Friday, December 5, 2008

Malaysians paying a premium for fuel

News analysis by Izwan Idris - The Star Online - 5 December 2009

MALAYSIANS were paying RM1.52 per litre for petrol when crude oil was below US$50 per barrel 3½ years ago.

Today, we are paying RM1.90 per litre as crude oil hovered at US$48 per barrel yesterday.

Based on crude oil price at US$50 per barrel, the market price for RON 97, the most popular petrol grade sold at local pumps, is estimated at RM1.40 per litre. RON 97 accounts for about 80% of the more than one billion litres of fuel sold at local pumps every month, according to some estimates.

Analysts believe that pump operators have been paying duties for all fuel products since October. At current prices, that would translate to about 50 sen per litre in extra fuel revenue for the Government.

The volatility in the international crude oil market and the lack of transparency on how local fuel price is calculated make it very difficult to accurately estimate how much duty the Government has collected in recent weeks.

Crude oil hit a record US$147 in July, resulting in the Government having had to subsidise every drop sold at local pumps.

The global financial crisis turned worse after that, sending crude oil prices plunging. This resulted in six price cuts at local petrol pumps since August.

Recently, there had been talk about setting a floor price for fuel sold at local pumps. The extra income from duties collected for fuel sale will help the Government cut its budget deficit.

The funds could also be channelled towards pump-priming activities to prop up the economy, said RHB Research Institute in a note.

If a policy to set a minimum price for fuel were introduced, the additional revenue should be diverted to improve public transport facilities.

Fast-tracking projects such as expanding the Light Rail Transit network in the Klang Valley and building a new one in Penang, should be a priority.

Such projects would also give a much needed boost to the construction industry and alleviate traffic woes in the cities.

In the US, fuel sold at pumps is taxed. The money collected is used mainly for transportation-related projects. If not, then drivers should pay for fuel at market price, said Bank Islam senior economist Azrul Azwar Ahmad Tajudin.

He said the Government should divert funds from fuel revenue into developing alternative sources of energy. In Brazil, almost all light vehicles can run on ethanol made from sugarcane.

Back home, palm oil is blended with fossil fuel to make biodiesel, but its usage remains below expectations. Increased use of alternative fuels will lower demand for traditional fossil fuel, and help keep prices of petrol and diesel in check.

Using palm oil-based fuels would also lend support to the plantation industry that is now struggling to cope with the sharp decline in the price of crude palm oil.

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