Monday, June 09, 2008

Slippery oil prices - when it rains it pours

Malaysiakini columnist Uncle Sim Kwang Yang has had his article Unhappy days are here again! published.

No prize if you guess that his topic is related to the recent oil price increase announced by the government.

Uncle Sim wrote:
“How many millions of Malaysians fell into a paroxysm of dismay and depression - like I did - on June 4 when the prime minister announced a sharp jump in the prices of petrol and diesel?” […]

“The future for the individual, the country, and the whole Asian region even, suddenly looks very bleak.”

Coincidentally, while reading Uncle Sim's article early yesterday morning, I was also chatting with a very popular blogger when she mentioned the same phrase ‘unhappy days’ to me. However both of us agreed that the fuel subsidy has to go.

But almost everyone is feeling despondent about the increased fuel price but even more than that, dreading the eventual and more impactful consequences, namely increased transportation cost*, food, electricity, water, and other essential stuffs including expenditure for the kids schooling, etc.

even though the government promises 100% subsidization to public transport operators, what about the smaller commercial vehicles used by Ahmad, Ah-Kow and Aru? And I am never confident of any form of fuel subsidization, even for public transport operators because this being Malaysia, I can expect corruption to creep into the system.

Additionally the 'austerity' that the government preaches to us could well have a cruel snowballing effect as businesses may suffer from the invariably reduced consumption, which will threaten their continuing commercial viability.

The only enterprise which will boom, and I say this not as a cruel joke but as an observed reality of Malaysian life, will be the 4-Ekor and gambling businesses. Poverty leads to financial desperation, and desperation leads to fantasized hopes ... and fantasy leads the poor to the 4-Ekor shops (but hopefully not the Ah Longs).

The government’s call for austerity or a ‘change of lifestyle’ (while having a ring of truth) unfortunately lacks the required political credibility to serve as leadership entreatments to hold Fort Austerity, when we witness the blooming ministers and senior civil servants cakap ta’serupa bikin brazenly in our face. Mana ada 'leadership by example'?

As Uncle Sim said:
“… the financially frayed nerves of the people will be even more sensitive to news reports of massive government wastage, failed white elephants, and revelations of corruption in high places.”

Generally, Uncle Sim’s article is well written and balanced – he didn’t spare the government nor did he overdo the criticisms.

However Malaysiakini writer Stanley Koh was less forgiving in his
We need a more caring, innovative government, giving us chapter and verse on the coming agonies for the lower income brackets – he’s not wrong there either.

Yes, indeed these are truly unhappy days!

Stanley Koh wrote:
"After more than 50 years, the Barisan Nasional government has failed to improve its governance and administration, a shame shared by many Malaysians.”

I don’t completely agree with his sweeping description of '50 years’, some of which were good ones and, let's be fair, enjoyed by almost all of us. But he’s right in saying the UMNO-led government wasted precious years in not improving its governance and administration. But how could it when the party sustains itself in power through a system of political patronage, cronyism and all the attendant creativity of 'kebijaksanaan atasan'.

But like my chat-blogger-friend, Stanley Koh is absolutely correct in stating:
“… Public confidence towards the current government regime in managing economic chaos is razor-blade thin.”

Thus, while many like my blogger-chat buddy and I do understand the need for the cabinet to remove more of the fuel subsidy, there is no general public confidence that the government has the solutions to address the public hardship that will inevitably follow, or for that matter, the integrity to wisely use the savings (from the subsidy) for the public interest.

In the end, the government removing part of the fuel subsidy had really been a case of 'damn if it does, and damn if it doesn't', because the continuously rising fuel prices represent a no-win dilemma for virtually every government in the world.

Uncle Sim did remarked: "We have not heard from the Pakatan Rakyat what their alternative policy is on this matter of rising fuel prices", and for the reason I just mentioned, because for any political party, it would be a torturous terrible terrifying case of facing either
Scylla and Charybdis in making such a tough unpopular but long overdue politico-socio-economic policy.

I am of course putting aside someone's questionable and unsustainable populist promises of lowering the fuel price, in exactly the same manner as I had sneered cynically at his promise of political reforms.

And my decision on the latter has been more than amply justified when we witnessed that his first so-called political 'reform' after the recent general election had been nothing more than to perpetuate the UMNO subversive tactic of encouraging party hopping, apart from regularly boasting about his success in enticing BN politicans to defect to his party - see this Malaysiakini news article.

Would this political manoeuvring be 'deformasi' or 'reformasi' on an already dented democratic process. So, in the face of all these shameless reneging of 'promises' of political reforms, you still want to believe another of his 'promises', that of lowering the fuel price? Besides, would such a populist policy be good economic management for the nation's interest?

