Wednesday June 18, 2008

Petronas has nothing to do with price hike

I REFER to the report, “Price hikes not properly explained to the public” (The Star, June 17).

I think the observation made by Second Finance Minister Tan Sri Nor Mohamed Yakcop is largely true. The issue really is how we should manage this difficult time more professionally and holistically.

Since the fuel price hike, wild accusations and wild responses have ensued. Today, I read about people circulating e-mail asking consumers to boycott Petronas retail outlets.

While many are genuinely concerned with the quantum of price increase, we are in many ways reacting and posturing based on information and misinformation.

Let me elaborate why boycotting Petronas retail outlets is not the correct thing to do. Hopefully, this will help us to be more rational in this whole episode.

While we can disagree with the price hike, we must understand it has very little to do with Petronas. Before I proceed, I think it is better for me to declare that I am not in any way connected with the oil business.

The retail price of petroleum products in Malaysia is decided and fixed by the Government through what is generally known as the “automatic pricing mechanism or APM” – a mechanism where the retail price is determined by the price of crude, the refinery cost, marketing and distribution costs, tax imposed by the Government and the commission paid to station owners.

For a long time, the APM ensured price stability at the retail level. The volatility of crude oil prices (albeit within reasonable range) does not affect the retail price because the Government fixed it by varying the amount of taxes it levied on the petroleum products.

The mechanism works well so long as the prices of crude fluctuates within a reasonable range. However, when the prices of crude started to escalate as in recent years, the APM could no longer hold.

To maintain the same retail price, the Government initially had to reduce the tax levied on petroleum products. Soon, the Government not only had to totally forgo the taxes but also to introduce subsidies in order to maintain the same retail price.

As crude prices continued to escalate, the subsidies shouldered by the Government continued to increase in tandem.

Oil companies, like Petronas, Shell and others charge the Government the market price of petroleum products that is different from the retail price. The Government subsidises the consumers by paying the difference between the market price and the retail price to the oil companies.

This is the system, as I understand it. I think we must discern the issues involved here. Petronas as one of the retailers of petroleum products in Malaysia is different and apart from the Government’s policy on subsidies. The retail price of petroleum products as it stands today is not for Petronas to determine. It is for the Government to decide.

T.K. CHUA,

Kuala Lumpur.

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