WHY MALAYSIA ’S DRASTIC FUEL PRICE HIKE IS A BLUNDER
          Proposing for petroleum income to go straight to Treasury

At this time of booming commodity and petroleum prices, Malaysia as a resource-rich and a substantial net exporter of oil and gas should wallow in such wealth, but instead its people are groaning under economic hardships.  This strange phenomenon is a clear indictment of failure of government, and the causes are attributable to long term and short term factors.
 
Long term factors: low income of the common people, due to decades of gross mismanagement.  Prolonged political hegemony by a racist regime has devastated the political, economic and social fabric of the nation, as reflected in the depravity of its democratic institutions, racial polarization, and entrenched corruption and cronyism.  Massive pilferage and squandering of public funds have impoverished the public coffers, while worsening economic malaise and widening income disparity under spiraling inflation have brought severe economic pressure on the common people.
 
Short term factors: the untimely and drastic increase of fuel price (41% for petrol, 63% for diesel) - by eliminating almost completely long entrenched oil subsidies in one go - has shaken the nation and caused an uncontrollable stampede to make hefty price increases across almost the entire spectrum of our economy, whether justified or unjustified.  Reeling under this sudden inflationary attack, consumer confidence has slumped, further aggravated a weakened economy.  The hardest hit are the poor who have found their currency shrunk overnight, and are now struggling to make ends meet.
 
The question uppermost in people’s mind is: why must the government deliver such a hard blow, and doing it at such a bad time when the country is already hard-pressed under global economic slow-down and rising inflation?  Isn’t Malaysia supposed to be awash with petrodollars with the current sky-rocketing oil prices?  Can’t the government use these extra dollars from oil to soften the impact?
 
The government advanced two main reasons for its decision to re-structure oil subsidies – to save subsidy costs which it claimed to be unbearable; and to reduce distortion to the economy. 
 
The government claims that, by such drastic reduction of subsidies, it could save RM13 billion.  However, after discounting the cash rebates of RM6 billion to vehicle owners, the net saving is actually RM7 billion.  This figure is pittance compared to the tens of billions of ringgit of leakages of public fund through the present corrupt system of government procurement, not to mention public wastages everywhere.  Considering that public procurement exceed RM100 billion in a year, losses through corruption and cronyism by not practising open and transparent tenders could easily surpass RM30 billion. 
 
If the government is sincere in uplifting the livelihood of the people, it should have embraced clean and competitive tenders, as promised by the Prime Minister when he came into power five years ago.  If he had done that, he would have shot two birds with one stone – bringing huge financial saving to bolster its treasury while vastly improving the competitiveness of the economy.  This measure alone would have been sufficient to achieve (in fact surpass) the objectives of the current subsidy cuts.

OIL BONANZA & PETRONAS
 
Even if a price increase is desirable, Malaysia as a net exporter of oil can still afford the luxury of doing it at the pace and time deemed least disruptive to the smooth running of its economy, unlike other countries which heavily depend on oil imports.
 
Another factor the government should have taken into consideration is that the current oil price surge (touching USD 145 per barrel today) is clearly unsustainable as the cost of production is unlikely to average more than USD 40 to USD 50 per barrel.  In due course, when speculative factors subside, prices should stabilise at a much more reasonable level.  So, why must we tango in strict tandem with the haywire prices at this particular time?
 
At this hour of desperate need for hard cash, much attention has naturally been focused on Petronas, which is supposed to reap the oil bonanza on behalf of Malaysians.  The question on everybody’s lip is: where has all our oil money gone to?
 
To assist in the understanding of our present oil windfall, I will attempt to outline a brief picture of our current oil wealth, based on Petronas’ annual report ending Mar 2007 and interim report ending Sept 2007 (the latest available in the Internet).
 
Malaysia produces about 700,000 barrels of crude oil and 950,000 barrels oil equivalent (boe) of natural gas per day.
 
Under the production-sharing contracts (PSC) entered into between Petronas and the various production contractors, Petronas’s shares of these productions are 75% for crude oil and 70% for natural gas.  That is to say, for every 100 barrels of oil and every boe of gas produced by the contractors, Petronas collects 75 barrels and 70 boe respectively free of charge from these producers, as all exploration and production cost are borne by the producers.
 
To appreciate how huge these annual free-of-charge collections are, I will translate them into dollar terms.   Assuming a more moderate price of USD 100 per barrel for oil and USD 70 per boe for gas, such annual collections are worth:
 
For oil: USD100 x 700,000 x 365 x 75% = USD19.2 billion
 
For gas: USD70 x 950,000 x 365 x 70%  = USD17.0 billion
 
Total                                                       USD36.2 billion
 
Converting to Ringgit at 3.2:                       RM115.8 billion 
 
 
Under Petronas’ accounting system, this RM115.8 billion will be reflected as net “profits??? after deducting export duty of 10%, royalties of 5% each to the federal government and the respective state governments and petroleum income tax of 38%.   On top of that, Petronas will also have to pay a certain amount of dividends to the federal government.  The remainder, which should still be an astronomical sum, would stay in Petronas as retained profits.
 
It will be seen that the entire collection at such newly elevated price level is so huge that it is much more than half of our national budget. Allowing such a big chunk of our national income to stay outside the ambit of Parliamentary authority will be making a mockery of our annual budgetary debate.  It is akin to fussing over small breakages of a fishing net when it is already defectively designed with an in-built large hole.
 
It is about time our parliamentarians consider amending the law to channel the entire collection under PSA straight into the national cofferS, and Petronas should only act as the government’s agent for collecting Malaysia ’s share of production and managing the upstream production business in Malaysia as it is doing now, for which it should be paid an adequate management fee.  I am quite sure Petronas is fully capable of standing on its own feet without relying on such oil collection as its income, as it has already evolved into a full-fletched operator in this field.
 
With such additional infusion of oil wealth, the government’s coffer will be instantly strengthened, thus enabling the government to speed up the implementation of essential infrastructure projects to boost the economy.  There is, however, a qualification to this scenario.  Which is: sustainable prosperity will only come if, and only if, we have in place a clean and efficient government –  distinct from the present decadent regime.
 
The writer, Kim Quek, who is an accountant by profession, has written extensively on the socio-political issues confronting the nation. His collection of past writings and essays had been collated and published in a book entitled "Where to, Malaysia?".