But yes, I know none can be so blind as those who refuse to see ... (sigh)!

Anyway, back to the oil price. We learnt that the cabinet had determined the new fuel price at RM2.70 per litre based on the global oil price of US$130 per barrel.

But thanks to the Israeli Deputy Prime Minister Shaul Mofaz who opened his big fat mouth on Friday,
Oil surges to new heights after Israel’s war threats on Iran. The per barrel price rocketed to US$139 per barrel. I dread to think what will happen should George Bush obsessively carry out his final in-office rightwing Christian act for Israel by bombing Iran.

I read somewhere that for every one US dollar increase in the per barrel price, the fuel price at the gas station will rise by 1 US cent.

Now, oil market observers expect the per barrel price to rise to US$150 by this coming July. This will be a US$20 increase from the Malaysian government's working price in determining the new fuel price. Roughly, the extra US$20 will increase the price per litre at the pump by an additional 20 US cents (65 sen).

Could this be why the government had hastily abandoned its earlier plan to announce the new price in August, fast forwarding it instead to last Thursday? The 78 sen price rise (planned for August) would have been wiped out by the forecast July oil price.

And does this mean we will face another price hike in July/August, taking the per litre fuel price to around RM3.35?

But wait, there’s more for as the saying goes, "when it rains, it pours" – and I refer to my earlier post
Higher fuel price - nasty tasting but necessary medicine where I voiced my warning that “…the Malaysian government will have a torrid time playing catch up in its effort to remove the subsidy completely because the oil price continues to rise.”

I also remarked “…Bear this in mind please, the fuel at RM2.70 per litre is STILL highly subsidized, where the true price per litre is more at RM5.00 ..... that is, RM5.00 for now as we may expect it to rise even further.”

Sorry for more unhappy news, but the prediction on future oil price is horrendous for us. Australian experts reckon that the per barrel price before this year is over may well be US$200. That’s a blooming US$70 jump from the government’s current working price of $130.

That will cost an extra US 70 cents or RM2.29 for each litre at the pump (using US$1 = RM3.27). The true price per litre will thus be [current 5 + 2.30 (rounded)] = RM7.30.

Will the government hold the new fuel price of RM2.70 per litre or will it use the same (proportionate) formula and raise the oil price by the year’s end to RM3.95?

Or will it … and this is truly frightening ... give us the whole unsubsidized caboodle of RM7.30?

Truly Tragically Tsunamic because we didn't do what we should have done long long ago. We can see that procastination is the thief of not only time.

UPDATE @ 15:45:

From the Star Online:

Shahrir Samad as the Domestic Trade and Consumer Affairs Minister is currently in the hot seat - I must say I feel sorry for him. When asked to comment on analyst reports that the oil price will hit US$200 (RM680) per barrel (as kaytee has sadly revealed above), he said: “I hope it doesn’t reach that high but if it does, I hope the price won’t peak for a long period.”

Not much of a comment, isn't it, but then what could he have said!

The Star reporter said that Shahrir fell short of the government giving a firm assurance to the public that the 78 sen per litre petrol increase would remain until the government’s new subsidy scheme expires in March 2009. Instead Shahrir tap danced around by making a non-committal (basically meaningless) comment that any increase in fuel price before then would be ‘impractical’.

He said: “If we raise fuel prices before giving out the new subsidies promised, people will complain.”

But what if the government implements the alternative subsidies quickly?

Then he admitted: “I can assure you that whatever rebates and road tax reductions we have announced, we will follow through but I cannot give you a ‘yes’ or ‘no’ answer as to whether there will be any more price increases in the coming months.”

For the time being, we may assume that he means ‘yes’ to further fuel price increase(s) ..… at least until the government gives a firm commitment or assurance.

But I have already expressed my fears in the main post.


  1. What's the bloody use of being a net oil exporter but its people are being charged world market rates for their fuel? It is like charging the people of Nauru world market prices for their guano.


    This is an article i read about the rising costs of oil. Interesting read.

  3. interesting with mathematical calculations article. However u have missed out a very important and material factor in your analysis. U have omitted to include Petronas into your mathematical formula. An a net oil exporting country, we should benefit from the global oil price hike. Obviously, this factor must be included in the calculation. Hope u can highlight on this aspect.

  4. Its very easy to be against subsidies when you are one of those who can easily afford the price dislocations, perhaps with minor belt tightening or slightly reduced surplus income, or like certain "Malaysian" bloggers, you really live in the 1st World and earn a 1st World income.

    For the low income people in the country, fuel price hike and its inevitable follow-on effects are a disaster.
    Much of the Barisan government's talk about mitigating the effects on the poor is just that, talk.
    And like much of the empty talk from this regime, nothing will come out of it.

