Petrol prices at the pump have gone up by 10 sen to RM2.15 per litre for RON95 and 20 sen to RM2.55 for RON97 for the month of July 2015. This is despite the price of Brent crude oil per barrel trending downwards for the month of June 2015 versus May 2015.
However, retail petrol prices have gone up because the price of Brent per barrel is only one component out of several which go into the calculation of the Mean of Platts Singapore (MOPS) benchmark price which is used under Malaysia’s managed float system which came into place on Dec 1, 2014.
From then onwards, retail petrol prices are set based on a month-to-month basis based on an average of MOPS prices plus a fixed margin for oil companies and retailers.
Performance Management and Delivery Unit (Pemandu) associate director Kelvin Tan explained “the Malaysian pump price floats in the sense that it is unsubsidised. Whereas in international markets pump prices can fluctuate even on a daily basis, the Malaysian pump price floats on a lagged basis, so that the current price reflects the average spot price of the previous month”. This means that July’s pump prices will be based on June average prices.
“Also, pump prices are not solely based on crude oil prices. Rather, they are based on a reference price called ‘Mean of Platts Singapore’ (MOPS). MOPS does not just take into account crude oil prices, but also certain refining, logistics and other costs as reflected in the marketplace,” explained Tan.
Therefore, while MOPS prices might track crude prices, it will not track it exactly because of the other cost components. The two will usually move in a similar direction to each other, but not necessarily on an identical path.
As can be seen in the chart, since RON95 pump prices began to be determined by a managed float last December, it has more or less trended in the same direction as Brent crude. However, for June 2015, the pump price moved in the opposite direction to Brent prices; this might be because the MOPS prices are not based on a calendar month average.
Therefore, if there is significant changes to any of the cost components towards the tail end of the month, this would be reflected in future monthly MOPS prices.
The MOPS average is then added to several other fixed margins under the Automatic Pricing Mechanism (APM) of the Ministry of Domestic Trade, Cooperatives and Consumerism. This is set at 31.7 sen per litre of RON95 petrol and 22.8 sen per litre of diesel and 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.
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, but no fuel subsidy component.
Tan said that from an economic perspective, the system theoretically could be improved because although the regional price is set by the market (through the MOPS monthly average), Malaysian unit margins at the oil companies and dealer level which contribute to the final retail price are fixed and are not dependent on market forces.
He added that allowing the margins to be determined by market forces would be from an economic standpoint, more efficient. However, this would not necessarily be perceived as a benefit either by the consumer or the oil companies and dealers, said Tan.
“In the near term, it is not clear whether consumers benefit or are disadvantaged by fixed margins. When you set fixed margins for dealers and for oil companies, it is naturally not clear if market set margins would be higher or lower. So prices could be higher or lower if margins were to be set by the market. Further, they might be higher in some places and lower in others.
“So while it is a more economically efficient system (to leave margins entirely to market forces) there would be winners and losers and we would not know in advance who those winners and losers are,” opined Tan.
“The current managed float system is a less volatile system,” he added.