How Much Are Malaysians Really Paying For Fuel?
UPDATE: Due to overwhelming feedback, we have factored in average monthly disposable income and income-to-petrol-spending ratio in the article and infographic to provide a more accurate comparison among the countries.
Many Malaysians were shocked when the Government announced that subsidies for RON95 and diesel will be scrapped from December 1, 2015 onwards due to falling global fuel prices.
Just how much are Malaysians really paying for fuel compared to drivers from other countries around the world?
New prices are fixed according to a managed float system, which is based on the monthly average world price of crude oil. The move was followed by a 4 sen decline in the price of RON95 from RM2.30 to RM2.26 per litre for the month of December.
In January 2015, retail prices of RON95 and RON97 fell further to RM1.91 per litre and RM2.11 per litre, respectively.
Historically, the retail prices of petrol and diesel in Malaysia had been determined through the automatic price mechanism (APM), which ensured that the difference between retail and actual prices were borne by subsidies and sales tax exemptions.
Through the system, set in place in 1983, the Government also standardised fuel prices at pump stations, and fixed the margins of oil companies and dealers at a level that will not be affected by fluctuations in world oil prices.
How much have Malaysians been paying for fuel?
RON95 petrol entered the Malaysian market in 2009 at RM1.75 per litre. It replaced the lower-octane RON92, which cost RM1.70 per litre in 2008.
The price of RON95 has increased steadily from year-to-year, due to the gradual reduction in fuel subsidy as part of the Government’s long-term plan to boost national coffers.
The fuel’s price was raised from RM1.90 to RM2.10 per litre in September 2013, and again in October 2014, from RM2.10 to RM2.30 per litre.
Though there have been much hesitation on removing fuel subsidies in the past, due primarily to fears about its political repercussions, the Government has finally set a firm footing on its subsidy reform plan. Subsidy for sugar prices was also abolished in 2014, which saw the increase of sugar prices from RM2.50 to RM2.84 per kilo.
One advantage that comes with the removal of fuel subsidies is that consumers now get to enjoy the benefits from any decline in global crude oil prices, something Malaysians have not been getting for the past 31 years when the retail prices of fuel products in Malaysia had remained mostly static or gone up.
The new managed float system has put the price of RON95 in Malaysia as one of the lowest in the world, at only US$0.54 (RM1.91) per litre, compared to neighbouring countries like Singapore and Thailand, where RON95 costs US$1.38 (RM4.94) per litre and US$1.00 (RM3.58) per litre respectively.
Meanwhile, RON95 costs US$1.07 (RM3.83) in China, US$0.99 (RM3.54) in Australia, and US$1.72 (RM6.16) in the United Kingdom.
How much are we really spending on fuel?
Petrol is an essential part of modern life. However, the price of fuel itself is not an accurate yardstick for the overall cost of living.
Let’s assume that all drivers around the world use up an average of 120 litres of petrol in a month. If you look at the price of petrol alone, this would mean that drivers in Singapore and Australia are paying an estimated 155% (US$166 or RM592) and 83% (US$119 or RM425) more for petrol every month, compared to Malaysian drivers, who pay an average of US$65 (RM231). Meanwhile drivers in the United States (US) pay US$79 (RM268) for petrol every month.
However, the average Malaysian draws a monthly disposable income of just US$939 (RM3350) compared to their Singaporean and Australian counterparts, who take home an average monthly disposable income of US$2,887 (RM10301) and US$3,536 (RM12616) respectively. Elsewhere, folks in the US earn an average USD3,066 (RM10940) in a month.
Using the same average fuel consumption baseline of 120 litres of petrol per month, when you factor in average monthly fuel expenditure and average disposable income, Malaysians actually spend significantly more on petrol, which make up an estimated 7% of our average monthly disposable income.
This is because theoretically speaking, if drivers in Australia and in the US consumed the same average amount of fuel in a month, they would be spending just 3% of their respectively monthly incomes on fuel. Based on the same estimation, Singaporean drivers would spend about 6% of their monthly salary on fuel.
Of course, this comparison does not take into account the transportation infrastructure and total number of drivers in these respective countries, and actual fuel consumption statistics may differ.
Fuel price drops can be bad
Lower fuel prices are often viewed upon favourably by drivers. However, because oil is one of Malaysia’s main exports, the declining price of crude oil has had an adverse impact on our currency, which has hit a record low since 2009.
Early this month, the Ringgit was quoted at 3.5425 against the US dollar, compared to 3.211 in June. The decline represented a weakening of 10.81% weakening of the Ringgit against the US dollar in the last six months.
Plunging oil prices will result in a slowdown in oil and gas investments, and affect the Government’s ability to manage its fiscal deficit on account of falling oil revenue, which made up for 30% of total revenue in 2014.
In the long term, although subsidy removals are often unpopular with consumers, the cut-back on subsidy expenditures is necessary in ensuring the long-term sustainability of the national budget and in elevating the country to high-income status by 2020. Savings on fuel subsidies will instead be channelled on infrastructure and development that would directly benefit the welfare of the people.
The priority now should be to raise productivity and increase median income levels so that Malaysians can enjoy better standards of living and achieve our target of becoming a high-income nation.