down when the same black gold prices tumble. So, what does the government plans to do during such volatility?

Food Prices Up - A Way to Lose Weight - Cartoon

Last but not least, while fuel subsidies should not exist in the first place, the timing of abolishing it now together with introduction of too many new taxes (such as GST), while maintaining present punishing taxes (such as excise duties) during such challenging time is definitely not a wise one. But considering the government coffers are almost empty, certainly this is desperate times for desperate measures.


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How Australia Manage Oil Price your reference..

Just read YB Sim take on the drastic cut on allocation for public U. All these cuts AT A GO just point to one cruel/cold/hard reality – the Treasury is EMPTY,really empty!

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