In Budget 2022 presented in November 2021 by the Finance Minister, the crude oil price forecast was based on price of US$67 (RM281.40) per barrel for Government revenue projections. Based on this forecast, the government was expected to collect some RM43.9bil in terms of petroleum-related revenue. The bulk of this is in the form of the annual dividend from Petroliam Nasional Bhd (Petronas) amounting to RM25bil, the Petroleum Income Tax (or PITA) of RM12.4bil and other forms of petroleum-related revenue of RM6.5bil.
At the same time, the government was also expected to spend a considerable sum in the form of subsidies, especially those related to the retail price of petrol. Based on data that was provided in the Budget 2022, some 5.2% of the total planned expenditure goes towards subsidies and social assistance, which translates to about RM17.4bil.
The forecast petrol subsidy based on a crude oil price of US$67/barrel was probably just about RM4.4bil for 2022 based on Star columnist Pankaj C. Kumar’s estimate.
Hence, with the consumption of approximately 22 billion litres of subsidised petrol/diesel per year, the government was prepared to subsidise approximately 20 sen per litre based on the RON95 market price of RM2.25 per litre against the controlled market price of RM2.05 per litre.
The Minister also commented that the price of RON95 is presently subsidised as much as RM1.65 per litre based on a fair market price of RM3.70 per litre.
Assuming a similar RM1.65 per litre subsidy is also accorded to diesel, the government is set to subsidise close to RM3bil per month (based on the consumption of 1.83 billion litres of petrol/diesel per month multiplied by RM1.65 per litre). In essence, the government subsidies for petrol and diesel are highly correlated to the global crude oil prices and for every US$10 (RM42) price change, the government’s fuel subsidies changes by approximately RM610mil per month or RM7.3bil per year.
With the higher oil prices, the government’s revenue is set to improve and this could be both in the form of Petronas’ dividend and other petroleum-related taxes and payments. This is estimated to be about RM7.8bil for every US$10 (RM42) change in the Brent crude oil price.
Hence, on a net basis, the government will still be able to afford these subsidies, but the nation loses out in terms of revenue when subsidies are extended fully.
Judging from the data in the table (above), one can see the vast disparity in Asean countries with a median and mean price of RM5.54 and RM5.39 respectively. In fact, Malaysia’s fuel prices are so low that we are presently ranked 12th cheapest in the world.
The vast price differential among Asean countries is due to taxes being imposed by the respective governments to curtail consumption and encourage consumers to switch to more affordable public transportation.
Malaysia too has a taxation mechanism in its fuel calculation as the automatic pricing mechanism (APM) adopted by the Government which calls for a tax of 58.62 sen per litre for petrol and 19.64 sen per litre for diesel. However, this is not imposed when the government steps in to fix the price at a certain level, which is what we have today for RON95 at RM2.05 per litre.
RON97 takes the full impact of oil price increase and that in a sense reflects on those who could afford it. To get rid of subsidies all together will trigger higher inflation as many items will be impacted by a rise in transport costs. There is no easy solution, between “market” forces and controlled price increases. For the B40 and M40 it is necessary that costs are tempered by subsidies, otherwise they face further depletion of their disposable income. Anyway with GE15 seemingly soon, the Government will restrain any increase in the price of RON95 and diesel in the foreseeable future.
Reference:
Malaysia’s boon and bane, Pankaj C. Kumar, The Star, 19 March 2022
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