Sober Thinking About Oil & Subsidies

Now that a few days have separated us from the shock of the sudden rise in the price of petrol, we can think about the issues a little more soberly. The cyberscene has been filled with a lot of venom against this development but in the last few days, other writers have begun to weigh in with more considered opinions.

Tan Teng Boo of iCapital.biz wrote:

“Maintaining the high level of subsidies is easy and politically popular but it would be an economic suicide. Subsidies are expensive not only in terms of the actual money being used but also in terms of the huge opportunity cost and the long-term adverse impact on the efficiency of any economy.”

In other words, you should put the revenue earned from oil sales to better use, rather than to maintain low fuel prices.

The question of course is, has this revenue been put to better use? Interestingly Malaysians did not really care much about this question when we were enjoying low petrol prices. As RPK puts it in his own special way:

“It is not Abdullah Ahmad Badawi’s fault. He has no alternative but to increase the price of petrol. Instead, we should be angry with ourselves. We kept quiet over 34 years since 1974. We did not care what they did with Petronas over 34 years since 1974. We did not bother to ask what they are doing with the estimated RM2 trillion of Petronas’ money. We did not demand that the public or Parliament get to peep into Petronas’ accounts. We just continued voting for Barisan Nasional over 34 years since 1974 without a care in the world. We should be angry with ourselves for the increase in the price of petrol, not with Abdullah Ahmad Badawi.”

http://www.malaysia-today.net/2008/content/view/8433/84/

Lee Siok Choo, in her column in The Sun, Making Sens, wrote:

… some politicians have argued that as an oil producer, Malaysia should price its oil much cheaper than non-oil exporting countries. This argument is flawed. Oil is a depleting resource and should be valued accordingly. Maintaining low prices will only encourage wasteful consumption, deter conservation and inhibit the use of renewable energy like solar and biofuels.

Oil producer Norway offers an excellent role model. According to Wikipedia, Norway’s petrol price is US$2.65 a litre – the second highest in the world and more than three times higher than the new price of US$0.84 a litre in Malaysia.

In line with its policy of preserving its oil wealth as long as possible, in 1990, Norway set up a State Petroleum Fund (SPF). All oil revenues, including dividends from state-owned Statoil, go to SPF. Worth US$388 billion at end-2007, SPF is the second largest sovereign wealth fund in the world.

http://sun2surf.com/article.cfm?id=22957

If something is cheap, we tend to waste it. If the global price of oil has risen in value, that value should be reflected in the price we pay. About the only way we can encourage a culture that conserves rather than waste is to impose a price penalty for wastefulness. Look around us: the trend is towards big SUVs and 4-wheel drives which are gas guzzlers.

Mohd Hafiz Noor Shams writes in The Malaysian Insider:

Higher global fuel prices require the structural transformation of our economy and the first step in transforming the economy is by accepting the fact that crude oil is no longer as cheap as it was in the early 1990s.

A continual upholding of subsidy policy delays the inevitable transformation required and the sooner we realise this, the better will we be prepared for the future. It is time for us to take the bull by its horn rather than sweeping the dirt under the carpet by continuing to adopt a policy burdened with a huge deadweight, as if the world has not changed.

http://malaysianinsider.com/mni/we-must-face-economic-reality.html

Basically the point is that there is a real chance that higher oil prices are here to stay, if not now, then in the foreseeable future. Our country must prepare for it. The sooner the better. Subsidising fuel prices will encourage more consumption, not less. Lowering the cost of car ownership, as has been suggested by some, will put more cars on the road. We need to think more strategically. And use the revenue we gain from high oil prices to prepare the nation for the time when we have no more options energywise.

And so I was happy to read that the president and CEO of TNB has called for a Malaysian energy policy:

“If you don’t have energy, the whole country is going to collapse and for Malaysia it is so timely for us to decide on our energy policy. Our oil and gas are going to deplete soon. When we don’t have oil and gas, how are we going to generate energy for the country? It is not just for the power sector but also the transport sector.”

http://www.theedgedaily.com/cms/content.jsp?id=com.tms.cms.article.Article_51706d31-cb73c03a-18992130-365b979a

But the most important point from that article is his final statement, “We don’t have that yet. We depend on imported energy (talking about coal) but we don’t have a policy.” Not having a plan for our future energy needs means making policy as we muddle along. Precisely what is happening now.

Goh Keat Peng, in his article in The Micah Mandate, rightly pointed our attention to the plight of the poor in these circumstances. However, the answer is not in subsidising fuel prices. This is because such subsidies are not efficient in alleviating the problems of the poor. People who consume more get subsidised more. It is the rich who will gain the most from lower fuel prices, since they own cars, and big, gas-guzzling ones at that. Furthermore, there is the problem of leakages, in terms of foreign cars and smuggling. Then too there is the question of priorities. If we are concerned about the plight of the poor should we not work to reduce the price of essential food items in the wake of rising commodity prices? What about health care?

The sudden rise in fuel costs have served to highlight the whole issue of our country’s energy needs and policy. We also need to think through our transport policy, especially the fact that we have two national car companies dependent on the domestic market for their survival. It raised questions about how revenues from our oil reserves have been, and should be, put to use. And finally, we need to think about putting into place programs that will be more efficient in helping the poor cope with the ever-rising cost of living.

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