Sunday, June 08, 2008

Fuel subsidies must go, but so must cronies, corruption and wastage

Thanks for all the comments encouraging me to continue blogging. I mentioned that I might blog again if the shit hit the fan. And hit the fan the shit did.., in the form of increased fuel prices in Malaysia.

I think there's something intrinsically wrong when a litre of petrol or diesel costs the same as lunch (outside KL lah). But I think it's more wrong if Malaysians are charged market prices for oil, when the govt forces us buy cars and houses at tax-inflated and bumiputra discount-inflated market prices (respectively). I think it's wrong if we are charged market prices for petrol when development funds meant to improve our educational and business infrastructure (which increases our income and hence, our ability to pay market prices) are squandered in favour of enriching BN cronies and faulty bumiputra & ketuanan melayu policies.

Here's a post I made in a local forum on this topic:

Personally, I think fuel prices in Malaysia need to be UNsubsidised. Subsidies are a downward spiral and is nothing less than switching of the burden of higher cost from consumers to taxpayers.

However, subsidies cannot be looked at in isolation. All national budgets are simple creatures. What is the cash inflow, and how is it matched by the cash outflow. Cash inflows are few, mainly taxes and returns from govt investments. Cash outflows are more complex, from govt spending, to govt investment, to these fuel subsidies.

I think the issue here is not the fuel subsidies. It is unrealistic for the public to expect the govt to 'PREVENT' the increase in fuel prices. Malaysia is insignificant to the overall crude oil dynamics as a producer, or a consumer. Trying to hang on to the subsidies in the face of current oil price trends is like trying to hold back a tidal wave with your bare hands. Everybody still gets drenched, and we'll also drown in the process - because we stubbornly stood on the beach staring down the incoming tsunami instead of running for higher ground.

In my mind, there are 3 connected issues:

1. Since Malaysia is a net oil exporter, the net profit from oil will always increase as oil prices increase. Because we produce more than we consume, the increased profit from selling oil that we produce, will always be more than the increased costs of paying for (including subsidies) the oil we consume.

The matter is whether the govt (via Petronas) should spend their oil production profits to 'subsidise' the consumption of oil. For me, that's a matter for the public to decide. BN and PR have made their intentions know (albeit after the elections) in that BN wants to eliminate the subsidies while PR (via Anwar's statements) promises to use Petronas profits to subsidise consumption. So vote wisely.

Me, I prefer that the govt spend the money on improved public transport, better schools and better infrastructure so that the public can increase their earning power in order to cope with the additional cost of living, rather than trying to subsidise living costs. There is no benefit in subsidies (other than delaying the inevitable doom). Additionally, subsidies are so easily and rapaciously abused as I'll show in point 2 below (only one example of many).

2. The consumption of oil itself is fraught with problems. Namely, which consumers do you subsidise? Right now, everyone is subsidised. From the kapcai riders earning RM800/mth to the biggest towkays and royalty driving Mercedes S-classes and Aston Martins. But my thinking is that individual consumption of fuel for private transportation is actually a small proportion of oil consumption.

It's the transportation industry, power generation industry and the smugglers to Thailand (by road) and Indonesia (by boat) who are the biggest users of these subsidies. Should they be entitled to it?

Smugglers... definitely not. But subsidies are like banning liquor and gambling. The more you do it, the more illicit and illegal activities will occur.

And take the power generation industry. Tenaga buys fuel feedstocks from Petronas at subsidised prices. That is justified as electricity prices to the public are also controlled. And electricity tariffs are staggered in that smaller consumers pay less, and larger, commercial & industrial consumers pay more - which is somewhat fair.

But the IPPs (independent power producers) like YTL and Tanjung also pay ridiculously subsidised prices for their fuel feedstocks. If they were selling the power back to Tenaga at Tenaga's cost of production (maybe with a small premium of for the IPP's smaller scale vs Tenaga), that would be okay. However, IPPs sell power to Tenaga at cost+ (ie. guaranteed profits), and the most ridiculous thing is that Tenaga has to buy everything the IPPs produce, even if it is in excess of Tenaga's needs. This means that the IPPs will produce as much as they possibly can to maximise profits, and therefore they are consuming the maximum amount of oil as well... at subsidised prices.

And because IPPs are currently producing excess power that Tenaga doesn't need, the excess power is wasted because it can't be stored, translating into higher costs for Tenaga and higher tariffs for the public. That also means that billions in fuel subsidies are being spent to subsidise IPP production of wasted power. Everyone loses, much is wasted and the only party gaining from this arrangement are the IPPs... and of course, their politician sponsors from BN in the background.

