Rising oil prices – fuel subsidy costs Malaysia more than it profits, each US$1 increase is a RM410m deficit


That the Russian invasion of Ukraine is having a profound influence is simple, and it’s not simply from features of the quick strife. Oil prices have additionally spiked as a results of the disaster, having gone previous the US$120 per barrel mark, and it is this increase that raises the query – is there a chance of a readjustment of the fuel subsidy in Malaysia, given the rising stress the increase is placing on authorities funds?

As The Star studies, rising oil prices are usually constructive for a web oil and fuel exporting nation like Malaysia. According to a CGS-CIMB Research report, it is estimated that for each US$1 (RM4.18) per barrel common increase in oil prices, the federal government stands so as to add some RM370 million in income.

However, provided that the nation has a fuel subsidy mechanism in place, that very same US$1 per barrel increase will set the federal government again by round RM780 million in fuel subsidies, primarily based on the value of RON 95 and diesel remaining unchanged at their ceiling price of RM2.05 per litre and RM2.15 per litre respectively. To give an thought of how a lot subsidy is in place, RON 97 is at present priced at RM3.45 per litre this week.

The analysis home stated that the federal government begins incurring fuel subsidy costs when oil prices hit the US$55-US$60 per barrel mark, and that on a web foundation – primarily based on the belief that retail fuel prices of RON 95 and diesel stay unchanged – estimated that the federal government would lose RM410 million in web earnings for each US$1 increase in Brent oil above the US$60 per barrel stage.

It added that the rising oil prices elevate a number of questions, essentially the most notable of which is if the federal government will elevate home fuel prices. The authorities must stability the professionals and cons of doing so, as a hike in fuel prices could have a important destructive influence on the economic system, notably in growing inflation in addition to bringing about a discount in disposable earnings and consumption development.

Therefore, any resolution by the federal government to regulate fuel subsidy must transcend fiscal elements, taking financial, political and social influence into consideration. Additionally, the analysis home stated the fiscal stability can be worse if different subsidies – for liquefied petroleum fuel and cooking oil – are additionally taken under consideration. The authorities has stored the prices of those unchanged regardless of a sharp worth increase within the international market, it stated.

Nonetheless, CGS-CIMB Research believed the federal government can stand up to rising spending as elevated oil prices would additionally imply that it can demand increased dividend fee from Petronas, which might basically enable the federal government to maintain the subsidy afloat. Also, the one-off windfall tax introduced beneath Budget 2022 – which is projected to yield RM6.2bil for presidency coffers this 12 months – might offset the influence of upper oil prices.

The analysis home stated that an alternative choice to decreasing subsidies whereas minimising the influence on consumption can be to introduce the usage of money handouts. In 2008, the federal government introduced a RM625 cash subsidy, but only as a one-time payment.

Then, in 2019, the Pakatan authorities introduced plans to introduce a petrol subsidy programme (PSP). The scheme, which was to see eligible B40 (and later, M40) recipients being given a fastened subsidy fee of RM30 a month for automotive house owners, and RM12 for bike house owners, by no means went via, being canned in July 2020.

A observe on subsidies and the associated fee it has incurred in current occasions. In 2019, the federal government spent RM6.32 billion in subsidies, however this dropped to RM2.16 billion in 2020. The lowered spending was resulting from international crude oil prices falling considerably as a results of an “oil war” amongst oil-producing international locations, which noticed the barrel worth dropping under US$20 at one level in April 2020. Pump prices fell to RM1.25 a litre for RON 95 and RM1.46 for diesel that month, though the MCO meant motorists couldn’t make the most of a budget fuel.

In June of final 12 months, finance minister Datuk Seri Tengku Zafrul Abdul Aziz stated an additional RM4.22 billion was anticipated to be spent in 2021 on fuel subsidies as a results of the increase in international oil prices. At that time, he stated that authorities had allotted RM3.78 billion in subsidies, however was anticipated to accommodate subsidies of as much as RM8 billion because of the increase, RM4.22 billion increased than the unique allocation.

What do you assume? Should fuel subsidies stay as they’re, or ought to the federal government begin weaning the rakyat off it? If so, how would it accomplish the duty with the minimal destructive influence? Share your ideas with us within the feedback part.

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