Apparently Malaysia Can't Afford Fuel Subsidies Anymore

Last week, Finance Minister Tengku Zafrul Abdul Aziz expressed his intention to review the fuel subsidies currently in place due to the sharply rising global price of crude oil, which recently has exceeded US$120 per barrel (RM503.16), stimulated by the ongoing Russian-Ukrainian conflict.

A recurring concern of many lately has been the price of fuel, or more specifically how much the price of crude oil has to rise until the Malaysian government is seemingly no longer willing to offer the Rakyat the heavily subsidised RON95 at RM2.05/litre that has been the norm for the past year.

The magic figure, in Ringgit, might be somewhere around the region of RM28 billion as that’s how much Tengku Zafrul stated that the government may be having to fork out in 2022 to maintain the subsidised prices for petrol, diesel, and liquified petroleum gas (LPG).

In early March 2022, should the subsidies not be in place, RON95 would have reached RM3.70/litre, an RM1.65/litre increase that would have to have been compensated for. While it remains at RM2.15/litre, diesel has an actual cost of RM4/litre if not for subsidies.

Unsustainable But Still Workable?

He added that these will cost the government about RM2.5 billion a month, a more than tenfold increase from the RM200 million that was needed to cover subsidies in January 2021. For reference, Malaysia spent RM11 billion in overall fuel subsidies last year.

In reviewing the current programme, the government is looking into a more tiered system where lower-income citizens will be given a more heavily subsidised price while high-income individuals will have to pay more for fuel due to fewer subsidies.

This is in contrast to the current reality at petrol stations where the subsidised fuel prices are enjoyed by all regardless of income level.

“Therefore, the government will review the fuel subsidy mechanism to implement a more targeted and focused aid and subsidy to the vulnerable and those really in need,” Tengku Zafrul told the Dewan Rakyat during the Minister’s Question Time on Thursday (Mar 10), according to The Star.

The minister also mentioned that because the government could not borrow against these operating expenses (such as subsidies), they must be offset by increased revenue and cost-cutting, making a targeted subsidy programme the most obvious way forward. Or so the minister claims.

This large gulf in the retail price of fuel at petrol stations compared to the market price will, he added, likely result in an increased risk of ‘subsidy leakage’ caused by petroleum products being smuggled into neighbouring countries where pump prices are higher.

'Targeted Aid' - The Best Solution?

All that being said, there was no mention to address the eventuality that the prices of many everyday items will also climb if the retail price of fuel is increased and how this will impact the B40 and M40 categories that the government purportedly wants to provide targeted aid to.

By the way, similar efforts have been attempted and abandoned. Some were trying to disqualify luxury cars, others only focusing on B40 individuals somehow. It's messy.

There are a torrent of other questions this raises as a target subsidy programme can be somewhat ineffective at best or completely exploitable at worst if implemented poorly.

Perhaps it might be a more feasible option to have MyKad holders verified at the petrol stations before being allowed to purchase subsidised fuel. This is done frequently at bordertowns with Thailand and Singapore (at least before the pandemic) to prevent non-citizens from piggybacking off lower fuel prices here, so why can't it be done throughout the country?

Even then, to encourage more conservative use of that fuel, a certain monthly limit/quota can be imposed beyond which said MyKad holder has to pay a higher rate or a rate much closer to market price. Simply targeting Malaysians based on income level is not an accurate indicator of their lifestyle, level of disposable income or specific financial situation.

This would discourage many motorists from unnecessarily using the fuel they have in their tank and might even encourage more conservative driving, less speeding, using more fuel-efficient (or zero emissions EVs) cars, not leaving their vehicle idling for long periods when stationary just to use the air-conditioning, utilising more tolled highways to minimise driving distance, and not embarking on spur-of-the-moment meandering interstate road trips.

For most of us that spend most of our fuel on essential transportation such as commuting to work, a monthly quota between 80-100 litres of subsidised fuel would be a reasonable amount to expect us to not exceed.

There will also have to be numerous and very specific protections in place to not burden business owners and operators to ensure that the higher cost of fuel isn’t something that will be too burdensome when it is inevitably passed on to the end consumer - the Rakyat. Inflation could run rampant (more than it already is) and the cost of living could soar.

Is that worth more than RM28 billion?

Hangat-Hangat Tahi Ayam?

Again, simply having a blanket dividing line between those who receive ‘targeted aid’ and those who do not, in terms of increased fuel prices is a simplistic solution to a very complex problem, especially if the B40/M40/T20 categories are used. In this case, since higher fuel prices will potentially impact every sector of the economy, it is the very definition of ‘trickle up economics’.

All this might be moot if, as it has in the past, the price of crude oil starts to decrease after a periodical spike. In the last 10 years, we saw crude hit a similar high of USD105/barrel in late 2013 before sharply decreasing to around USD44/barrel in January 2015 and its decade-lowest in April 2020 when it was priced at around USD15/barrel.

Mind you, those peaks and valleys were all unmotivated by anything like the Russia-Ukraine conflict in terms of geopolitical tensions. Unless the government presents a convincing case to why they believe fuel prices will remain high over the long term, who's to say that this is all more or less temporary?