    By the way anyone tried to renew their Road Tax last Friday or Today ? Did you get paid the Rm 635 rebate (via Postal Order, as alleged by the Joker masquerading as a Minister) ? I bet the answer is "NO".

    Day by Day , it is becoming more urgent to get rid of this Barisan Nasional Federal Government. The longer Barisan Nasional stays in power, the more harm it is doing to Malaysia's future.

  5. kk46 said "The longer Barisan Nasional stays in power, the more harm it is doing to Malaysia's future"

    Well, your de facto leader was a large part of that BN in power, holding several significant high offices and contributing to the overall problem. He won't be the solution for us.

    You want us to give him a chance? Why not give AAB a chance to see how he will handle this oil price crisis.

    We cannot use the excuse of poverty to keep the subsidy in significant proportion. The subsidy in reality doesn't benefit the poor as much as it has the rich.

    There'll be some pain, that's for sure (and as someone who came from an absymally poor family, I know a bit about pain) but we have to remove the subsidy and the sooner the better.

    In some ways we need to give (perhaps grudgingly) AAB the credit for taking the necessary plunge - compare his action to AI's populist and lazy policy of not only keeping the subsidy but actually enhancing it - which is not only bad for Malaysia but when eventually it's no avoidable to remove it (because the kitty has been emptied), the pain for the people will be so great it cannot be mitigated.

    AI is simply saying things people want to hear (and he has the gift of the gab, I grant him this), but that's not responsible leadership at all - which has been why I couldn't bring myself to support him.

    Show me where his reformasi is when this man is actually encouraging and boasting of party defection by elected BN MPs. Is this his idea of political reforms?

    The problem with removing the oil price subsidy is not that it's wrong but that it has been left so late when the significance of the subsidy has reached major proportions. But it's better later than never, while lamentably, AI is preaching 'never'.

  6. "AI was a large part of that BN in power, holding several significant high offices and contributing to the overall problem".

    I need to refute your historical perspective.

    Anwar has not had any position in the Malaysian government for 10 years. To put the timeline in perspective, at the time, Bill Clinton was the US President, Goh Chok Tong was the Singapore PM, and George W. Bush was Governor of Texas.

    In addition, Mahathir ran a notoriously tight administration. I find it quite funny that you have quite a high respect for Mahathir, yet ascribe the abysmal failures of Mahathir administration to someone else. Accountability doesn't work like that, you know.

  7. Tony Pua suggests and suggested to channel profit from oil directly to EPF...

    He's siding to the left, and so am I~~

  8. I agree that we are facing an era of extreme uncertainty over the global economic troubles which appear to be currently unsolvable.

    The greatest fear for us now is for the Government to mortgage the future of our children and ourselves by borrowing and overspending now to appease public opinion and demands. Hopefully, institutions like the EPF will not be forced to lend to the Government to finance subsidies now, and leaving our future generations to pay off the debts.

    Incidentally, the information available on global petrol prices show that the cost of petrol including delivery costs averages RM3.0 in Europe also (compared to your cost of RM5.00). The selling price of around RM7.30 in the UK includes fuel taxes and VAT of RM4.30 (notice they charge taxes not give subsidies).


  9. Yes, Ktemoc, let them eat cake.

    Actually, I find it quite ironic that a supposed Socialist like Ktemoc, for political reasons (he hates Ibrahim's guts) is advocating an IMF-style economic paradigm on this issue. While, me, a proud Right-Wing Capitalist, is advocating a social-democratic approach to the energy-cost issue.

    Personally, I don't support the fuel subsidy, but I'm advocating a serious, I mean serious, effort to mitigate the cost of living issues among the lower income group.

    Many successful Social-Democratic economies do not subsidise their fuel, but provide at low cost or Free-of-Charge many goods and services to the needy which help mitigate the rising cost of living.

    If you can bear to take off your Ibrahim-brand blinkers for a while, that is precisely what the PR Selangor state government is attempting, even on the limited state government budget.

    Why I'm thinking this way, is this current cost of living increase is at risk of running into hyperinflation. If you apply Orthodox capitalism (IMF bitter medicine style) you are going to cause mysery to millions of people. It is a recipe for disaster.

    I think Anwar Ibrahim has learnt his lesson from 1998.

  10. Fossil fuel (Oil) will be obsolete soon as Japanese and American are developing new energy technology to replace Oil. Then Oil price will drop
    as market demand drop.

  11. kk46, I did not attribute the entire BN problem to AI nor excuse Dr M from the fuel subsidy issue. I said AI "was a large part of that BN in power, holding several significant high offices and contributing to the overall problem."

    Yes, he might have left UMNO 10 years ago but the problem didn't start 9 years ago.

