WHEN Budget 2022 was presented in November 2021 by the Finance Minister, the government’s revenue was based on a crude oil price forecast of US$67 (RM281.40) per barrel.Based on this forecast, the government 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.

       However, this expenditure is still rather loosely defined as a more detailed breakdown suggesting that the government expected to spend some RM6.2bil in petrol (which includes RON95, diesel, and liquefied petroleum gas (LPG)) and toll subsidies and others.

       Hence, the forecast petrol subsidy based on a crude oil price of US$67/barrel was probably just about RM4.4bil for 2022 based on this column’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.

       Petrol price asean

       More subsidies?

       According to the Finance Minister, Malaysia is set to fork out RM28bil this year if oil prices stay above the US$100 (RM420) per barrel mark.

       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.

       Malaysia uses the Means of Platt Singapore or MOPS as a reference price to derive the retail price of petrol in the country and the above comments were made when Brent was trading at about US$120 (RM504) per barrel, as against US$108.89 (RM457.34) per barrel at the time of writing.

       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, based on this column’s estimates.

       Of course, with the higher oil prices, the government’s revenue too 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.

       Are subsidies affordable?

       Providing social assistance to Malaysians of need is the job of any government that sits in Putrajaya.

       However, before we agree that subsidies are bad for the people as it encourages not only wastage but also smuggling activities, we must take note that the reason why the government is stuck in this perpetual argument as to whether it should subsidise petrol products or not.

       In other countries, and we don’t have to go far for this to make a comparison, petrol prices are not only actually sold at market prices, but they are also taxed.

       Figure 1 provides the current market prices of petrol in various Asean countries.

       A tax on fuel is a norm

       Judging from the data in the table, 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.

       For example, in Europe, based on data provided by https://countryeconomy.com, where prices ranged between €1.30 to €2.35 (RM6.06 to RM10.95) per litre of fuel, the tax component itself is between a subsidy of €0.17 (RM0.80) per litre to a tax of €1.52 (RM7.06) per litre.

       Malaysia too has a taxation mechanism in its fuel calculation as the automatic pricing mechanism (APM) adopted by the government 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.

       Distortion from price control

       Malaysia again missed the opportunity to play catch-up with the rest of the world when oil prices dropped drastically in 2020 after the pandemic.

       Instead of taxing fuel, Malaysia decided to be generous and cut fuel prices even to as low as RM1.25 per litre in April 2020. However, as prices gradually climbed back, Malaysia only adjusted the prices to the level when prices hit RM2.05 per litre in late February 2021.

       Thereafter, as prices continue to rise, not only did Malaysia maintain the price, the element of subsidy kicked in.

       When fuel is cheap, it encourages wastage as consumers are not made aware of the actual cost of a particular product. Just like water, which is a finite resource, providing free water is simply a populist move and the cost to generate treated water to consumers is many times more than the actual price we are paying.

       Fixing RON95 or diesel too is a populist move and by right, the government should move away from subsidies and let the consumers pay what the market price is.

       RM30bil APM difference

       Assuming if we go back to the APM that we have, the government will be collecting RM10bil in revenue and probably saved some RM20bil in subsidies if global crude oil prices average US$88 (RM369.42) per barrel this year.

       Hence, the difference between the subsidy provided and the tax collected is a huge RM30bil difference, which can be used to provide targeted assistance to the B50 group.

       Yes, adjusting for fuel prices is painful, but if even countries like Laos, Cambodia, Thailand, and Indonesia can do it, why can’t we?

       Why should we subsidise fuel when the government’s coffers are in dire straits?

       The elephant in the room

       Providing blanket subsidies is not the answer and targetted subsidies are difficult if prices are not adjusted.The best way to address this issue is to make necessities more affordable.

       This can be done via a better wage structure, starting with a minimum salary that reflects reality.

       A higher minimum wage will encourage workers to be better compensated and any market price changes for basic needs are easily absorbed.

       To do this, the government should set a timeline as to when it intends to move towards market-based pricing to enable the general public to adjust their consumption pattern as well as to enable the adjustment to be absorbed into the economy, especially with respect to inflation expectations.

       In conclusion, while the higher oil price is a boon for Malaysia, which will enable the nation to improve its petroleum-related revenue, it is also a bane for the government in the form of subsidies.Pankaj C Kumar is a long-time investment analyst. The views expressed here are the writer’s own.