Why fuel subsidies will not help Malaysians

About Politics, Society, Business, ALL ARTICLES | April 14, 2008

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Photobucket By ANDREW WONG

Most people should know by now that the government is now recanting its initial plan to further reduce fuel subsidies in our country.

Even the marginally intelligent observer would recognize this move as a method of appeasing an irked electorate and to rebuild the establishment’s image as a generous and benevolent government.

Yet, I’m truly disappointed with this announcement.

This one moment gifted to the government to come good on its promise of transparent government and accountability, they sell down the river to distribute as an economic handout.

Once again, they misconstrue the demands of the citizens. We don’t really want money shoved down our throats when it seems convenient - some may beg to differ on the money part. In fact, people really aren’t that averse to unpopular decisions. We just want a system of governance in which federal decisions are explained in painstaking detail such that even the most simple-minded folk have an idea of what’s going on.

When faced between a choice of displaying true character in government and unreasonable demagoguery, the government chooses the latter. And they wonder why they lost so many votes.

Needless to say, I’m actually in favour of the reduction of fuel subsidies. It irritates me to see the opposition front politicize the issue of rising commodity prices without actually providing the people with strong economic reasons other than the increase in the costs of living. But of course, most people don’t stop to question the economic ramifications of most decisions, so long as they can make up next month’s rent. That doesn’t leave much by way of discussion.

First, I must establish that I’m not an environmentalist. Not in the conventional sense anyway.

I think 4.0L V12 engines are as good as sex. If I had a chance, I’d fly first class to the grocery store down the road and back. I wash my car with a hose instead of a bucket and I’m proud of it. But the logic behind this is quite simple, isn’t it?

The higher the price of fuel, the less we use. Yet, we’ve reached such a level of dependency on petrol and diesel that there seems to be an insatiable thirst for the black stuff.

According to a UNDP report, Malaysia produces USD$4.1 of GDP per unit of energy used. That puts us well behind countries such as Japan, the United Kingdom and Denmark. More telling is the fact that we’re also placed behind countries such as Colombia, Sri Lanka and Namibia. Sure, one can make an argument that this indicator does not take into account the level of industrialization and population differences but you have to admit, at USD$ 4.1, we have a terrible rate of fuel efficiency.

The argument against fuel subsidies are not and should not be limited to the environmental aspect of things.

Such, we’re reaching peak oil, polar bears are drowning, George Michael is touring North America again and Al Gore deserves his Nobel Prize.

But the economic aspect of things is much more telling of the situation.

I picked up this interesting piece sourced directly from the National Economic Planning Unit. The numbers are slightly dated but that does nothing to dampen the truth behind them. In 2005, the Government subsidized each litre of petrol by 24 cents and diesel by 59 cents. On top of that, the government also waived a sales tax of 58 cents per litre of petrol and 19 cents per litre of diesel.

Fuel subsidies are expected to cost the government RM35 billion this year. The waived sales taxes mean that the government forfeited RM 7.6 billion in 2005.

If you think those come up to mind-boggling numbers, well, no shit, Sherlock. Imagine what the federal government could’ve done with all that money. The schools, hospitals, transport systems and security forces that could’ve benefited from the injection of cash.

Essentially, what we’re doing is creating price controls which any free market trader will tell you make zero economic sense because our prices do not reflect global prices.

By utilizing government funds to maintain this price control, we are perpetuating several problems:

1. The presence of an unnecessary deficit in the government budget.

2. An opportunity cost of under-funded projects in the areas of education, transport, healthcare and defense due to the diversion of funds into subsidies.

3. A system of high taxation as the Government has to get the money to fund the subsidies from somewhere. Guess who’s paying? The abolishment of fuel subsidies will inevitably lead to something called cost-push inflation.

Essentially, the prices of everything will go up, consumers lose confidence in the economy which precipitates a reduction in expenditure leading to an economic slowdown.

Fuel subsidies appear to be the only way for us to avoid such an unfortunate outcome.

But are we engineering a solution or merely a band aid response, hiding the problem till it metastasizes into a cancer too dangerous to ignore?

Our insistence on maintaining fuel subsidies merely feeds into the psyche that they will forever be in place to protect our interests and shield us from the perils of open market prices. Does it sound like a similar policy? No points for guessing, but it’s a three-letter abbreviation starting with a ‘N’ and ending with a ‘P.’

As it stands, we are one of the very few countries in Asia that continues to subsidize fuel prices. I cite the example of Singapore where Singaporeans have to pay RM4 per litre of petrol.

