Oil price highest since 2008, but Malaysia is not profiting from it, here’s why

Crude oil is now trading at its highest price since 2008. Yesterday, the Brent crude oil index climbed past USD 130 per barrel. Analysts say escalating conflict between Ukraine and Russia could worsen energy supply situation, pushing prices past USD 200 per barrel.

Closer to home, Malaysia’s crude oil export follow the Tapis index, which is now trading at around USD 132 per barrel, twice its average price in 2021.

The oil and gas industry is Malaysia’s most important revenue generator, contributing 20 percent of Malaysia’s annual Gross Domestic Product (source: MIDA).

In theory, high oil prices is a boon for Malaysia, because it also means that Malaysia will earn more from its oil export. But that’s not happening at all, because our Ringgit continues to remain weak – still at RM 4.18 today, 40 percent lower than in 2012 - despite the higher foreign exchange earned from higher priced oil exports.

So what went wrong? Two words – fuel subsidies.

RON 95 petrol is now capped at RM 2.05 per litre, while the standard Euro 5 diesel (B10 biodiesel blend) is capped at RM 2.15 per litre. Unsubsidized RON 97 petrol is now selling at RM 3.75 per litre - that's the true market price for petrol, and it's a rate our friends in Thailand and Indonesia have been paying for years.

So on one end, high oil prices will boost export earnings. At the other end, it also means that the government has to spend more on fuel subsidies, effectively negating most of the gains from higher crude oil prices.

Now do you understand why fuel subsidies are so stupid? Still, no Minister wants to touch this topic with a ten-foot pole because removing fuel subsidies is political suicide.

Granted, with the ongoing Covid-19 situation and a business environment that is just barely recovering from MCO, we have to recognize that now is a terrible time to pullback on fuel subsidies.

But here’s the thing, no one wants to talk about removing fuel subsidies when the economy was in a better shape either.

It doesn’t matter which side of the political divide, all political parties will attack any Minister who proposes to remove fuel subsidies, because in the eyes of short-term-minded, shallow-thinking voters - who unfortunately number a lot - a government that removes fuel subsidies is a government that doesn’t care for the people’s welfare, and it's a sentiment that shrewd politicians will be happy to amplify.

Earlier this year, analysts at UOB estimated that Malaysia’s fuel subsidy cost for 2022 to be at RM 18.6 billion, assuming the crude oil prices will average at USD 90 per barrel (may no longer be true if the Russia-Ukraine conflict continues longer).

If the average crude oil price goes past USD 100 per barrel, the cost of fuel subsidy for Malaysia will balloon to RM 24 billion.

Malaysia’s capped price for petrol (RM 2.05) and diesel (RM 2.15) assumes crude oil price to average at USD 60 per barrel. At this level, the government doesn’t have to pay any extra in fuel subsidies.

UOB estimates that for every 1 USD increase in crude oil prices above USD 60, Malaysia has to pay RM 600 million in fuel subsidy per year, assuming petrol and diesel consumption to be at 25 billion litres.

Meanwhile, every 1 USD increase in oil price above USD 60 will bring an additional RM 300 million in export revenue to Malaysia. In other words, Malaysia will still lose, no matter how high crude oil prices go.

Also, there’s a correlation between cheap fuel prices and low salaries. If you want higher salaries, you have to accept higher fuel prices, because that’s just how the economy works.

Cheap energy encourage employment of cheap, low skilled foreign labour, thus keeping salaries depressed.

Meanwhile, high energy prices encourage investment into more energy efficient technologies, which in turn require higher skilled talent and service providers to develop, manage, and maintain.

It’s also why green technologies like renewable energy and electric vehicles are progressing at a much faster rate in Thailand than in Malaysia.

If you pay RM 4 per litre for fuel, you too will start thinking about hybrid and electric vehicles, which in turn creates demand for businesses to build the supporting ecosystem.

Also read: Toyota doesn’t sell hybrids in Cambodia, so why is Phnom Penh SEA’s Prius capital?

Of course, this is a generalization and we recognize that there are many more factors behind stagnating salaries than just cheap fuel.

But without digressing this into an unnecessarily academic post, the general rule of thumb still applies – countries that spend money to subsidize fuel cannot progress far because fuel subsidies take money away from investments into schools, universities, hospitals, infrastructural projects like improving telecommunication and roads in rural areas - things that will improve the living standards of everyone in the longer term.

Spending RM 18.6 billion on fuel subsidies instead of healthcare, education and infrastructure is an extremely unproductive use of tax money, but this is the will of the majority of voters so this is what the government will deliver. 

Improving education, healthcare and infrastructure will have a far bigger longterm impact on the country’s economy and its talent pool but the problem is that such investments take at least 5 to 10 years to materialize, maybe even more, before the public can see its impact.

Cheap fuel is an immediate popularity boost and can win a political candidate's election tomorrow, while the impact of upgrades in healthcare and educational reform will only benefit the next guy in the next election, so why bother.

This is why no minister here will want to talk about removing fuel subsidies, but you as a stakeholder of your children's future and this country's future, will need to think about it.

To a politician, what happens 10 or 20 years later is somebody else’s problem. It’s not like the guy who is standing for election educates his / her children in a local public school anyway, or send their family members to a local hospital.

There is never a right time to cut fuel subsidies. There will always be push backs and excuses, short term pain is to be expected, and it takes a strong leader to push it through.

In 2014, Indonesian President Jokowi bit the bullet to remove fuel subsidies, freeing up billions of dollars in its national budget and today, 8 years later, we can see how much the Indonesian economy has  progressed.

The lack of fuel subsidies is also why Indonesia is now attracting so many electric vehicle-related investments in the region.

Also read: Indonesia starts work on SEA’s first EV battery manufacturing plant – cuts reliance on commodity exports

Petrol price is now floated on an open market but diesel is still subsidized at IDR 500 (RM 0.15) per litre, to aid industries and the logistics sector, but there is no ceiling price.