THE price of crude oil in the global market had fallen from the peak of US$110 per barrel in June 2014 to US$37 per barrel in December last year, primarily due to excess supply. The price had fallen almost 66 per cent in less than 18 months, causing alarm among countries dependent on oil revenue.

The large-scale production of shale oil by the United States is said to have increased its oil production, which contributed to the downward trend of crude oil prices. In addition, the 12-member countries of the Organisation of Petroleum Exporting Countries (Opec) have also decided to maintain the current oil production quota. The decision by some major producing countries to maintain their market position, even at a low price and subsidy rationalisation on petroleum products by many countries in the world such as India, China and Indonesia, also contributed to the declining trend in crude oil prices.

The price of petroleum products at the retail level is not directly related to the crude oil price. The retail price closely follows the price of refined products, which may vary for different product types. For example, during the period of January 2015 to December 2015, the refined product cost of RON95 was higher than the crude oil price by US$5 to US$20 per barrel, while for diesel, it was between US$5 and US$15 per barrel. The refined product cost commonly used in this region refers to Means of Platt Singapore (MOPS) average price denominated in US dollars.

In the Malaysian context, the retail prices of petroleum products, that is petrol, diesel and liquefied petroleum gas (LPG) is set through the Automatic Pricing Mechanism (APM) implemented since April 2, 1983. The control and setting of prices of petrol, diesel and LPG at the retail level through the APM mechanism is intended to stabilise the prices of the petroleum products.

The government in November 2014 decided that the retail prices of RON95 and diesel will be determined by a managed float system based on APM, starting from Dec 1, 2014, whereby changes to the retail prices of RON95, RON97 and diesel are to be made on the first day of each month. The average change in the cost of a product for the current month would determine the retail price in the next month.

In the past, especially when the crude oil price was high, the government would normally set the retail prices below the actual prices by providing subsidies. In 2014, the amount of petroleum subsidies provided by the government was RM17.7 billion. With the introduction of the Goods and Services Tax (GST) from April 1 last year, the government also provided GST relief for the retail sales of RON95 and diesel to consumers and selected sectors.

Although there was a sharp decline in crude oil price as much as 66 per cent over the last 18 months (July 2014 to December last year), it is not so in terms of refined products. The cost of products used in the retail price calculation based on APM is the cost of refined oil products and not the price of crude oil. The cost of refined products for RON95 only decreased by 22 per cent, that is, from US$73 per barrel in December 2014 to US$57 per barrel in December last year. The slower pace of reduction in the retail price is also compounded by the depreciation of the ringgit against USD. The average exchange rate against the US dollar depreciated by 23 per cent from December 2014 (RM3.51) to December last year (RM4.32).

As Malaysian crude oil is of higher quality and largely exported, oil companies in Malaysia partly import crude oil for their refineries. Companies without refineries mainly import all of their refined products. Thus, the exchange rate factor plays an important role in the determination of the final retail price of the petroleum products. In view of this, the proposed new pricing mechanism by certain parties, that is, to be based on the actual production cost of Malaysian oil refineries denominated in ringgit, is not feasible given that the country’s fuel needs are still being fulfilled by imports and they are denominated in USD.

Even within the existing pricing framework, the retail price of RON95 had decreased seven times, while diesel had decreased five times from December 2014 to January this year since the implementation of the manage float system based on APM. In comparison with the price of RON95 for December 2014, the retail price of RON95 in January this year had decreased approximately 18 per cent, while the retail price of diesel decreased by 28 per cent during the same period. These reductions are quite in line with the quantum of reduction in refined product costs, factoring in the exchange rates. The latest retail price per litre of petrol RON95 is RM1.85, RM2.25 for RON97 and RM1.60 for diesel, much lower than the retail prices in some of the countries in the region.

The writer is the secretary-general of
the Treasury, the Finance Ministry

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