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Siapa yang untung dengan sistem baru harga petrol?

December 25, 2014

Who wins with a managed float for petrol prices?

A managed float system with prices for RON95 petrol and diesel changing monthly protects consumers against price volatility at the expense of lower pump prices when crude oil prices fall. However, the reverse is true when crude oil prices inch higher.

The first day of December saw the introduction of a new system of determining pump prices of RON95 petrol and diesel. The new managed float system is more responsive to changes in the price of oil in international markets but it is by no means a true float.

Pump prices of RON95 petrol and diesel could change as frequently as every month under the new managed float system. The biggest change for Malaysian consumers is the loss of the fuel subsidy, which last year totalled more than RM20 billion.

The change to a managed float came about by circumstance. In a space of just four short months, crude oil prices have fallen by at worst 40%. Brent crude, the most commonly used benchmark, is now trading at the lowest level in years and has been intermittently under US$60 a barrel this month.

The reasons for the crash are complex but most experts cite a combination of slowing demand and oversupply from new shale oil production in North America. This new extraction method has made the United States almost self-sufficient in fossil fuels.

Saudi Oil Minister Ali al-Naimi
Ali al-Naimi

Then there is matter of Saudi Arabia and the Gulf states refusing to assume the role of a swing producer. “The best thing for everybody is to let the most efficient producers produce,” Ali al-Naimi, Saudi Arabia’s powerful petroleum minister told reporters at the weekend.

Middle East producers have the lowest cost of production in the world and Saudi Arabia traditionally leads OPEC members in cutting production during periods of low oil prices.

Malaysia is in a unique situation where there has been little to no direct benefit to consumers from the rout in oil prices. This is different to much of the rest of the world, where low crude oil prices have since translated to lower pump prices and lower fuel costs. All this has helped keep inflation rates in check.

In Malaysia, pump prices are in fact higher than at the start of the year, by as much as 16 sen per litre for the popular RON95 and 23 sen per litre for diesel.

Premium RON97 fuel, which has been following market prices for much of the year, has become cheaper but it is not a replacement to RON95 as it is significantly more expensive.

The first price increase this year was a 20 sen hike for both RON95 and diesel to RM2.30 and RM2.20 per litre respectively in October. Two months later on Dec 1, there was a downward adjustment of 4 sen for RON95 and upwards adjustment of 3 sen for diesel to RM2.26 and RM2.23 per litre respectively.

The last adjustment on Dec 1 came about with the introduction of a managed float for RON95 and diesel prices after the unsubsidised price for both fuels fell below government-regulated prices.

Based on a benchmark of wholesale oil prices in the region, the managed float determines pump prices based on the average of the Mean of Platts Singapore over the last 10 or 11 days of each month.

The final retail price is the sum of the Mean of Platts 10 or 11-day average and a fixed margin for oil companies and retailers (petrol stations).

To be specific, the fixed margin under the Automatic Pricing Mechanism (APM) of the Ministry of Domestic Trade, Co-operatives and Consumerism is set at 31.7 sen per litre of RON95 petrol and 22.8 sen per litre of diesel. The fixed margins are made up of the following components:

Alpha: The difference in price between the Mean of Platts and the actual wholesale price transacted by oil companies and refineries. Set at 5 sen for petrol and 4 sen per litre for diesel.
Operational cost: Transport and marketing costs set at 9.54 sen per litre for both petrol and diesel.
Oil companies’ margin: Revenue margin for oil companies set at 5 sen per litre petrol and 2.25 sen per litre for diesel.
Fuel retailers’ margin: Operators of petrol stations get a revenue margin of 12.19 sen per litre for petrol and 7 sen per litre for diesel.
Fixed-margin-component-of-petrol-and-diesel-priceIn addition to the fixed margin, there is an allowance for a sales tax to be applied on petrol and diesel of up to a maximum of 59 sen and 40 sen a litre respectively. There is no fuel subsidy component.

Comparisons with other markets for petrol and diesel in the region operating under free float systems show that the fixed margin promised to oil companies and fuel retailers in Malaysia is not onerous.

The gross margin after land costs in the Hong Kong retail fuel market was reported at HK$1.07 (47 sen) per litre for petrol and HK$0.74 (33 sen) per litre for diesel in a study by the Special Administrative Region government. This compared to 31.7 sen per litre of RON95 petrol and 22.8 sen per litre of diesel for Malaysia.

The same study found that the gross margins after land costs reported in Singapore were higher for petrol but significantly lower for diesel when compared to the Hong Kong market.

While the fixed margin promised in Malaysia to oil companies and fuel retailers is not high when compared to regional retail fuel markets, such a comparison is flawed because we are operating on a fixed margin basis while others allow market forces to dominate.

The question here is if the fixed margin is as low as they can possibly be? What if we were to switch to a free float and do away with the fixed margin? Would competition between oil companies then bring down the gross margins?

Another benefit of a free float as opposed to a managed float system is that prices can change more frequently than just at the start of each month, as is the case currently. This will benefit consumers when wholesale oil prices fall on a daily basis, as is also the case currently.

According to a PKR leader, MP for Pandan Rafizi Ramli, the current managed float system has resulted in the government secretly collecting RM274 million in sales tax on petrol over a period of 45 days between Nov 1 and Dec 15.

His calculations show that sales tax on petrol is in effect collected whenever the actual wholesale price of petrol falls to below the managed float price and increases as the difference between the two prices grow.

The opposite is true if and when actual wholesale prices rise and the government will in effect be subsiding fuel.

To sum up, the current managed float system is adequate in that it ensures a stable price for fuel. But this comes at the expense of not being to immediately enjoy lower prices for petrol and diesel when global oil prices fall. Then again the opposite will be true if and when oil prices rise again so it can be seen as a reasonable tradeoff.

This leaves two questions that need answering: Are consumers getting the best deal under a managed float with fixed margins for oil companies and fuel retailers or would a free float be better? And in the longer term, at which price will subsidies for petrol kick in again if oil were to go back up to above US$100 a barrel?


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