Tag: fuel subsidies

Categories
Economics

[1718] Of would you rather have flexible prices, Jeff, or just cheaper prices?

MP Jeff Ooi said:

Yesterday, all four petrol companies in Singapore – Shell, Exxon-Mobil, Caltex and Singapore Petroleum Company – reduced their pump prices by 4 cents a liter for petrol. Diesel price remained unchanged at S$2.033/litre.

[…]

Currently, Malaysia retails petrol at RM2.70/litre and diesel at RM2.50/litre.

[…]

Incidentally, oil prices have fallen by about 7% since hitting a record high last Thursday. Oil prices fell to US$136 per barrel on Tuesday. (See Crude Oil price chart on the top right hand corner of this blog)

Will Malaysia defy the law of gravity, that what goes up must come down, and reduce the fuel burden on Joe Public? [Petrol price down… in Singapore. Screenshots. July 10 2008]

He seems to suggest that Malaysia should lower local fuel retail prices after global crude oil prices suffered a dip. Just like Singapore. He of course failed to identify or mention that prices in Singapore are free whereas Malaysian prices are inflexible due to our fuel subsidy regime.

As Friday has proven, the dip is merely temporary and more about fluctuation and not a general trend.[1] I am wondering if he would agree to increasing the retail prices whenever the global prices are up…

Whatever the MP feel, it would definitely be interesting if we have subsidy in an ad valorem manner. Under this arrangement, local prices will fluctuate according to global prices while the subsidy is set as a percentage of the fuel prices.

Regardless the cost and benefit of maintaining a subsidy, subsidy ad valorem-styled will certainly be a more robust policy compared to the current structure. More importantly, ad valorem subsidy will allow prices to act as a signal better compared to the current Malaysian policy.

The graph below illustrates the current subsidy program with local prices fixed regardless of global prices. The blue color represents the size of subsidy while yellow represent the amount paid for fuel by consumers. It makes our model far simpler if we assume that the consumer purchase only an unit of fuel per day. This assumption is made for simplicity’s sake and nothing else.

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As you can see, the subsidy merely acts as a buffer to fix local prices. If global prices actually go below the fixed level, tax is automatically introduced. Given expensive crude oil prices and the size of current subsidy at the moment, I doubt a tax would be introduced.

This policy probably be good if there is a tendency for global prices to revert to a mean. The fixed local prices can be the mean and this will mean in the long run, the cost of running the policy is zero, at least nominally.

The graph below illustrates ad valorem subsidy with the subsidy itself assumed to be at 40%:

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As you can see, the local price is capable of going low as global price drops, unlike as shown in the fixed local price structure. Depending on the subsidy, the size of subsidy can be made lower than what it will be under the other model.

The only weakness of ad valorem subsidy is that the subsidy lives on forever as long as the rate is above 0%. Compare this with the introduction of tax in the first scenario.

Due to reasons stated earlier — concerning signaling and robustness, as long as global prices do not fall below local fixed prices — regardless of my support for total elimination of fuel subsidy, ad valorem subsidy is better than the current fuel subsidy policy practiced by Malaysia.

And there you go: a simple analysis comparing two different subsidy policies.

I have a feeling that what Jeff wants is this…

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…which is totally an unreasonable and irresponsible policy.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[1] NEW YORK, July 11 (UPI) — Crude oil prices eased back after setting a record above $147 per barrel on the New York Mercantile Exchange Friday. [Oil prices ease after record Friday. United Press International. July 11 2008]

Categories
Events Photography

[1714] Of my Sunday’s afternoon in Kelana Jaya

After all the hype, it was as dull as The Phantom Menace.

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Metblogs KL has more (please do not take it too seriously).

Categories
Humor Politics & government

[1711] Of tailgate party in front of the Kelana Jaya Stadium tomorrow

The mercury is rising out there. With the Deputy Prime Minister has been accused of being linked to murder, a former Deputy Prime Minister accused of having too much fun while rumor of the announcement of emergency tomorrow, I think it is time to chill out a bit. There will be a huge gathering tomorrow. Initially supposed to bitch about greater fuel prices, Anwar Ibrahim is expected to make some big announcement. But us commoners should just let the big boys play the slugfest. We should just go up and enjoy the Sunday.

Tomorrow in front of the Kelana Jaya Stadium, let us drive our MPV, set up the grill and have a tailgate party prior to an announcement by Anwar Ibrahim that, according to a friend which heard from a trusted source which in turn was informed by the American intelligence, may set in motion a coup d’tat.

