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Setting the retail price for petrol and diesel
Sun, Feb 15, 2009
The New Straits Times

By Ismail Ahmad

HOW does the government determine the price of petrol?

While not exactly rocket science, it is nevertheless a complicated computation, taking into account a range of factors and considerations, which is used to decide how much it costs to fill up your tank.

Since 1983, the retail price of petrol and diesel is set using the Automatic Pricing Mechanism (APM).

Through it, the government sets the retail price for petrol and diesel at a level where fluctuations in the cost of the product will not affect the retail price.

The APM ensures the difference between the retail price and the actual price will be borne by subsidies and sales tax exemptions.

It also standardises the price of fuel at pump stations, fixes the margins of oil companies and dealers, ensures distribution channels are secure and minimises disruptions of petrol and diesel supply.

Components that make up the APM mechanism include:

i Cost of product

Like most countries in the region, Malaysia uses the daily average price of "Mean of Platts Singapore (Mops)" to determine the product cost for petrol (RON97, RON92) and diesel.

(Platts is the daily market prices for petroleum products published by McGraw Hill Companies Ltd in Singapore).

ii. Alpha

The difference between the Platts published price with the actual purchasing price by the oil companies is called Alpha.

It is set by the government at five sen per litre for petrol and four sen per litre for diesel.

If the buying price of oil companies is higher than the Platts price which is more than Alpha, the oil company will bear the extra cost and vice versa.

iii. Operational cost

Operational cost comprises handling charges which include transportation and marketing costs.

The rate is currently 9.54 sen (0.40 cents) per litre for Peninsular Malaysia, and 8.98 sen and 8.13 sen per litre in Sabah and Sarawak respectively.

iv. Oil companies' margin

Margin or profit of oil companies is fixed at five sen per litre for petrol and 2.25 sen for diesel.

v. Station dealers' margin

Margin or profit of dealers is fixed at 12.19 sen per litre for petrol and seven sen per litre for diesel.

vi. Sales tax

The government may collect maximum sales tax of 58.62 sen per litre for petrol and 19.64 sen for diesel according to the Sales Tax Act 1972.

This component is used fully to adjust the final retail price before the subsidy element is considered.

vii. Subsidies

Subsidies are given when the actual price of petrol and diesel are higher than the fixed retail price, after taking into account full sales tax exemption of 58.62 sen per litre for petrol and 19.64 sen for diesel.

# Issues and challenges

The ongoing financial meltdown has affected oil fundamentals, as well as the pricing of global crude oil which has been drastically reduced from US$147 ($221) per barrel in July 2008 to US$40.36 on Jan 11, 2009.

The persistent volatility has witnessed price swings on an unprecedented scale.

Even though the Organisation of Petroleum Exporting Countries took steps to increase the price of crude oil by reducing output, it failed to stop the slide in the price of crude oil in the world market.

Consequently, our government reduced the retail price of both petrol and diesel seven times between Aug 23 and Dec 16, 2008 from RM2.70 per litre to RM1.80 per litre for petrol and from RM2.58 per litre to RM1.70 per litre for diesel.

However, the price of crude oil will not remain low and there is a possibility that it will be on an upward trend once the world economy bounces back.

In view of this, the government improved upon the current retail price setting mechanism in order to ensure the setting of optimal retail prices of petrol and diesel to benefit all concerned.

It cannot be denied that petroleum products still need to be subsidised to ease the burden of the people when there is an increase in the world price of crude oil.

Nevertheless, subsidies are a one-off expenditure that do not provide any returns in income for the government.

An unrealistic subsidy bill that exceeds developmental expenditure is unreasonable and will jeopardise the nation's development. In fact, from 2005 to 2008, the government spent RM40.5 billion to subsidise petroleum products.

Starting from June 5, 2008, due to the high subsidy for petroleum products following the continuous increase in the global crude oil price, the government restructured the subsidy system by increasing the petrol retail price from RM1.92 per litre to RM2.70 per litre, and RM2.58 per litre from RM1.58 per litre for diesel.

This led to an outcry from the public although a cash rebate of RM625 per year for owners of vehicles under 2,000cc and RM150 per year for owners of motorcycles under 250cc was included in the subsidy restructuring package.

The situation was made worse with the drastic increase in inflation rates from 3.8 per cent in May 2008 to 7.7 per cent in June 2008. The surge in inflation rates reflected the higher prices of essential goods that affected the disposable income of the people.

# Current automatic pricing mechanism (APM) to adjust the retail price of petrol and diesel in tandem with changes in product costs.

The improved APM used to fix the retail price of both petrol and diesel is done to reflect realistic market cost changes.

This feature is introduced to ensure stability and ease excessive government subsidies for petrol and diesel. The underlying principles in the improved APM are to set petrol and diesel retail prices that:

1. Reflect changes in cost of petrol and diesel

2. Emphasise price stability

3. Progressively ease the government's burden in providing subsidies of RM0.30 sen per litre.

# Paving the way forward

Generally, the government's stabilisation measures are designed to address short term developments in the market.

However, in the current volatile market, the government must focus on a sustainable long-term measure.

Therefore, the improved price setting mechanism will bring about stability in retail prices in the market and at the same time allow traders, industry players and consumers to manage their expenditure in a more orderly manner.

This method will allow the government to collect taxes when the product cost is low and exempt taxes as well as grant subsidies when the product cost increases.

 
 
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