Fuel is cheap in Asia, but society pays a very high price

Fuel is cheap in Asia, but society pays a very high price
by Michael Backman
The Age
July 2, 2008

ABDULLAH Badawi, Malaysia's Prime Minister, hasn't done much right of late. But one thing he got absolutely right was to raise the price of petrol by 40% at the start of June. I received many emails from Malaysian readers complaining about the decision and asking if I would write a column attacking it.

"Many Malaysians follow what you say," wrote one correspondent. Good. On this occasion, popular sentiment in Malaysia is dead wrong and the Malaysian Government is 100% correct. In fact the Government's decision is probably the single most important micro-economic reform undertaken in Malaysia for years.

The Malaysian Government's decision is especially courageous given that it did so badly in the March general elections in which the ruling party was left with fewer than half the seats in Parliament and the ruling coalition lost power in five of the 13 states. All the ruling party needs is for a handful of its coalition partners to join the opposition and it will fall from office.

Many decried the fact that the price increase was not phased in but was effective immediately. But again, the Government was 100% correct. Delaying unpopular reform simply gives pressure groups and political opportunists time to try to stop such decisions.

It is similar to the overnight 25% across-the-board tariff cut announced by then prime minister Gough Whitlam in 1973, which occurred with no consultation and without even a submission to cabinet, thus ensuring the decision was not diluted.

For all its pretensions that it is "uniquely Asia", Malaysia is beginning to look more like a piece of middle America. It is now home to sprawling suburbs populated by people who travel by car to and from air-conditioned shopping centres stocked with goods from China and the West. Traffic jams are legendary, air quality is falling and the people are growing fatter.

Cheap, subsidised petrol is a factor. Embryonic public transport doesn't help, but then it is little wonder that public transport is relatively poor. Malaysians don't want to pay for that either. Bus fares in Malaysia are incredibly cheap and each time there is an increase in fares, there is a public outcry.

Of course, one thing the Malaysian Government should now do with the billions it will save on a reduced subsidy is to improve public transport infrastructure.

Without the increase in the fuel price, the total cost of the Government's fuel subsidies this year would have been in excess of $US17 billion ($A17.8 billion). That's more than four times what the Government spends annually on education, health care and defence. This ridiculous state of affairs has meant that, essentially, Malaysian children have to be poorly educated so that their parents can drive around in big cars.

Opposition politician Anwar Ibrahim has led public protests against the fuel price rise and has even said that,
should he get into power, he would immediately lower prices. Yet again, Anwar has shown himself to be an
opportunist who will say anything to get into power. His opportunism is compounded by the fact that he is a former finance minister and should know better. (In any event, much of his time will now be spent on other matters, given that last weekend one of his aides complained to police that Anwar had sodomised him.)

Rising demand for oil in Asia is the main reason world oil prices have gone through the roof. And much of this
derives from the fact that, like the Malaysian Government, many Asian governments keep energy prices artificially low. Asian consumers and businesses have decided what sort of cars and plant and equipment to acquire based on these false prices.

In recent months, India has had to raise prices by about 10%, China by 16%, Indonesia by about 29% and Nepal by 25%. Even with these new prices, Malaysia's retail petrol price is still too cheap — for example, the new price of around US70¢ a litre compares with the new price of $US1.26 in Nepal (one of the world's poorest countries).

The Indonesian Government has also wrestled with energy pricing. Its draft budget for this year assumed an oil price of $US60 a barrel. That had to be adjusted to $US95 in March but, by then, the oil price was already higher than $US100. Sensibly, it raised the retail price of petrol and related fuels, otherwise the annual subsidy threatened to blow out by $US18 billion to $US26 billion this year.

In some instances, artificially low prices have starved oil companies of the cash necessary to invest in new oilfields and refining. Sinopec and PetroChina are among the world's top 50 companies by market capitalisation and yet, in the middle of the greatest oil price boom in history, both companies are experiencing massive losses from refining because the Government limits their ability to pass on rising costs.

Price controls also distort incentives. Malaysia and Indonesia have big reserves of natural gas. As many vehicles as possible in both these countries should be converted to LNG, but the incentive is much reduced when petrol prices are kept artificially low.

Smuggling is another problem. Both countries face big problems with subsidised petrol being illegally sent out of the country to be sold for profit elsewhere. Organised criminals, elements within the Indonesian navy, and perhaps even terrorist groups, have been prominent among the smugglers.

No one wants to pay higher prices for things, and of course higher prices hurt the most vulnerable in any economy.

But trying to hide an economy from rising prices is no solution. If there is one good outcome from the high oil price, it is that Asia's wasteful oil subsidies will be banished for good.