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Focus Special
Since 1983, the retail price of petrol and diesel is set using the Automatic Pricing Mechanism (APM) in Malaysia.
Through it, the government sets the retail price for petrol and
diesel at a level where fluctuations in the cost of the product will
not affect the retail price. The APM ensures the difference between the
retail price and the actual price will be borne by subsidies and sales
tax exemptions. It also standardises the price of fuel at pump
stations, fixes the margins of oil companies and dealers, ensures
distribution channels are secure and minimises disruptions of petrol
and diesel supply.
Components that make up the APM mechanism include:
1. Cost of product - Like most countries in the region, Malaysia uses
the daily average price of "Mean of Platts Singapore (Mops)" to
determine the product cost for petrol (RON97, RON92) and diesel.
2. Alpha - The difference between the Platts published price with the
actual purchasing price by the oil companies is called Alpha. It is set
by the government at five sen per litre for petrol and four sen per
litre for diesel. If the buying price of oil companies is higher than
the Platts price which is more than Alpha, the oil company will bear
the extra cost and vice versa.
3. Operational cost comprises handling charges which include
transportation and marketing costs. The rate is currently 9.54 sen per
litre for Peninsular Malaysia, and 8.98 sen and 8.13 sen per litre in
Sabah and Sarawak respectively.
4. Oil companies' margin or profit of oil companies is fixed at five sen per litre for petrol and 2.25 sen for diesel.
5. Station dealers' margin or profit of dealers is fixed at 12.19 sen per litre for petrol and seven sen per litre for diesel.
6. The Malaysian government may collect maximum sales tax of 58.62 sen
per litre for petrol and 19.64 sen for diesel according to the Sales
Tax Act 1972.
This component is used fully to adjust the final retail price before the subsidy element is considered.
7. Subsidies are given when the actual price of petrol and diesel are
higher than the fixed retail price, after taking into account full
sales tax exemption of 58.62 sen per litre for petrol and 19.64 sen for
diesel.
Issues and challenges for Subsidies in Malaysia
The ongoing financial meltdown has affected oil fundamentals, as well
as the pricing of global crude oil which has been drastically reduced
from US$147 per barrel in July 2008 to US$40 in January
2009. The persistent volatility has witnessed price swings on an
unprecedented scale.
Even though the Organisation of Petroleum Exporting Countries took
steps to increase the price of crude oil by reducing output, it failed
to stop the slide in the price of crude oil in the world market.
Consequently, our government reduced the retail price of both petrol
and diesel seven times between Aug 23 and Dec 16, 2008 from RM2.70 per
litre to RM1.80 per litre for petrol and from RM2.58 per litre to
RM1.70 per litre for diesel.
However, the price of crude oil will not remain low and there is a
possibility that it will be on an upward trend once the world economy
bounces back. In view of this, the government improved upon the current
retail price setting mechanism in order to ensure the setting of
optimal retail prices of petrol and diesel to benefit all concerned.
It cannot be denied that petroleum products still need to be subsidised
to ease the burden of the people when there is an increase in the world
price of crude oil. Nevertheless, subsidies are a one-off
expenditure that do not provide any returns in income for the
government.
An unrealistic subsidy bill that exceeds developmental expenditure is
unreasonable and will jeopardise the development of Malaysia. In fact,
from 2005 to 2008, the government spent RM40.5 billion to subsidise
petroleum products.
Starting from June 5, 2008, due to the high subsidy for petroleum
products following the continuous increase in the global crude oil
price, the government restructured the subsidy system by increasing the
petrol retail price from RM1.92 per litre to RM2.70 per litre, and
RM2.58 per litre from RM1.58 per litre for diesel.
This led to an outcry from the public although a cash rebate of RM625
per year for owners of vehicles under 2,000cc and RM150 per year for
owners of motorcycles under 250cc was included in the subsidy
restructuring package.
The situation was made worse with the drastic increase in inflation
rates from 3.8 per cent in May 2008 to 7.7 per cent in June 2008. The
surge in inflation rates reflected the higher prices of essential goods
that affected the disposable income of the people.
Current automatic pricing mechanism (APM) to adjust the retail price of
petrol and diesel in tandem with changes in product costs. The improved
APM used to fix the retail price of both petrol and diesel is done to
reflect realistic market cost changes.
This feature is introduced to ensure stability and ease excessive
government subsidies for petrol and diesel. The underlying principles
in the improved APM are to set petrol and diesel retail prices that:
1. Reflect changes in cost of petrol and diesel
2. Emphasise price stability
3. Progressively ease the government's burden in providing subsidies of RM0.30 sen per litre.
The Way Forward
Generally, the government's stabilisation measures are designed to
address short term developments in the market. However, in the current
volatile market, the government must focus on a sustainable long-term
measure. Therefore, the improved price setting mechanism will bring
about stability in retail prices in the market and at the same time
allow traders, industry players and consumers to manage their
expenditure in a more orderly manner. This method will allow the
government to collect taxes when the product cost is low and exempt
taxes as well as grant subsidies when the product cost increases.
PetrolWorld March 2009
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