This article first appeared in Forum, The Edge Malaysia Weekly on June 10, 2024 - June 16, 2024
“No turning back from targeted fuel subsidy.” That was the headline of my first article this year, which argued that the government should proceed with dismantling the costly blanket subsidy policy, the benefits of which are enjoyed by all, including the rich and foreigners. The country faced a subsidy bill in excess of RM80 billion last year, a substantial part of which went to fuel, notably petrol and diesel. In addition, it is facing the high cost of servicing its debts and meeting pension payouts. Clearly, it can no longer afford a subsidy system that covers everyone.
In fact, as far back as 2005, in this column, I had written about the difficulty of maintaining a blanket fuel subsidy mechanism. In an article headlined “End the fuel subsidy” (Issue 547, May 2005), I said: “If there is a need to continue fuel subsidies, these should not be blanket subsidies because the rich will also benefit, as in the case of petrol. Fuel subsidies must be targeted at specific sectors …” which should include the poor, needy, farmers, fishermen and for public transport.
In another article in October 2014, headlined “Need to explain the fuel subsidy story well”, I emphasised why a blanket subsidy was not sustainable, especially in an environment of high-priced crude oil, and that the prices of diesel and petrol per litre then were lower than that for Coca-Cola and Evian mineral water.
This simply makes no sense as exploring for crude oil —with no guarantee of discovery — then producing and transporting it from the deep seas costs billions of dollars in investments. These investments are grossly higher than what is involved in producing Coca-Cola or Evian. Further huge investments are needed for the crude oil to undergo a refining process before it can be marketed and sold as petrol and diesel.
Today, a Coca-Cola four-pack of 320ml (or 1.28 litres) costs RM7.90 while two 500ml bottles of Evian mineral water (1 litre) cost RM11.80 at Jaya Grocer near my house in Putra Heights. Even two locally produced 550ml bottles of Spritzer (1.1 litre) cost RM2.50. These prices are higher than the current subsidised pump price of diesel at RM2.15 per litre and RON 95 petrol at RM2.05 per litre. That is how cheap fuel products are in Malaysia.
These prices are very low too when compared internationally, including with countries that produce more crude oil than Malaysia. According to GlobalPetrolPrices.com, which tracks 169 countries (sans Brunei and as at April 15, 2024), states that our RON 95 pump price of RM2.05 per litre is the ninth cheapest in the world. This is even cheaper than the equivalent-grade petrol in Saudi Arabia, which sells at RM2.96. Saudi Arabia is the world’s largest exporter and second-largest producer of crude oil in the world. The global average price for RON 95 is RM6.35 per litre.
As for diesel, at RM2.15 a litre, our pump price is the 10th lowest in the world. The global average price is RM5.71 per litre. The pump prices of diesel and RON95 are higher in many parts of the world because they are not subsidised or are subsidised to a small degree. Many governments impose additional taxes like a carbon tax and a sales tax in their efforts to reduce CO2 emissions to meet the world’s net-zero emissions target by 2050 to fight the environmental impact of climate change. As it is, Malaysia does not impose any carbon or sales tax for petrol and diesel.
With the May 21 announcement that the rationalisation of the fuel subsidy for diesel will begin in Peninsular Malaysia, the government has paved the way for a “soft landing” for the implementation of the targeted subsidy.
Under phase 1 and 2 of the subsidised diesel control system (SKDS), more than 420,000 vehicles from the public transport and logistics sectors will still get the subsidised price of RM1.88 and RM2.15 a litre respectively via a fleet card system.
Fishermen will still enjoy their subsidised price of RM1.65 a litre, while farmers and individual car owners who are eligible will get a RM200 monthly cash aid. What has not been finalised (as at press time on Friday, June 7) is the date of the floating of the diesel price to market parity and if it will be done on a staggered basis.
With all this assistance in place, the inflationary impact of the targeted subsidies could be partly mitigated. The fleet card system, better enforcement and higher pump prices are expected to help reduce smuggling across the borders via roads and fishermen’s boats, which is costing the government RM4.5 million a day or around RM1.6 billion a year. Smuggling is prevalent as diesel is sold at double the price in Thailand and Indonesia, and four times more in Singapore.