A lot of people are going to scoff at the idea of comparing petrol prices with a country with obvious financial advantages over us, but that’s just escapism. Sure, their currency is stronger than ours and according to logic, when the conversion of their currency occurs, their prices don’t differ with ours by much. But taking into account purchasing power parity - a system in which you compare what a dollar of local currency buys in a local market with what a dollar of foreign currency buys in a foreign market - then the aforementioned perspective is altered drastically.

Sure, the price of a carton of eggs in Singapore may be S$5, the same as our RM5; but you can only get so far in life with eggs.

The cost of living in Singapore is definitely much higher.

We’re talking about overpriced property prices, exorbitant healthcare costs, the 7 percent Goods and Service Tax and of course, the infamous Electronic Road Pricing system that robs unsuspecting drivers most surreptitiously.

Still think we’re having it worse than our friends down south? Over there, if you’re drawing S$3,000 a month, you’re considered borderline poor. Yet, they still find it in them to brave the lack of a fuel subsidy. So what makes us so different?

Simple, corruption. Even if, by some stroke of persuasive genius, the masses were convinced of a gradual but absolute abolition of fuel subsidies in our country, many people will still question - correctly - if the savings will trickle down to the citizens and improve our welfare or merely go into the construction of another Zakaria’s Home of Fun and Adventure?

This is where the opposition rightly comes into the picture. Instead of chastising the government for their efforts to do away with a money-draining policy, they should work instead to ensure that any savings as the result of the abolition of subsidies will go to the right areas.

Table a resolution in the Dewan that mandates all fuel taxes be spent on the development of alternative energy sources. That way, we will actually be paying for the sustainable development of our country’s resources. Impose a capital gains tax or a windfall tax on the local petroleum conglomerate Petronas requiring them to channel a percentage of their profits into alternative fuel ventures.

Argue for the upgrade of public transportation systems nationwide to ease the burden on our overcrowded highways. Fight for the more efficient usage of non-renewable fuel sources such as petrol. If you’re going to politicize an issue, make it something that will change our fortunes in the next 30 years instead of quibbling over how much prices will change tomorrow.

On this one issue, I find fault with both ends of the spectrum: the government for its acti ons reeking of accommodate-ist misguidance and the opposition for failing to demonstrate that they can, when it results in the common good of all people, look beyond partisan politics and actually work with the establishment.

–
ANDREW WONG is a contributing writer for theCICAK.

Andrew is stuck in educational purgatory as he awaits admission to undertake his undergraduate degree. He spends most of his days lamenting about his lack of height. On off days, he compounds his misery by listening to A Perfect Circle.

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I still believe that a fuel subsidy is necessary, to a certain extent. Lets just say that if the subsidy is removed, the hole in my pocket will expand further. Anwar Ibrahim made a good point, we’re a fuel exporting nation, hence the price of fuel, should be less for us. It costsUSD 10 for 45 litres of petrol in Bahrain, that comes up to roughly RM 0.70 a litre, we’re paying almost 3 times that.

If the approach is correct, I believe the fuel subsidies can be maintained, if not reduced, I believe it should stand. The country is generating significant revenue from the oil business, the sad thing is, the money goes to mickey mouse projects like making teh-tarik in space, buying submarines that can never be used, etc. If all the money is put to good use, we can pay less for fuel, while our standard of living can be upped as well.

Thats the difficult part isn’t it?

Anyways dude, I know you’re making a stand, but trust me, if you were in my shoes, the fuel subsidy is a must, I take that you’ve yet to experience the pain..but then again I could be wrong.

Good points nonetheless.

Comment published by Spoonman on 15 April 2008.
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I’m interested to know some facts since we’re looking at the fuel subsidy in question.

1. What is the average income of a Singaporean? What is the average income of a Malaysian?

Also to consider, what is the population of Singapore, and what is the population of Malaysia?

Do all these have an effect on this discussion? Shouldn’t it?

2. We hear Najib Tun Razak insists that the fuel subsidy will sooner or later bankrupt the nation. When will this happen?

3. When you mention an alternative fuel source, what are you proposing? Because biofuels mean a higher cost of food, the electric car was killed before it matured, and LPG will sooner or later run out?

4. The failure to mention that we have no viable and reliable mass transportation should be addressed first before any mention of the removal of a fuel subsidy, should it not?

Don’t get me wrong, I agree with the notion that our government is wasting cash and people cannot simply rely on the subsidy any longer. However, the fault goes back to the government in not preparing for an alternative, or being totally inefficient in maintaining them.

Look at our bus companies for intercity travel. The lack of enforcement of safety regulations make them a death trap.

Komuters and all other train systems on the federal level can’t cope with the amount of people, and can’t even keep on time as it is.

Comment published by Aput on 15 April 2008.
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Oh goodie, my favourite topic.

