Published August 18, 2008

MALAYSIA INSIGHT
Can idea of making fuel cheaper

After all, there is no guarantee that the oil price spiral is over

By S JAYASANKARAN
KL CORRESPONDENT
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PRIME Minister Abdullah Ahmad Badawi last week mooted the idea of reducing pump prices because world oil prices had ostensibly gone down.

Yes, oil prices have decreased - from about US$150 a barrel to US$115 last Friday. But even at those levels, Malaysian pump prices continue to be subsidised so there is no reason for Mr Abdullah to promise cuts. There is no guarantee that the oil price spiral is over. In fact, there is reason to believe that the upward spiral could begin again.

When the Prime Minister raised petrol and diesel prices by 44 and 63 per cent respectively back in June, it was a singularly brave decision. More so because the Cabinet had previously promised not to change prices until August.

The howl of public protest that resulted was understandable but the reality was clear. There was, and still is, no such thing as a free lunch. With global oil prices going through the roof, there was no way Malaysia could be shielded any more.

Economically, Mr Abdullah's decision was the right one. When you price a scarce resource cheaply by dint of subsidies, you are creating distortions and people waste that resource because they take it for granted. But as pricing moves closer to the market value - and Malaysia is still nowhere near that - the laws of economics begin kicking in.



And Malaysia has seen that: the traffic jams in Kuala Lumpur are still there but are much less severe after fuel prices went up. Indeed, the number of cars on the road has dramatically diminished as more and more people have turned to public transport. This, frankly, is the way it should be.

But now the Prime Minister is vacillating, torn between a desire to play populist politician and the need to be responsible.

Perhaps, he senses that the Opposition is gathering momentum. That is probably why the government is announcing grants to various states - RM1 billion (S$424 million) to Sarawak first and then the same to Sabah.

Indeed, Malaysia holds the dubious distinction of being one of the rare net oil exporting countries in the world to be racking up a budget deficit. In 2007, Saudi Arabia, the United Arab Emirates, Kuwait and Libya all had budget surpluses of between 12 per cent and 36 per cent of gross domestic product. Even Venezuela had a budget surplus equivalent to 3 per cent of GDP. Malaysia, on the other hand, had a deficit of 3.2 per cent of GDP. One suspects that the figure is going to be much higher this year.

To put it in context, 2008 will mark 11 straight years of budget deficits. That is at least six years too long. Mr Abdullah would do well to remember that when he contemplates rolling back fuel prices.