Biting The Bullet - The Other Side's View

Continuing my practise of posting articles of what I consider as of public interest, I post here a column piece taken from The Sun, currently the most journalistic mainstream newspaper locally. If this still does not make any sense of the fuel price increase to you, nothing will.

Making Sens - By Tan Siok Choo

Petrol – rhetoric vs reasoned arguments

AMID the mélange of angry protests, incendiary rhetoric and reasoned arguments over the government’s proposals to increase electricity tariffs and to reduce subsidies for petrol, effectively raising prices by 40.6% to RM2.70 for petrol and by 63.3% to RM2.58 for diesel, several points need to be made.

First, assuming the need to reduce fuel subsidies, there is no good way to increase prices. Because the modern day economy is lubricated by oil, a hike in the price of petrol and electricity is likely to affect almost all homes and owners of motor vehicles. Furthermore, few like paying more money for essential items.

Some have suggested the government should have progressively reduced the level of subsidies, thus allowing prices to rise gradually. At first sight, this gradualist approach appears attractive. But India’s experience suggests otherwise. Even though petrol prices were raised by about 10%, this has triggered continuing strikes and demonstrations in the subcontinent.

Second, the politically cost-free option was for the government to do nothing. Prime Minister Datuk Seri Abdullah Ahmad Badawi said without revamping fuel subsidies, the government would have to spend RM28 billion this year, a sum equal to more than 18% of the government’s annual revenue. Against a backdrop of expectations that oil prices will continue to accelerate, this do-nothing approach could be financially suicidal.

Consumers in this country must be made to realise one salient fact – the era of cheap oil is over. Strong demand in Asia coupled with stagnant output among major producers suggest in the next two years, oil prices will remain high. Furthermore, expectations of a continuing weakness in the US dollar will drive more investment funds into commodities like oil.

Two forecasts by US investment banks underscore this new era of triple-digit oil prices. One of Wall Street’s biggest energy traders, Morgan Stanley, issued a report earlier this month predicting oil prices could surge to US$150 a barrel by July 4.

Last month, Goldman Sachs’ economist Arjun Murti said prices could escalate to between US$150 and US$200 a barrel over the next two years. Murti was one of the first to suggest in a March 2005 report that oilwould breach the US$100 a barrel level. Three years ago, when oil prices were about US$55 a barrel, his prediction generated much derision. Today, few will dismiss Murti’s forecasts as laughable.

Price trends in recent weeks suggest both forecasts could become reality – possibly sooner than expected. After hitting the then record high of US$135.09 on May 22 in the New York Mercantile Exchange (Nymex), oil prices slid to settle at US$121.61 a barrel in after-hours electronic trading last Wednesday. On Thursday and Friday, prices resumed their upward trajectory, surging to a new all-time high of US$139.12 before closing at a record US$138.54 a barrel. Last Thursday and Friday’s combined jump of US$16.24 in closing prices was the biggest two-day gain in Nymex’s history.

Third, 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.

Going forward, the Malaysian government must move decisively to increase this country’s efficiency in energy use. Priority should be given to improving public transportation. Encouraging the use of renewal energy sources, in particular solar energy and biofuel made from palm oil, should be stepped up.

Germany’s successful feed-in tariff policy, adopted in 2000, should be studied by our policy-makers. The policy – requiring utilities to buy all available solar energy from homeowners and farmers at prices higher than conventional energy – have helped to jumpstart its solar industry and made Germany the top solar market in the world.

Furthermore, while the revamp in fuel subsidies could cause temporary hardship for consumers and businesses in this country, it should also open the door of opportunity for ventures that promote fuel efficiency in cars as well as in homes, factories and offices. In short, the rise in fuel prices presents both a challenge and an opportunity.

Opinions expressed in this article are the personal views of the writer and should not be attributed to any organisation she is connected with. She can be contacted at schoo@noordinsopiee.com