MALAYSIA'S share of oil production is less than one per cent of the world's output and its known reserves are less than 0.5 per cent of global reserves. Malaysia's daily production is 700,000 barrels, compared with Saudi Arabia's 10.4 million barrels.

However, with the rising global oil, food and commodity prices, the battle cry of some Malaysians is to use Petronas' oil revenue for subsidies as the country is an oil exporter.

They argue that the high, and very volatile, oil price yields a higher revenue for Petronas and that these should be channelled to help the rakyat. The fact is this is being done. Ninety one per cent of Petronas' revenue is channelled to the government, leaving it with nine per cent for reinvestment.

Petronas contributes more than 40 per cent of Federal Government revenue. Since its inception in 1974, the national oil corporation has paid the government RM403.6 billion. This is about 50 per cent of the government's development expenditure from the Third Malaysia Plan (1976-1980) to the Ninth Malaysia Plan (1996-2010) period.

In fiscal 2008, the national oil corporation contributed RM67.6 billion to the government.
At this level, its contribution is more than the collection from the corporate sector and income tax, which total RM43.8 billion.

Development projects such as roads, schools and hospitals financed with Petronas funds benefit the rakyat, improve the quality of life of Malaysians and lay the infrastructure and foundation of national growth for the longer term.

In addition, Petronas has contributed to national development through corporate social responsiblity projects.

It has financed human resource development through investment in Universiti Petronas, provision of scholarships and vendor development.

For the national oil corporation to continue with its operations, generate profit to provide funds for the government's coffers and finance development for the longer term, it must continue to invest in exploration and other related activities. The cost of exploration has risen drastically and the newer fields, which are in deeper waters and further offshore, are increasingly more expensive to exploit.

It also needs to diversify its operations and seek opportunities overseas as Malaysia's own resources are limited.

To its credit, Petronas has done that over the years. Today, with operations in 38 countries, its international operations constitute the bulk of its revenue, overtaking exports. For the fiscal year ended March 31, 40.3 per cent of total revenue came from its overseas operations, surpassing revenue from domestic exploration.

Some argue that Malaysia's oil wealth belongs to the people and that profits earned by Petronas should be returned to the rakyat in the form of subsidised petrol prices.

Undoubtedly, Petronas funds have been used to provide petroleum and gas subsidies. But direct oil subsidies complicate macro economic management, are inefficient and inequitable with substantial opportunity costs in terms of revenue forgone.

Direct subsidies, in addition to being unsustainable, also hide the true cost. They do not reduce inflation, as they hide the fact that the prices of goods and services are rising and increase government deficit.

If fuel subsidies had remained at the old level, the government deficit of three per cent would have increased to between eight and 10 per cent of gross domestic product (GDP). This situation, according to Second Finance Minister Tan Sri Nor Mohamed Yakcop, would be similar to an individual borrowing to the limit on all credit cards and then borrowing from Ah Long.

This will send a wrong message to the market, and the economy will be adversely affected due to the unacceptable and unwelcome consequences.

In the face of an uncertain global economic environment, rising inflationary pressures, the subprime mortgage crisis in the US which started last August and is yet to play out and with signs of it spilling onto the real economy, it is important for the government to be in a strong financial position and the flexibility to respond to changing circumstances.

It is important that governments, including our own, manage their limited finances prudently and not succumb to populist policies. That would be the easy way out. But leadership, and responsible leadership in particular, demands the right policy measures, even if they are unpopular, that are good for the long-term survival of the nation and benefit the rakyat.

Malaysia's economy is one of the most open and dependent on trade. What happens in the rest of the world affects Malaysia's economy. It is important, therefore, to build strong domestic defences to cushion the impact of the adverse external environment on the local economy and the people, especially the poor.

Thus, the higher revenue earned by Petronas should not be wasted on direct subsidies which, according to Professor Danny Quah of the London School of Economics, had reached a "tipping point". The government, he added, must be pragmatic in dealing with the oil revenue. These must be prudently managed to provide the "biggest bang for the buck".

The government's subsidy bill has been steadily rising. Last year, it spent RM53 billion on fuel subsidies -- RM33 billion on diesel and petrol and RM20 billion on natural gas. If the government had not restructured the oil subsidy, the bill would have exceeded RM60 billion. (Between March last year and March this year, Petronas' subsidy on gas to the power sector and industry totalled RM78 billion.)

Steps have been taken to restructure the subsidy and minimise the impact of rising fuel and food prices on the poor and those in the lower-income groups.

Towards this end, a whole range of essential food items continue to be subsidised.

The subsidies are targeted, more focused and equitable. Besides, the lower subsidies at the pump, which resulted in higher pump prices, reduce leakages and discourage over-consumption.

Public transport operators, those who use petrol-powered taxis and hire cars, are eligible to buy petrol at a lower price of RM1.92 a litre, up to 720 litres per month for each vehicle.

The fleetcard offers a lower price for diesel taxis and buses. This is to keep transportation costs affordable as the public transport system is mainly used by the lower-income group.

With the expansion of the fleetcard system, less than 20 per cent of diesel consumption will be affected.

There is no reason for businesses to raise prices and blame it on the increase in the diesel price.

Direct benefit also accrues to car owners in the form of rebates -- RM625 to owners of cars below 2000cc. A car owner who decides not to use his vehicle but opts to use public transport will still get the rebate.

With this shift, the move to reduce consumption is not blunted.

Indeed, since the reduction of petrol subsidies, there have been fewer cars on the roads as more people are using public transport.

This has to be a positive move in conserving energy and ensuring that our limited energy resources last longer.