The realities behind rising fuel prices

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There may have been an increase of 20 sen for RON95 – but Malaysia still subsidises to the tune of 63 sen per litre to arrive at the current price of RM2.10.There may have been an increase of 20 sen for RON95 – but Malaysia still subsidises to the tune of 63 sen per litre to arrive at the current price of RM2.10.

By Palau Shavin

The recent increase at the petrol pump has predictably caused a hue-and-cry among Malaysians, some of whom are planning to take to the streets to hold protests against the government’s decision. The 20 sen rise for RON95 petrol and diesel announced on 2 September was followed a few days later by a 15 sen increase in the already pricey RON97 petrol.

A majority of Malaysians use RON95, which now retails for RM2.10 per litre. Though the government has repeatedly raised the pump price of RON97, it held off from increasing the price of the cheaper grade of petrol since 2010, no doubt realising the unpopularity of such a measure.

But with the country’s fiscal deficit climbing, Putrajaya had little choice but to dish out some strong medicine. To its critics, the government rightly pointed out that Malaysia still subsidises fuel costs, and that the country remains one of the cheapest places to buy fuel in the region, if not globally.

In fact, a recent Bloomberg Gasoline survey of 60 countries, Malaysia was ranked highly in terms of cheapest places to buy gasoline, tying with Nigeria, with only Iran, UAE, Egypt, Kuwait, Saudi Arabia and Venezuela offering cheaper pump prices.  (The survey was done before the recent price hike, but even factoring it in doesn’t change the ranking all that much.)

Malaysia still subsidises fuel cost to the tune of 63 sen per litre for RON95 and 80 sen per litre for diesel. In fact, the total spent on fuel subsidies is a whopping RM24.8 billion and, with the 20 sen subsidy reduction, Putrajaya says it expects to save RM1.1 billion this year from September to December, and RM3.3 billion per year in subsidy bills from the exercise.

However, the fuel price increase has already had a knock on effect in terms of a corresponding rise in the prices of food and goods, with some economists predicting a slight increase in inflation rates.

Research house AmResearch Sdn Bhd had predicted that the fuel price hike will drive up the average inflation rate in 2013 to 2.2 per cent.

“The cost component of transport contributes 14.9 per cent to the basket of CPI (consumer price index). With the petrol pump price increase, the transport index is likely to register an increase of 3.2 per cent in 2013,” said its daily report.

The question is, are Malaysians being unrealistic in expecting low fuel prices, even as the crude oil prices worldwide climb? The short answer is, yes.

It is already clear from an economic point of view that subsidising fuel is just not feasible for a country that is running low on foreign reserves, with a growing fiscal debt to boot. And yes, we may still be a net oil exporter but that scenario is expected to change in a few years, when our imports will be more than our exports. It is better to start weaning the public away from their over dependence on subsidies now.

The environmental consideration is also a crucial – and perhaps the most important – reason to rationalise fuel prices.

Burning fossil fuels to produce energy is a major contributor to greenhouse gases, which, as it increases, leads to global warming. Scientific studies show that the Earth has become warmer over the past few centuries, and that man has played the biggest role in causing this change by his use of fossil fuels. As the Earth warms, polar ice caps melt, sea levels rise, and weather systems change, all of which would have a catastrophic effect on mankind.

Fossil fuels are not an infinite resource – we are using them up at an alarming rate, which is why alternate fuel sources are being actively researched and funded.

Car manufacturers are increasingly looking to hybrid and fully electric vehicles as the key to the future even here in Malaysia, while some countries are already pushing for biofuels to reduce dependency on petrol and diesel. The European Union, in 2008, set a target for renewables to comprise 10 per cent of transport fuel by 2020, most of which would come from so-called first generation biofuels made from sugar, cereals and oilseeds.

Malaysia could easily take a leaf out of the EU book, as we have huge tracks of oil palm plantations, and palm oil is being increasingly used as a biofuel.

What we cannot and should not do is to keep the price of a depleting commodity artificially low.

Cheap fuel has indirectly led to the continuing deterioration of the public transportation sector in the country. Why take the bus when it is cheaper to have your own vehicle to get to work and back? With the lack of investment in the public transport sector, services are not kept up, leading to a vicious cycle of more people using their own vehicles to clog already congested roads.

Compare this to the German example. Fuel costs are high (RM6.39 per litre), so most people opt to take public transport – buses, underground, trains and trams – to work and back. Private transportation is used mianly during non-peak hours and for weekend outings with the family.

Closer to home, Singapore has invested billions in its MRT network and efficient bus system to keep cars off the road, and the petrol price is kept high – RM4.92 per litre for petrol. But in both Singapore and Germany, public transport is government-run, and not privatised.

Klang Valley’s ambitious MRT and LRT-extension projects, which are currently on-going, will hopefully help to encourage more people to opt for public transport to travel to work and back.

If the Land Public Transport Commission can get its act together and put into place a proper feeder bus network, and ensure and enforce bus lanes on major roads as well as improve public bus services outside the city, then the pain of increasing petrol prices will no longer matter.

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