Thursday, January 12, 2012

Petrol Subsidies: Time To Go

I read this last night, and I wholeheartedly agree (excerpts):

For Global Gasaholics, Ending Subsidies Is the First Step: View

Jan. 10 (Bloomberg) -- Fuel subsidies are the crack cocaine of global economic development: easy to get hooked on, hard to give up. And as every addict knows, there are good and bad ways to try to kick the habit.

Consider Nigeria and Iran. In Nigeria, the government’s recent decision to remove fuel subsidies and more than double the price of gasoline has led to riots and now a nationwide strike. Two years ago in Iran, an initiative to cut subsidies and almost quadruple the price of gas (as well as boost the price of food and water) provoked little unrest, lowered oil consumption and bolstered the economy and the government.

The differences between the two efforts offer valuable lessons about the best ways to eliminate fossil-fuel subsidies - - a staggering global misallocation of resources that does little to help the poor, distorts markets and pumps more greenhouse gases into our atmosphere.

In 2010, the value of all fossil-fuel subsidies, for both production and consumption, was roughly $500 billion. On the consumption side, 37 countries spent $409 billion underwriting their citizens’ fuel purchases, according to the International Energy Agency…

…There’s not much good to say about fuel-consumption subsidies. For starters, they encourage waste -- Venezuela has the dubious honor of having Latin America’s highest per-capita energy consumption. They also skew economic development because investment decisions are made on the basis of false market signals. And because consumption subsidies reward high-energy users, they help the middle class and the rich over the poor, who rely heavily on dung or wood and aren’t connected to the power grid.

The IEA, an independent body formed after the oil shocks of the 1970s, estimates that only 8 percent of that $409 billion went to the bottom-income quintile. Moreover, such government funding sucks up money that could be used to help the poor in other ways: Venezuela devotes at least 6 percent of its gross domestic product to fuel subsidies, about double its education budget; in Indonesia that amount is around 4 percent; the $6 billion that Nigeria has been spending to keep fuel prices low is three times its health budget.

In addition to freeing up hundreds of billions of dollars for more productive uses, unwinding all consumption subsidies by 2020 would reduce demand for energy by 4.1 percent and carbon- dioxide emissions by 4.7 percent, according to the IEA…

Here’s some back-of-envelope calculations:

Say your a low income earner working in KL. You might have a scooter, or a Viva/Kanchil. Your petrol usage might come up to about 50-100 litres a month. Based on current prices, that means the government’s subsidising your petrol to the tune of RM60-RM120.

A middle income earner, with a bigger car such as a Toyota Vios or Honda City, might be using up to 100-150 litres a month – your subsidy amounts to RM120-RM180 a month.

Then there’s guys like me, riding gas guzzlers and driving a lot, burning up more than 200 litres a month – the government’s supporting my “needy” car to the tune of at least RM240 a month. I’m getting at least double – if not more – the subsidy someone earning a fifth of my income is getting, yet I don’t really need it and they do.

Let’s not even mention the proliferation of supercars and luxury cars now on the road – the differential and the inequity would be even more.

Petrol subsidies, in short, are massively regressive as they disproportionately help the rich and the middle class, and not necessarily the poor. It’s past time to consign them to the history books. Doing so would also save nearly 5% of annual government outlays at a stroke.

Obviously there will be some hardship involved, especially for those in the lower income brackets. Some of the public budget savings can be redirected towards direct assistance for low income families – the mechanism is already in place with BR1M.

That’s a far cheaper and fairer alternative to petrol subsidies, and cleaner for the environment.


  1. How much of the fuel subsidies affect motorist directly?If for instance as an average its RM1000/annum and 5 mil active vehicles,its RM 5 bil per annum.I remember seeing subsidy numbers of RM 20 bil for petrol/diesel.
    The main concern is that reducing fuel subsidies impacts the whole chain with multipliers beyond the fuel increase..10 sen increase in diesel increases roti canai by 10 sens for instance.

  2. I can't remember the figure, but the budget for next year is around RM12-RM14 billion I think. The final bill will depend a lot on the international market price for crude oil.

    As for pass-through effects on other goods, they should be a one-off effect only, perhaps lasting 1-2 quarters. And increases in the price of staples such as food definitely strengthens the argument for targeted transfers, not blanket subsidies.