Bring a tent too. It will be hot tomorrow. Or rain. It is Malaysian weather after all. It is worse than Malaysian politics as you can imagine. In any case, you certainly will not want to miss the drama.

Forget not to marinate your chicken and beef and lamb and other edible stuff. And some turkey too, just in case we need to visit the Turkish embassy. But please, please, do not bring cat, dog or any exotic meat. Maybe some paddy chicken is alright since we expect a lot of human-sized frogs on Sunday.

And oh, if you plan to have a barbeque tomorrow, marinate your stuff today!

We could throw some balls too and play catch. And maybe, get your children to fly the flags of PKR. You know, like how they do on every football Saturday?

A coup d’tat? Sounds like a French delight, do you not think so? We must celebrate with clam chowder soup with french fries and maybe with some croissants with cheese. Haha. Instead of a civil war, we would probably go to war with the French over this. Aux armes citoyens!

And oh yes. Do not forget your “I Oppose Fuel Subsidy” banner tomorrow! Or “Change Your Lifestyle!” Or “Tian Chua for Prime Minister!”

Categories
Economics

[1684] Of we must face economic reality

After years of plugging a pinky into a hole of an imperfect dike, the rising tide behind it has grown sufficiently large that the dike can no longer withstand the pressure on the other side. The dike was not supposed to be there in the first place and now reality looms. In reaction to the recent removal of fuel subsidy, already there are voices on the street blaming the Abdullah administration of mismanaging the economy. This is a most unfair assessment. On the contrary, the subsidy reduction will benefit our society in the long run.

This accusation has history that goes well past June 5. Higher cost of living was one of the reasons cited why the Barisan Nasional lost significant votes to the Pakatan Rakyat candidates on March 8. In convincing voters to vote for the Pakatan candidates, Anwar Ibrahim had proposed to reduce retail prices of fuel to a level seen in 1990s.

Despite rhetoric, I absolutely doubt a Pakatan government could increase the size of fuel subsidy without hurting the economy in times when real crude oil prices are at record levels. In short, Pakatan’s argument against any kind of subsidy reduction is grounded on populism and not economic reality.

Malaysians so far have been lucky, from a certain point of view, that we are shielded from the harsh reality outside. That shield of subsidy, however, is costly and is definitely an inferior way of spending precious resources.

Instead of artificially fuelling consumption, these resources could be better spent to build capabilities, especially in education and research. More efforts need to be channeled to areas which could structurally improve the economy. A subsidy does nothing of this and it in fact only delays the inevitable march to move beyond petroleum at a very costly manner.

While lucky, I do not think we are learning from the past. We have been at this juncture before and there are lessons to be learned. In the 1970s and the early 1980s, high crude oil prices encouraged greater fuel efficiency. As demand fell with respect to supply due to increased awareness and requirement for conservation, prices dropped significantly and continued to stay low until around 2003.

I am confident that with the right policies in place, the structural changes that brought upon low energy prices in the past can happen again. The key phrase here is the right policies and one of such policies is elimination of the fuel subsidy.

The subsidy we have been enjoying masks the actual cost of consumption and the associated problems like pollution and over-consumption.

With everything masked, it is really hard to rectify any problem in the economy. It is like a noisy generator placed behind a blast door, operating at its breaking point where we do not have to hear the insufferable noise it produced. Despite the state of the generator, it continues to deliver power to us and it gives the perception that everything is fine and dandy when in fact, it is not.

We get the benefit but we are not paying for the cost. Thus, there is a grave disconnect in our cost and benefit model. By the time we find out that something is wrong, it would already be too late to do anything. A subsidy is that blast door and it prevents a signal of impending disaster from reaching us.

Truth be told, Malaysia is not the only country phasing out its fuel subsidy policy. Indonesia is on the same path as Malaysia’s while India and Taiwan are another two. It cannot be that all four different countries conspire to make the life of its own citizens harder. It cannot be that all four different countries are mismanaging their economy. The truth is that a lot of governments in the world are realizing the cost of fuel subsidy regime.

One argument puts forth that since Malaysia is an oil producer country, we should not be paying astronomical retail fuel prices. A tempting point but it fails to grasp the idea of trade-off. Pray tell, with fuel prices much higher, should we consume the fuel as if it is dirt cheap, or sell it to the world market and buy more education, more infrastructure that offer some guarantees of actual economic growth and if we could, buy a more sustainable economy?

The rise of fuel prices is a global phenomenon and the Abdullah administration has no power to dictate world prices. Whether we believe it or not, governments around the world are at the mercy of the invisible hand.

