Subsidized

Now that the price of petroleum in the world market has fallen to about $50 per barrel, from almost $80 per barrel during the middle of 2006, Malaysians are asking about the possibility of the government lowering the retail price of fuel. I hope that it won’t.

Fuel is highly subsidized in this country. The government sets the retail prices of petrol, diesel, and cooking gas, and pays the difference (from the actual market prices) to the oil companies. For example, if the government sets the retail price of petrol at RM1.90 per liter, it would have to pay oil companies 10 sen per liter of petrol sold if the market price is RM2.00; or 60 sen if the market price is RM2.50. This way, not only do the Malaysian people enjoy cheaper fuel, but they are also insulated from the day-to-day fluctuations in the price of petroleum in the world market.

Oil by POLangevin at deviantART

Subsidies distort the market, because they make a good appears cheaper than it actually is. In a market economy, price plays an all-important role as an indicator of the relative values of all goods and services. The fuel subsidies make Malaysians under-appreciate the value of oil compared to other goods and services. While the people enjoy ‘cheap’ petrol the government picks up the tab. Benefits of the fuel subsidies are also regressively distributed, as the rich are more likely to drive big, fuel-thirsty cars, and hence consume more of the subsidies, than the poor. Since we cannot prevent foreigners from filling up at our service stations, we are subsidizing them as well using our taxpayers’ money; not to mention the rampant smuggling activities along the borders.

As the world price of petroleum increased, the government had to increase the retail prices of fuel in order to put a cap on the ballooning compensation it would have to pay the oil companies. By now the economy, and much of the population, has fully adjusted to the (current) higher fuel prices, so the government need not lower the retail prices of fuel simply because world price of petroleum has decreased.

Even with the lower world petroleum price, the government is still paying a significant amount in fuel subsidies, as the retail prices set are still lower than the market prices. Lower market prices of fuel mean substantial savings for the government, which means more money available for other purposes like spending on schools and hospitals. More important though, is to have Malaysians paying closer to the actual market prices of petrol, diesel, and cooking gas. We need to get Malaysians to recognize the actual value of such non-renewable fossil fuels and the issues that surround them.

While we may not be prepared to do away with fuel subsidies totally, the government may consider replacing the current price-setting mechanism with a fixed subsidy of, for example 50 sen per liter of petrol, and let the retail price fluctuate. This should create better awareness about the economy, economics, and energy-related issues, as well as saving the government from flak every time it needs to adjust the retail prices of fuel.