3. Lastly, is govt spending itself. What's the alternative spending if public funds are not spent on subsidies?

How can the govt justify such drastic moves to reduce overspending on subsidies, when we don't seem to be doing anything to reduce overspending on guaranteeing profits for IPPs, highway toll operators, GLCs like Proton, Bernas, Class F contractors, AP permit holders, govt dept waste etc?

In fact, how do we know that the billions saved from these subsidy reductions will not be spent on guaranteeing more profits for cronies and wastage?


CaptainCaveman said...

Welcome back! Even with my 'caveman' mentality i know what you are talking.

Will take some time before we can have a better and desirable education system, a reliable public transport and equatable business infrastructure.

What if all those so called saving by removing subsidies but is to continue 'subsidizing' the BN cronies?!

Like you say the 'shit' hit the fan again. You are the MAN! Shit them!

Crankshaft said...

Good one, Sean.

You didn't mention the glaring lack of hybrid cars in Malaysia.

The government deliberately doesn't approve import of hybrid cars as it would reduce profits for Petronas.

We should be preserving our oil-reserves, but does the government care?

Oil Reserves And Fuel-Efficient Cars

kl said...

Great to see you writing /blogging again my man. Continue the good work!

BlackKnight said...

WHAT IS NEVER MENTIONED IN Mainstream Media like NST/TheStar/Utusan/BH are these facts....

Malaysian PerCapita Income USD 5000
Singaporean PerCapita Income USD 25000

Further The Star made a comparison of prices in Thailand , Singapore and Indonesia ..

For Thailand it is quoted at RM3.90/liter, however are they aware that in Thailand new cars are cheaper than Malaysia by RM10,000? They pay only one life time for their driving license? No renewal fee after that? Also that goes for road tax as well? And do TheStar also aware that you can drive all the way from Hadtyai to Bangkok on a six lane highway without paying any Tolls ??!!

Whereas here in Malaysia you have to pay yearly renewal for road tax , driving license and TOLLS, TOLLS, TOLLS!!!

For Singapore how can you quote RM 5.20 ? Please quote in Singapore Dollars because they are earning in Sing Dollars. You might as well say Europeans are paying RM10/liter. RM5.20/liter = Sing $ 2.20/liter, still cheaper than Malaysia in view of fact that Singapore is not a crude oil exporter. Are you saying that you fill up petrol in Singapore by paying Ringgit?

In economy, dollar to dollar must be compared as apple to apple. Not comparing like durian in M'sia is much cheaper than durian in Japan!! Of course-lah, Japan is not durian producer!!! Comparing Malaysian durian with Thailand durian make more sense!!

For Indonesia we might say is cheaper there at RM2.07/liter but compare that to their level of income!

Now, let us compare the price with OIL PRODUCING countries:

UAE – RM1.19/litre
Eygpt – RM1.03/litre
Bahrain – RM0.87/litre
Qatar – RM0.68/litre
Kuwait – RM0.67/litre
Saudi Arabia – RM0.38/litre
Iran – RM0.35/litre
Nigeria – RM0.32/litre
Turkmenistan – RM0.25/litre
Venezuela – RM0.16/litre
MALAYSIA – RM2.70/litre

RM 2.70!!! Individual perspective:

As of last month a Toyota Vios would 'cause a damage' of about RM 89,000.
In the international market, a Toyota Vios is about USD 19,000
USD 19,000 = RM 62,700 (using the indicative rates of USD 1 = RM 3.30)
That makes Malaysian Vios owners pay an extra RM 26,300.

This RM 26,300 should be cost of operations, profit and tax because the transportation costs have been factored in to the USD 19,000.

RM 26,300/ RM625 petrol rebate per year translates to a Vios being used for 42.08 years.

I do understand that the RM 625 is a rebate given by the government, but it also means that one has to use the Vios for 42.08 years just to make back the amount paid in taxes for the usage of a foreign car. Would anyone use any kind of car for that long?

Now with these numbers in front of us, does the subsidy sound like a subsidy or does it sound like a penalty? This just seems to be a heavy increment in our daily cost of living as we are not only charged with high car taxes but also with a drastic increase in fuel price.

With all the numbers listed out, I urge all Malaysians to join me in analyzing the situation further.

Car taxation is government profit, fuel sales is Petronas' (GLC) profit which also translates into government profit. The government may ridicule us Malaysians by saying look at the world market and fuel price world wide. Please, we are Malaysians, we fought of the British, had a international port in the early centuries (Malacca), home to a racially mixed nation and WE ARE NOT STUPID!!!

