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.