Spoonman: Anwar Ibrahim made those comments to win the elections. Simple as that. This was also a man who said that when he was Finance Minister, he didn’t raise the price of fuel. Perhaps someone should remind him that when he was Finance Minister, fuel cost USD10 per barrel. Today’s price is USD114. And if he claims that it should be cheap since we are a fuel exporting nation, does that mean you agree that we should abolish all subsidies when we become a fuel importing nation in 2010?

Aput: You cannont compare the pay of the average Singaporean against the average Malaysian. Oil is a commodity traded on the world market that is benchmarked against the same prices everywhere you go. That means a barrel of oil in Mongolia is the same as a barrel of oil in Switzerland. Surely you are not saying that we should pay less for gold compared to Singaporeans just beccause we earn less? That logic only applies to essential food items, not to commoditites like oil.

Comment published by vincent on 15 April 2008.
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Actually, if we continue at our current rate of consumption, we’re set to be a net oil importer by 2010. You can check that out at http://biz.thestar.com.my/news/story.asp?file=/2007/6/29/business/18168826&sec=business
Also, I totally agree with you that there must be accountability if fuel subsidies were to be removed; which is why I mentioned in my article that should there be a removal of subsidies, there must be a system of check and balance to ensure that the money is chanelled to the proper development projects. I drive too. I understand the pain of having to shell out money for petrol. But with global petrol prices not set to reduce anytime soon, the idea of sustaining subsidies in the long run is economically not viable.

1. I mentioned Singapore merely to illustrate my point that we can and should survive without fuel subsidies. Also, while Singaporeans do have a higher income per capita, a lot of it is not disposable income as it is locked in mortgage payments, the GST and the high cost of living. On the issue of population, Malaysians definitely outnumber Singaporeans, but is that any reason for the sustenance of a fuel subsidy? We may certainly have a higher proportion of citizens living close to or just above the poverty rate. The removal of fuel subsidies will surely affect them first. But so will the fact that development projects specifically targetting the welfare of the poor aren’t getting the optimal level of investment. Fuel subsidies are non-progressive in nautre. They don’t distinguish between income levels. Right now, what we’re doing is making it easier for the rich to use more fuel.

2. I can’t say for certain when the country will go bankrupt but I sure wouldn’t want to stick around longer enough to see it happen.

3. I am no expert on alternative fuel sources but I don’t think I’m be wrong when I mention that palm oil is still a promising venture as a biodiesel. Also, taking into account our country’s climate, solar power remains a largely viable option. People in general have never even heard of Project Suria which is actually a federal project to install photovoltaic cells in private residences to generate electricity. However, the costs of participating in such a program is high. Funds diverted from fuel subsidies could go to making this option cheaper. Also, new technology has made it possible to maximise solar energy via parabolic troughs. These technologies are already being utilized in France and Australia.

4. I absolutely agree with you that our transport system requires serious reviews. But I do not think that the removal of fuel subsidies and the improvement of our public transport system are mutually exclusive events. Even more so, I feel that they should be pursued as concurrent goals. If we’re only going to wait for conditions to be perfect to make a change, we’re going to be waiting forever.

Comment published by Andrew Wong on 15 April 2008.
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Vincent,

You make a good point. Malaysia is projected to become a net importer by 2011, based on current known oil reserves. Technology has allowed the oil industry to forray deeper into seabeds and to once inaccesible areas to drill for oil, so there is a good chance that our status as net importer will be prolonged. On the bright side, we do have LPG for the next 40 odd years.

Maybe I was taking too personally, due the large chunk of my paycheck that goes to the gas station. Think about it, if the government does not optimize funds, it wouldnt matter if we have fuel subsidy or not. If they decide to open up a mamak stall on the International Space Station, we’re still going to the cleaners.

If the fuel subsidy is to be abolished, fine, we as the public need to know how it will impact us on the long run. Will tolls be abolished? or reduced? Will the pricing of general goods reduce? Will public transport be improved? Will alternative fuels be more accessible? Will higher grades of diesel be introduced along with hightened promotion of diesel engines ala. Europe?

There needs to be a certain degree of transparency here, it wouldnt make sense to pay more for fuel when we’re not getting anything else in return. This is not Singapore, where there are 10 double decker busses and 2 MRTs to a person in a country which isn’t any bigger than Pulau Indah, hence there is no actual need for a car, even if one owns a car, JB is right across the bridge, they’d rather fill up to the half tank mark there and drive back, that’ll last them at least two weeks, considering the size of the country.

Comment published by Spoonman on 16 April 2008.
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Hey Andrew,

Nice points. I just realized that we can’t decide on what should be done. Based on economics, fuel subsidy should be removed, but based on reality, well like I said, there’s no point if the money goes no where.

