Roughly one week before the much-anticipated Budget 2016 review that will be announced on Jan 28, one federal minister told Malaysians that the government is studying whether it needs to impose a floor price for petrol. But it’s a bad, bad idea for the public.
So on Jan 20, 2016, Malaysians were told that the government is now mulling the need for a floor pump price for petrol in the country. The reasoning it seems is because global crude oil prices remain weak and may drop even further after dipping below US$27 per barrel as at the time of writing.
“We are studying what is the lowest price we can set. But for the time being, we will still use the float system,” Domestic Trade, Cooperatives and Consumerism Minister Hamzah Zainuddin was quoted as saying by Astro Awani.
But it’s a terrible idea as it defeats the purpose of the managed float in the first place, which was to remove subsidies while at the same time allowing Malaysians to pay less at the pump at a time when global oil prices have weakened.
And the worse part would be that with a floor price in place, Malaysians may end up paying to the government extra money that really should remain in their own pockets.
Recap – how managed float works
To understand exactly why a floor price is a horrendous proposition for the average Malaysian, it is worth revisiting how the current managed float works. A simplistic explanation is that the pump prices in January 2016 are based on the average spot price of Brent crude in the global market in December 2015.
However the average crude price is just one component in the overall calculation. Rather, the pump prices under our managed float is based on a reference price called the Means of Platts Singapore (MOPS), which not only factors in crude oil prices but also other costs involved in refining and logistics, for example.
Incidentally the other costs involved are why the movement of our floating pump prices may not always mirror the movement of Brent crude prices in the market.
In any case, the MOPS average is then added to other fixed margins under the Domestic Trade, Cooperatives and Consumerism Ministry’s Automatic Pricing Mechanism (APM) – these margins take into account operational costs, a fixed margin for oil companies as profit and a fixed profit margin for the owners of the petrol stations you fill up at, among other things.
The end figure after all these steps of the pricing mechanism are done would be the figure you pay for petrol, for example RM1.85 per litre for RON95 in January 2016.
Why floor price hurts
So that’s how the managed float works. Having a floor price however throws the system out of whack and may end up making Malaysians pay more than they have to for petrol at a time when living costs are rising on almost all fronts.
First, what does a floor price mean? Insofar as pump prices go, it would probably be a minimum price below which pump prices will not fall further regardless of how low crude oil prices or the MOPS average goes for a given month.
And after seeing Brent crude fall below US$27 per barrel this week, the lowest since 2003, it is anyone’s guess how much further prices may fall before it stabilises. Strictly in terms of fuelling up at the pump, this is good for Malaysians – paying less and less for every litre of petrol is nice at a time when we are paying increasingly more for everything else.
That is why having a floor price would suck. Essentially, with a floor price in place Malaysians would be denied potential price reductions after a certain point.
And after a Budget 2016 – before the revision coming next week, at least – that saw Putrajaya push most of the burden of belt-tightening to the average man on the street, this just adds salt to a tender wound.
But that’s not the worst part. If the Brent crude prices and the MOPS average fall low enough to cause the calculated pump prices to be below whatever floor price is set by the government, the difference would end up going to government coffers as tax.
And it would by no means be a trivial sum. According to Pandan member of parliament Rafizi Ramli, Malaysians use up roughly 30 billion litres of petrol each year.
That means that for every 10 sen extra that we pay for petrol, the government is probably pocketing RM3 billion every year – money that should remain in Malaysians’ pockets in these challenging economic times.
Best scrap this particular idea, dear leaders. Malaysians are already bearing too much of the brunt of the current economic turbulence and the least the government could do is not pile onto it.