The new mechanism will also allow government enforcement to better monitor sales and prevent leakages to commercial sectors that are not entitled to the subsidies. Diesel consumption was 6.1 billion litres in 2019 but this increased by 70% to 10.8 billion litres in 2023 despite the number of active, licensed and registered diesel vehicles increasing only 3% during the same period, indicating that there have been a lot of leakages in the sales of subsidised diesel. It has been estimated that total leakages through smuggling and the sale of subsidised petrol to commercial sectors that are not entitled to subsidies can be as high as RM4 billion to RM5 billion annually.
Despite these huge leakages, some have expressed the view that this is not the right time for subsidy rationalisation as electricity and water tariffs have increased, the cost of consumer goods and services have gone up but salaries have not risen much or even remained stagnant for many. As such, the next targeted subsidy to be implemented — for RON 95, which will affect many more households — should be delayed.
But with the government’s finances remaining tight and the price of crude oil expected to stay high until 2030 according to some forecasts, Malaysia cannot afford to put on hold its subsidy rationalisation plan, as crude oil is the main raw material that would impact the amount the government will have to continue to subsidise for diesel and RON95.
For the current pump price of RM2.15 and RM2.05 a litre for diesel and petrol respectively (inclusive of margins for oil companies, petrol station owners, marketing and transport costs), the level of crude oil prices should be in the range of US$49 to US$54 per barrel. Spot prices for the benchmark Brent and West Texas Intermediate (WTI) crude oil are much higher now, at about US$80 and US$75 a barrel respectively.
While the demand for renewable energy (RE) and electric vehicles (EV) is increasing because of the pressure for cleaner fuel in the face of climate change, it still cannot close the gap for energy required to power the world economy.
Demand for crude oil this year is estimated at 104.46 million barrels per day (bpd) as compared to 102.21 million bpd in 2023. Demand has even exceeded the 100.27 million bpd in 2019, before the Covid-19 pandemic. In 2005, demand was just at 83.65 million bpd.
The Covid-19 pandemic did cause demand destruction and prices of crude oil to drop drastically but if there is no other pandemic in the near future and despite the higher usage of RE and RV, demand is still expected to increase until 2030.
JP Morgan Research forecasts that global oil demand will reach 106.9 million bpd by 2030, an increase of 5.5 million bpd from 2023. It says: “This is underpinned by population growth and rising energy consumption in developing nations, outweighing the energy efficiency measures being undertaken in developed economies.
“Rising energy demand places greater pressure on traditional fuels to fill the gap. This is because the clean energy system is not yet mature enough to capture and distribute the significant increase in the generation of clean joules due to supply chain, infrastructure, and key materials bottlenecks. Generating and distributing the joules necessary to meet global energy demand growth and progressively decarbonise is a multi-decade process,” it added.
Overall, JP Morgan Research estimates that global oil markets could face a 1.1 million bpd deficit in 2025, widening to 7.1 million bpd in 2030. If this happens, oil prices could spike to US$150 per barrel over the near to medium term and US$100 per barrel over the long term.
The most optimistic scenario by the International Energy Agency (IEA), the developed countries’ energy watchdog, predicts that global oil demand will stabilise at around 105 million bpd by 2030, as positive scenarios aiming for net-zero emissions propose a significantly lower demand.
In contrast, the Organisation of Petroleum Exporting Countries and its counterparts (Opec+) see that the world economy and demand will remain robust and anticipate an increase to 112 million bpd by 2030. As geopolitical risks in the Middle East and Eastern Europe are expected to remain for the rest of the decade, Opec+ feels that they can continue to be the buffer for any supply shortage in the world.
Price-wise, Fitch Solutions company BMI in an April report indicated that crude oil could average US$85 per barrel in 2024, US$82 per barrel in 2025, and US$81 per barrel across 2026, 2027 and 2028. A Bloomberg Consensus included in the report projects that Brent will average US$83 per barrel this year, US$80 per barrel across 2025 and 2026, and US$72 per barrel across 2027 and 2028.
All these forecasts point to the fact that crude oil prices are unlikely to fall below US$50 anytime soon, and that a continued blanket fuel subsidy for all — including the rich and foreign workers – is not sustainable and will cost average Malaysians dearly.
The money saved from targeted subsidies, though, must be spent wisely to mitigate the rising cost of living, enhance social safety net programmes for the majority and improve public transport, health and education facilities.
Azam Aris is an editor emeritus at The Edge
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