    In my earlier post I wrote "But both Dr M and Anwar Ibrahim must share the responsibility of having the fuel subsidy in the first place, and allowing that to continue for years. It should have been gradually removed a dozen years ago."

    You just cannot excuse AI from the UMNO mess.

    C'mon kk, did I do a Marie Antoinette? While I advocate the removal of the fuel subsidy I also urge the government to mitigate the consequences - I wrote:

    "One immediate relief is to dispense with road tax for small engined vehicles, ameliorate the insurance cost through a public insurance scheme, and various other fees that directly affect the poorer public members. The public transport system must be improved – in this area, the government must not allow creative concepts from the private sectors to be shackled by the CVLB or the constraints of the NEP.

    Then there is that controversial issue - nuclear power! The government must seriously consider this option, and not leave it till, again, too late.

    Yes, removal of the fuel subsidy had to be done, it has now been partially done, there’s more to be done – and it’s the good government which can come up with a sound equitable mitigating scheme instead of just cheap grandstanding unconstructive and provocative criticisms based on sheer bullsh*t."

    etc etc in other posts.

    I beg to differ - AI hasn't learnt any damn thing - as I asked, where's his promised reformasi when this man is advocating and gleefully boasting of the shameful unconscionable treacherous party hopping by elected MPs. Party hopping is an UMNO speciality, and as I mentioned, you can kick him out of UMNO but you can't kick UMNO out of him. The leopard still has his spots.

    And you PKR people must learn to accept the public's criticisms of Khalid Ibrahim for his slothful half-hearted manner in which he had dealt with the BMC saga. He was less than impressive. If he can improve, that'll be good.

  12. Interesting and timely comments.

    Under normal circumstances, I would think it would be difficult for Mr Anwar Ibrahim to lower the pump price of fuel. But i am apt to believe he has connections with the money market movers.

    From what I can analyse from the trends, oil price will begin falling from August or September onwards. Peak is $150; $200 if Israel or America bombs Iran's nuclear facilities.

    These probably accounts for Mr Anwar's confidence. The timing seems all in his favour. Perhaps the Gods favour the courageous. quitters.

  13. kaytee

    granted i accept your argument that subsidies be removed and petrol be at market price. assuming crude goes down to US$25 per barrel ( i may be pooh-pooh now), the local petrol price be adjusted downwards, right.
    now, what happens to petronas profits and the attendant tax and excise duty accrued to the government. AT US$60 per barrel, a whopping sum of RM53.2 bilion was paid to the govt representing 32% of its revenue. At US$25 per barrel and assuming proportinate reduction, the governments share would be only RM22.3 billion. Where is the government gonna plug the hole of RM30.8 billion just to keep the deficit at 3.5% of GDP, all other things being maintained?
    And I wont be surprise there will be a GST on consumption and petrol price will be rather inelastic (adjusting downwards that is) to fund the Government's excesses. Who is going to pay for all these except the rakyat.
    So, whats wrong if I give Anwar a chance no matter how you bad you portray him to be.

  14. "In some ways we need to give (perhaps grudgingly) AAB the credit for taking the necessary plunge"

    I recall that when the AAB administration raised the fuel price by 20 sen last year, everyone got upset that there was a raise. However, there was one BN backbencher who said that 20 sen was too little and the raise should have been at least 30 sen. The Malaysian blogosphere was quick to condemn that chap as a heartless BN scumbag idiot. I think some of us owe that fella an apology now, because he may have been right!

  15. consistent with most government policies since 2004, it was obviously a recent decision, even the RTD was probably caught unaware of the rebates.

    this is possibly to shift the people's eyes away from the infighting in the party, the shambling political alliance of the ruling front and other 'less' important matters like the murder of the mongolian lady on m'sian soil, lingamgate, etc...

    to think of it as an economic move to save the country from whatever threat that looms over it would only give the guy credit.

    and let's face it, if someone is saying that he will reduce the price of fuel if he were to come into power, as a regular joe living in m'sia, wouldn't you be enticed as well?

    obviously things have not changed with them as they still think of the rakyat as illiterate peasants who wouldn't be able to understand the reasons behind the increase, other than saying, it's hard times, so please tighten your belts.

  16. This is one of the few rare times I find comments from kittykat46 catching my ttention. Sorry, KT, but I tend to think his argument more persuasive here. For once.

  17. Hopefully people can still survive and have something to eat and to cherish in life...

    I am wondering what happen to the government? Cutting subsidy, price increase? Are we run put of money? Is the country is desperate for money? Anymore money left in the Bank Negara?

    Recession may be inevitable, but the government need to make sure that the impact can be soften for those with less money.... Not following the capitalism idea ... the poor is getting poorer and the rich is getting richer...