We know the international rates are above the USD 130/barrel. We understand the fact that the fuel prices are increasing worldwide and we also know that major scientist are still contradicting on why this phenomenon is happening. Some blame Bush and his plunders around the world and some blame climate change and there are others which say petroleum 'wells' are getting scarce.

Again we go back to numbers to be more straight fwd

1 barrel = 159 liters x RM2.70/liter = RM 429 or USD 134

On 1 hand, we are paying the full cost of 1 barrel of crude oil with RM2.70 per liter but on the other hand the crude oil only produces 46% of fuel.

Msia sells crude oil per barrel at USD130 buys back Fuel per barrel at USD134. And not forgetting, every barrel of fuel is produced with 2 barrels of crude oil.

1 barrel crude oil = produce 46% fuel (or half of crude oil), therefore
2 barrel crude oil = approximately 1 barrel fuel
In other words, each time we sell 2 barrels of crude oil, equivalently we will buy back 1 barrel of fuel.

Malaysia sell 2 barrel crude oil @ USD 130/barrel = USD 260 = RM 858
then, Malaysia will buy back fuel @ USD 134/barrel = RM 442/barrel
Thus, Malaysia earn net extra USD 126 = RM 416 for each 2 barrel of crude sold/exported vs imported 1 barrel of fuel !!!
(USD 260-134 = USD 126 = RM416)

So where this extra USD 126/barrel income is channeled to by Malaysian Govt?????????

Another analysis:

1 barrel crude oil = 159 liters.
46-47% of a barrel of crude oil = fuel that we use in our vehicles.
46% of 159 = 73.14 liters.
@ RM 2.70/liter x 73.14 liter = RM197.48 of fuel per barrel of crude oil. This is only 46% of the barrel, mind you. Using RM 3.30 = USD 1, we get that a barrel of crude oil produces USD 59.84 worth of petrol fuel (46% of 1barrel).
USD 59.84 of USD 130/barrel turns out to be 46% of a barrel as well.

Another 54% = bitumen, kerosene, and natural gases and so many more.
And this makes a balance of USD 70.16 that has not been accounted for.

So this is where I got curious. Where is the subsidy if we are paying 46% of the price of a barrel of crude oil when the production of petrol/barrel of crude oil is still only 46%?

In actual fact, we still pay for this as they are charged in the forms of fuel surcharge by airlines and road taxes for the building of road (because they use the tar/bitumen) and many more excuse charging us but let us just leave all that out of our calculations.

As far as I know, only the politicians who live in Putrajaya and come for their Parliament meetings in Kuala Lumpur (approximately 60+ km) are the ones to gain as they claim their fuel and toll charges from the money of the RAKYAT's TAX.

It is so disappointing to see this happen time and time again to the Malaysian public, where they are deceived by the propaganda held by the politicians and the controls they have over the press.

Which stupid idiot economist equates rebates for rich or poor with the cc of the vehicles? An average office clerk may own a second hand 1300cc proton Iswara costing $7,000 (rebate = $625) while the Datuk's children can own a fleet of 10 new cars of BMW, Audi and Volvo all less than 2000cc costing $2 millions and get a total rebate of $625 x 10 = $6,250! Wow what kind of economists we are keeping in Malaysia...wonder which phD certificate that they bought from...

Misleading concept of Subsidy:

The word 'subsidy' has been brandished by the BN government as if it has so generously helped the rakyat and in doing so incurred losses. This simple example will help to explain the fallacy:

Ahmad is a fisherman. He sells a fish to you at $10 which is below the market value of $15. Let's assume that he caught the fish from the abundance of the sea at little or no cost. Ahmad claims that since the market value of the fish is $15 and he sold you the fish for $10, he had subsidised you $5 and therefore made a loss of $5.

Question : Did Ahmad actually make a profit of $10 or loss of $5 which he claimed is the subsidy?

Ahmad makes a profit of $10 which is the difference of the selling price ($10) minus the cost price ($0 since the fish was caught from the abundance of the sea). There is no subsidy as claimed by Ahmad.

The BN government claims that it is a subsidy because the oil is kept and treated as somebody else's property (you know who). By right, the oil belongs to all citizens of the country and the government is a trustee for the citizens. So as in the above simple example, the BN government cannot claim that it has subsidised the citizen!

bayi said...

Welcome back. I am glad I kept checking your link from time to time.