Living with ‘managed float’ fuel prices

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The move towards partial deregulation of fuel retail prices is in line with Malaysia’s intention of becoming a high-income developed nation by 2020.The move towards partial deregulation of fuel retail prices is in line with Malaysia’s intention of becoming a high-income developed nation by 2020.

The Malaysian government has decided to change the way it fixes the retail prices (otherwise known as pump prices) of RON95 petrol and diesel, shifting to the use of a mechanism it calls “managed float”, bringing them in line with the management system for RON97 fuel prices.

The managed float is a term more commonly heard in financial circles, where governments (or other interested bodies) try to moderate a currency exchange rate’s volatility – yet still allow the market to influence pricing – by buying or selling the currency in question. Under this system for fuel retail prices, though, the average wholesale price of fuel over the current month will be used to determine the retail price for the next month.

This move towards partial deregulation of fuel retail prices is in line with Malaysia’s intention of becoming a high-income developed nation by 2020. In developed countries such as the UK, Australia and Singapore, for instance, the price of fuel at the stations is a fully competitive market, with every retailer (or retail chain) setting their own prices independently of every other retailer.

By way of contrast, less developed economies including Nigeria and Pakistan still maintain fixed prices at the pump – and the massive subsidies in order to support these prices. In the case of Pakistan, for instance, whenever a price reduction is declared (as it was recently, due to the falling world oil prices), it usually results in a number of complaints from fuel retailers and even noncompliance from some.

Market volatility

The impact of such a system on the transportation and logistics industry depends on the government’s specific float management policies… and world oil prices, of course.

If the world oil price decreases, everybody, including industry players, is happy. However, as this industry is the lifeblood of our trade, manufacturing and commercial activities, a sudden shock increase in fuel prices would cause significant disruption in costs of transportation (especially of essential goods), eventually cascading to other areas of the economy.

Additional volatility in the market will make it difficult for logistics players to be both competitive and profitable without resorting to some form of hedging or, as the airlines have been doing, using fuel surcharges. Nevertheless, it does serve as a way of transitioning to a deregulated market, and to prepare businesses in the industry for that eventuality.

The opinions of the rakyat are varied as to the wisdom of this course. For instance, copywriter and social media planner Justin T., who works from home, feels that the logical step would be to go directly to full deregulation instead of this partial move, and that profits for oil companies should not be guaranteed, as it is under the managed float scheme.

Meanwhile, Yang L., a graphics designer in a PJ-based creative agency, believes that if fuel subsidies are removed, other automotive taxes should also be abolished – as it is, Malaysian car prices for foreign/imported models are mostly made of up tariffs, taxes and other charges. Yang is also unsure of the impact such a scheme would have on the rakyat if world oil prices increase, instead of decreasing as they are now.

Pitfalls on the road to deregulation

Unfortunately, the road to near-complete deregulation of the retail market is complex and requires additional thinking. In Malaysia, all petrol stations are affiliated with one of relatively few multinational oil companies, even the rural ones – which is not true in Australia, for instance.

Petrol stations in developed economies can also be co-branded, as a number of supermarket and hypermarket chains have gone into partnership with the oil companies (for instance, NTUC Fairprice with ExxonMobil in Singapore), allowing retailers greater flexibility to offer fuel discounts (perhaps based on in-store purchases).

Pump prices can fluctuate frequently, possibly on a daily or even hourly basis. Within each country, websites have sprung up using crowdsourcing to provide motorists up-to-date pricing for fuel stations nationally – in some cases, the websites have made arrangements with the major retailers to have live streams of their prices.

There are ways for the price-conscious customer to remain in control of energy costs through proactive management. For the individual, keeping an eye on the world oil prices (or more specifically, on the Singapore MOPS95 and gas oil prices), as well as the MYR/USD exchange rates, will provide a broad indication of whether the next month’s pump prices will go up, down or remain the same, allowing the consumer to make informed decisions as to when to refuel.

For companies, the use of fuel cards from a particular oil company may provide such companies with simplified administration and access to wholesale fuel prices. Organisations in the transportation and logistics industry may opt to use fuel contracts or options as a form of hedging during period of lower fuel prices, or purchase fuel in bulk during such times.

With Malaysia heading towards greater deregulation of the fuel retail market, individual and business consumers will change the way they purchase and use fuel, likely becoming more efficient and savvy along the way.

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