  3. Couldn't agree more about this. However majority of the people will not agree on this. Nor that we prevent the ripple effect if we decide to remove the subsidies. It will be hard but the economy will eventually be stabilized if we can remove all the unnecessary subsidies. Eg. sugar

  4. Whoever is going to be the axeman for this fuel subsidy has got to love the noose in such a highly politicized environ as Malaysia.

    Also, not to forget the impact on the very many unsustainable businesses whose existence now is only possible 'cos of the distortionate effects of the fuel subsidy.

  5. Don't understand why you say the pass thru is a once off effect.It may be so for CPIs...but for a person who buys roti canai the increase will be perpetual..his breakfast cost increases by RM1 compared to pre subsidy removal.

    I guess the bigger beneficiaries of the subsidies are the businesses and manufacturers.They are making profits whilst enjoying subsidies.There are companies making double digit million profits enjoying cheap electricity and gas..employing only 200 locals..and haven't paid tax since startup 20 years ago due to tax holidays.

    These type of companies shld be the first focus of subsidy rationalisation.

    For the man on the street,impose efficiency targets.Impose higher roadtax for gas guzzlers.Impose premiums for non efficient high energy cost buildings.

    Many ways to kill a cat.

  6. @anonymous 8.34

    "...the increase will be perpetual..."

    That's precisely what a one-off pass through of prices is - a one-time, permanent increase in the overall price level. That can be painful, but most can handle it; for the rest, that's what my proposed transfers are for.

    What you don't want to see is a self-sustaining cycle of price pass-throughs, i.e. a permanent increase in inflation.

    Graphically, the difference between the two scenarios is this - imagine an upward sloping line, with prices as the vertical axis, and time the horizontal axis.

    With a one-time pass through, the intercept of the line changes at the point where subsidies are abolished - the slope, which represents inflation, does not. With a perpetual pass-through, both slope and intercept change.

    "For the man on the street,impose efficiency targets.Impose higher roadtax for gas guzzlers.Impose premiums for non efficient high energy cost buildings."

    Ever try to register a 3.0 litre car? The road tax is currently 10x that for a 1.6 litre vehicle. Hasn't noticeably stopped people from using them.

    In any case, none of these solve the negative externality problems related to using fossil fuels. The market price of petrol (ex-tax) is currently about RM2.50-RM2.60, but the economic cost to society is closer to RM3.80-RM4.00. If we were to account for the true cost of using petrol, we need to impose petrol taxes not subsidies.

  7. Increase roadtax for gas guzzlers by another 500% then?Ppl needs cars..cos PT is bad.And the lowest 40% hv little or no disposable incomes.The rich won't feel another 200 bucks i.e 1% or less of income.But the poor feels pinch of 20 bucks.
    But industries n commercials shld be first priority of these cuts.At least impact is indirect to the rakyat even if they don't absorb the 0.3% opex increase.
    I completely agree that subsidies must go.
    But with present mindset of MRT is the saviour instead of holistic PT solution, we are a long way off track.

  8. Which is why I'm suggesting that part of the savings from any subsidy cut should be given directly to those in the lower income brackets, enough to offset the increase in petrol prices.

    That's more than affordable - at present prices, we're spending more than double on petrol subsidies what we're spending on the entire national healthcare system.

    The BR1M payouts (RM500 each) for households earning less than RM3,000 a month by my calculations is going to cost under RM2 billion. Say RM100 per month per household in petrol subsidy compensation, and we're looking at an annual figure of about RM4.4 billion.

    The other implication here is obvious - two-thirds of the benefits of petrol subsidies are going to the top 35%-40% of households.

    I'd actually prefer a tax on petrol use, because even if we go to actual market pricing, it won't fully capture the costs to society. For more, see here.

    "But industries n commercials shld be first priority of these cuts."

    The figures quoted don't include energy subsidies to commerce and industry - those come directly from TNB and Petronas, not the government. And commercial vehicle fuel use is a pittance compared to personal fuel use.

  9. I do remember PM Abdullah did gave away RM600/car when gasoline when up to RM2.70/liter.

    Long term solution is still to have better urban and public transport planning .

  10. Yup, totally agree with Oi Mun. Tackling this subsidies issue in isolation would only be futile. It really has to come hand in hand with better transport planning.

    The MRT is doomed to fail without proper planning on the feeder bus system. As it is, buses don't go where they need to go when they need to go. I think the best way is to make it compulsory for the Transport Minister and his Deputy to travel by public transport.

    Singapore's Transport Minister travels by public transport from time to time. How about that?

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