Blaming the Abdullah administration as the cause of higher fuel prices ignores the reality out there. An honest person is not interested in finding scapegoat but rather, is more interested in searching for the best policy fit given the current world scenario.

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 realize 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 dust under the carpet by continuing to adopt a policy burdened with a huge deadweight loss, as if the world has not changed.

In Malaysia, there is always a cynical saying about how we have first world infrastructure but third world mentality. Well, this crisis is a great opportunity for us to ditch third world policy for a first world and superior policy.

Besides, the Malaysian government is running on a budget deficit. That means you and I and a lot of Malaysians out there owe somebody money. We should be thinking on how to repay these debts.

By supporting fuel subsidy, however, we are basically swiping our credit cards liberally to finance our expenditure on food, fuel and none on investment for the future. How are we going to pay for these debts if we keep spending our resources so recklessly? Do we pass these debts to our children?

I vehemently say no. We are certainly more responsible than that. We must be more responsible than that.

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

p/s — a version of this article was first published in The Malaysian Insider.

Categories
Economics

[1675] Of a sustainable economic policy requires political sustainability

With the liberalization of the retail fuel market is making headlines on almost daily basis, the volume of liberal-friendly announcement has been dizzying. I am happy of the trend seen within the local retail fuel market of course but I fear the rate of change may be too fast for it to last for long.

Subsidy, as always, suffers from deadweight loss and that is the crux of any objection to it from mainstream economics. Other factors include over-consumption and externality: rather than internalizing externality, certain subsidies only make the matter worse. Affordability has been cited as a reason too but trade-off is a far better reason to oppose subsidy. Nevertheless, both reasons call for at least a reduction of subsidy, if not elimination.

The most neutral argument against subsidy, at least within the current Malaysian context, is the distribution of subsidy. If subsidy is a must, then I think some liberals would be happy to see some improvement in the subsidy delivery system. Typical economic tools which are superior to blanket subsidy ranges from cash transfer to tradable coupons to tax cuts.

After countless criticism aimed at the badly designed subsidy policy, it is heartening to observe that the government has finally endeavored to undertake targeted mechanisms and has actually considered money transfer — the most efficient of all welfare policy as proven by the Second Fundamental Theorem of Welfare Economics[0] — rather than relying on blanket subsidy which is always a blunt tool to help the poor while ruining the economy. If appeal to liberalism fails, then appeal to economics should do fine.

The direction of policies regarding retail prices of fuel is a cause for all liberals — the original liberals, I must add — to jump up and down until the floor gives way and then hold an all night long party in the basement. The speed at the current administration pursuing the matter is something else altogether. The political sustainability of the policy is a matter of concern.

Yes, it is a great tragedy that politics is not necessarily aligned with economics. What good in politics is not necessarily good in economics and vice versa. A sudden elimination of subsidy has a high chance of creating a backlash which may be detrimental to liberal policies. It has been reported that retail fuel prices will be floated to market prices in one go[1]and it is definitely not hard to imagine the kind of opposition such abrupt policy could garner from the public.

What we need are sustainable policies, both economically and politically. A sustainable economic policy without political sustainability is perhaps as useless as an unsustainable economic policy. A policy has to survive considerable amount of time for it to offer noticeable change. A one-time policy which in many ways mimics unsustainable policy only provides a short-term euphoria and may as well suffer from something to the effect of Ricardian equivalent.

Shock therapy may cause revulsion and eventual rejection and we do not need that. The best way to promote liberal economic policy within a heavily welfare-based society is through incremental approach. Gradual liberalization offers liberal policies the political sustainable we need to achieve economic sustainability. I would personally prefer a scheduled gradual reduction of subsidy that will eventually achieve parity with the world market price. Such measured liberalization has a better chance of weathering destructive populism.

There may be something behind this sudden fad of liberalization within the current administration. The magnitude of change is too large to not to attract suspicion. Perhaps, this is an act of desperation. Perhaps, the economic sustainability of the flawed subsidy policy has become too great for the administration to shoulder that political sustainability of the policy is entirely ignored

Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved Mohd Hafiz Noor Shams. Some rights reserved

[0] — In short, the Second Fundamental Theorem of Welfare Economics states that any efficient outcome could be achieved through lump sum transfer of wealth. See Fundamental theorems of welfare economics at Wikipedia for more explanation.

[1] — KUALA LUMPUR, June 3 (Reuters) – Malaysia will scrap fuel price controls in August and allow pump prices to rise in line with market rates under government plans to cut it’s burgeoning subsidy bill, the domestic trade minister said on Tuesday. [Malaysia to scrap fuel price curbs, use market rate. Reuters. June 3 2008]