Thursday, June 5, 2008

The subsidy mentality

YAB PM has announced that the price of petrol has to be increased to RM2.70 per liter. With the price of crude close to USD 140/barrel, the government has to make this very necessary but unpopular decision. Indonesia and India have recently increased fuel price and getting general backlash from the public. The fact is that the price is dictated by market forces and subsidy will dampen development.

Now that the government has decreased the subsidy, it is now their responsibility to report on what will be done with the surplus resource. This needs to be communicated well and implemented in the best of methods to avoid further backlash.

Of late, we hear everyone suddenly becoming experts in the oil & gas industry, demanding that Petronas subsidize this and that. Although Malaysia produces some 600,000+ barrels per day, the production is not contributed from Petronas alone. Petronas relies on her partners, the Exxons, the Shells, the Carigalis and others to jointly develop our resources. Royalty money is paid to Petronas and the crude is split according to individual Production Sharing Contract (PSC). It doesnt necessarily mean that the government of Malaysia makes 600,000 x USD 140 = USD 84M/day! The lack of communication to the general public forces people to assume all kinds of formula on how much the government makes from oil & gas production.

After the massive win by PR during the 12th GE, one guy has been pushing hard to get Petronas to subsidize the construction of the second Penang bridge and give out subsidies for low income families. There was also a question about Petronas’ Philharmonic Orchestra and whether the spending is justifiable. Heck, let's just sell the Twin Towers to the highest bidder because it was a wasteful project and auction off Seri Perdana and all bungalows for Ministers and senior Civil Servants.

First of, we need to give a free hand to TSHM to steer the ONLY Fortune 500 in Malaysia without any political intervention. He is the “unofficial” Oil Minister by virtue of Petroleum Act 1974 and he is more than capable to manage the mammoth company. We are lucky to have him because believe me, he is severely underpaid compared to CEOs the likes of ExxonMobil, Shell, Chevron. I bet you if we increase his pay package, some quarters will start questioning why, why oh why (yes they have questioned why we are paying so much for the Petronas advisor).

Although the price of oil has increased and profit is rising, the cost of drilling wells has also increased tremendously. Rig daily rates can fetch anywhere between USD 100k-700k per day. Construction barge daily rates can fetch up to USD1M/day. We can’t afford to not invest more money in foreign countries as the findings in Malaysia have not been as extensive as before. The country will become a net importer in the years to come thus making it more imperative to increase investment and participation in other oil-producing countries. The subsidy on oil has to be decreased gradually despite pressures from the general public. If oil is expensive, we have to find creative ways to reduce cost.

For daily consumers, we need to find better alternatives to get to work either by taking public transportation, car pooling or buying fuel-efficient cars or converting to NGVs. Complaining will not help the problem. If the price of rice is too much, reduce rice consumption and increase consumption of bread. Inflation will come, it’s a matter of whether we are prepared to face it or not. The name of the game is maintaining competitiveness. If we fail to compete, we are destined to fall. If the local Mamak increases the price of icea Milo and roti canai, don’t go there, simple as that. Market forces will to some extent dictate the true market price.

Yes, people in the low income group will be affected tremendously. I believe Dato' Shahrir Samad is preparing a cabinet proposal to combat this problem. We shall see what the Government is planning and judge later.


Stupe said...

While it is understandable that the government is taking the unpopular step to make away with the subsidy and caused a 2 hours jam in and around KL yesterday, my take is still on what will they do with the surplus of money. Will it be used to subsidise more important things...such as food to start with?

Some of us can make away with fuel but not with food. Shahrir is arrogant by saying that there won't be any rolling over effect, and there is no reason that the roti canai and the mee goreng to increase in prices. I beg to differ. wait a few days and you will see the price of essential goods skyrocket and everyone pointing their fingers to the increased pricing of the diesel and petrol.

Don't forget, while the fishermen and the transportation sector will be enjoying their RM1.43/liter of diesel, the other transporter company is not getting that privy. THey are going to pay the full RM2.58/liter and it is not rocket science to figure out that the cost will be passed down.

I guess the whole issue is not the oil price rise per se, but the trickling down effect to other essential goods. The poor are going to suffer and the middle class like you and me are being pushed around. Nevermind the rich, i bet some of them don't even know the price of the current essential goods.

Stupe said...

oh ya...speaking not not going to the mamak that increase the price of their food, that goes across the border as well..i know for one chinese food isn't the cheapest thingy and it is simply unacceptable when they increase 50sen/bowl of noodle...because the price of (controlled) flour increased.

don't know about you, but i make my own bread. :)

Nim said...

if anything, i'm confused as hell by all the things i hear fr the experts (or the claimants).i guess it was inevitable that the subsidies would eventually be removed altogether.the govt always compares to other asean countries but what about some quarters who say we should be comparing to oil producing countries instead?and i dont think i (or many for that matter) would be complaining (as much) if we didnt have to pay twice the value for cars here just so Proton can still be a player.where's the money from those crazy taxes going if not for subsidies or to improve our flawed transportation system?

Wata said...

As someone in the oil and gas industry in Malaysia, I would be interested in the 'release' of natural gas prices. I calculate that the price of gas as a raw material has increased by 240+%, compared to the 50+% of petrol. So everything that depends on raw gas as a feedstock (plastics, industrial chemicals, pharm products) just took a hit. This would involve every company in the Kerteh Industrial Area (can you spell 'efficeincy' and 'layoffs'?) Note that fuelgas prices have increased as well, and matches the price we are now selling gas to Singapore.

opcharlie said...

i think we are fortunate enough to make a decent living and survive - the challenge is to help the unfortunate ones in the kampung and such. how do we elevate their economic value and move them up to a higher position in the human capital supply chain? KL folks especially the young executives can kiss my a$$, still drinking starbucks and fine dining at Bon Ton but bitching abt fuel price, while mommy and daddy pay for their car and house. they can shut their yap.

bats said...

mate, i'm all for free-er economics, but the subsidy mentality should be eased a little in all aspects. let's back off those APs and toll agreements a little. let's re-channel our funds into building the nation (education, as always).

let's thank petronas for their charity, remind them that they are a GLC and tell them to stop bithcing about the cost of exploration and get on with running their fortune 500 company. nearly all the major oil producers are in that class, so petronas better be there too.

if they got not enough money for exploration, save a bit by scaling down on the house band at the orchestra (if that is true, of course), re-evaluating some spending, and streamlining their business. you and me know that there are petronas engineers and oil traders that don't know how to spell "bisnes". what's the story there?

give your CEO a decent base, and everything else on performance based criteria. they're running a fortune 500 company, they pay consultants thousands a day to tell em how to stay in business... all spending la bro.

we've been sitting on public transport for years. thank god for LRT!!! otherwise, koyak jubo la. we could never sort out our bas system. intrakota, sri jaya, rapid.. is it that difficult? they're the experts when it comes to trasnportation, why can't they sort it out? not lucrative enough?

it's those things that frustrate us la. screw the starbucks yuppies la, we got enough to worry about on our own.