There’s one very important factor that we’ve not touched on, general public. Our country is, and most of Asia is not mature enough to accept these kind of changes. I would prefer for the subsidy to stay (for selfish reasons), but I can understand and accept if its abolished, because I understand basic economics. When the last fuel hike took place in 06, there were rallys in central KL, public calling for reductions. It was tough explaning to educated people why the prices needed to be increased, they found it hard accept, and different conclusions were formed.

In the western nations, due to increase in prices, the public has been made more aware on vehicle efficiency, cost saving methods, vehicle choices and so and so forth. Every car in Europe on US is advertised with how many Miles Per Gallon (MPG) you get and what the emission standards are. There are also numerous sources to understand what is the best ways to be efficient and to keep costs low. With all this, they are well prepapred, but what about us? Most people probably haven’t even heard of MPG.

Well, all I can say is, in order to draw conclusions, we need to see what the government can do with and without subsidy. If the former is better than the latter or vice-versa, it would be easier for the public to accept, it be easier for the masses to understand more importantly.

Great deal of transparency is required.

Comment published by Spoonman on 17 April 2008.
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Andrew,

I have to say that I agree with your viewpoints. Fuel subsidy is actually killing the country. With the kind of money that they use every year just to make consumer fuel prices lower, they could actually be using that money to improve on a lot of other stuff that require more attention. Even just to mention a few would be the health and safety standards for NS Trainees. (having 16 trainees die is not a joke).And then of course there’s the education system that requires some revamping. Improvements to kampung areas, and so on. Plenty of other things that can make good use of the money.

And what you’ve said is true, this requires a lot of transparency. And at the rate the present govt is going about things, it almost doesn’t matter anymore what they tell the public, because they’re not going to believe it anyway. The govt can say that they are going to reduce fuel subsidy, and use the money to improve health conditions, but the general sentiment would be “aiya, cakap sajalah…”.

But first and foremost, before the govt can do much about this fuel subsidy thing, the public have to be informed enough to know that the govt needs to take this step. I believe that most people in Malaysia don’t really realise how much the govt is spending every year to subsidize fuel prices. And some parties might know, but not care, as long as they don’t have to pay that much.

People assume that since we export petroleum, then we naturally earn much from the rising prices of fuel, and hence, this should reflect in fuel prices for Malaysians being lower. A myth, but one that is generally accepted. Perhaps because not many are informed enough about the economics of scale, and some are just blatant ignorant.

The people need to know what’s going on behind this fule subsidy thing, before anything much can be done, really. Because the people are, after all, the consumers. And consumer power is quite dangerous.

Great piece of writing, Andrew.

Cheers.

Comment published by Michelle on 19 April 2008.
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Corruption aside, the crux of the matter is pure simple economics. Firstly, the redistribution of income has to be fairer; secondly, transport efficiency has to go up.

In the first point, lest you forget, the government forks out a per unit subsidy, not a per household or per capita subsidy. This means that the people driving gas-guzzling SUVs get a higher amount of subsidy than the market aunties who only ride a motorcycle. In absolute terms, the rich benefit more than the poor from fuel subsidies and this shouldn’t be the case. Surely there has to be a fairer way of redistributing government funds.

While the savings from withdrawing fuel subsidies may be given as handouts in the early stages to help ease society into it, it cannot be a long term solution, lest we have a second NEP. In other words, the disposable incomes of the poor must be raised. Might there be a case for unionism? Sure, strikes are terribly disruptive to the society at large, but as it stands the position and leverage of our workers are minimal. Plus, the income per capita of our country is appallingly low, partly due to the fact that the Mahathir administration positioned our country as possessing cheap skilled labour. A repositioning and new niche must be found to stay competitive and yet raise our disposable incomes.

In the second point, this concerns the public transportation system. In order for our dependency on petrol to go down, our fuel efficiency has to got to go up. As the article already puts it, our fuel efficiency is appalling. (To be fair though, our GDP is lousy to begin with. In fact, statistics have shown that the market competitiveness of a country rises in proportion with its GDP. Malaysia is quite an anomaly in that sense, we are strongly market competitive yet with a disproportionately low GDP.) A gradual removal of the fuel subsidies coupled with an increase in the quality of our public transportation systems will force back the stigma of having to take the bus/train/LRT.

Penang will prove to be a testing ground for public transportation efficiency, especially since it has a higher population density that Selangor.

Interlinking our cities with high speed rails much like the UK would also encourage people to live further away from urban areas, creating new communities, and the decentralising effect should prove helpful in bringing down living costs through reducing rents and land-related overheads.

Ultimately, if I can get from Seremban to KL in half an hour by rail and also be confident that I can get around with minimal difficulty using the public transportation system, I don’t see why people wouldn’t leave their cars at home.

Comment published by Jonathan on 23 April 2008.
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