Friday, January 22, 2010

New petrol pricing mechanism is an ideal policy

The government spends 8,000 ringgit per capita annually on various subsidies including fuel. It is justify that the system for fuel subsidies should be revamped as it could save as much as 1 billion ringgit.

Currently, the Government is subsidizing petrol at 30 sen per litre. The market price for RON 95 is RM2.10 per litre but due to subsidy, the pump price reduces to RM1.80.

From May 1, a cap on the amount of subsidized petrol that a car owner can buy monthly will be implemented. The price for Malaysians will depend on engine capacity and “socio-economic” factors.

Malaysians and non-citizens will have to pay different petrol prices as foreigners are not eligible for subsidized petrol and MyKad will be used to determine the eligibility while purchasing petrol.

Ironically, subsidy is a centrally planned measure that money paid to a given product by the government in order to lower the price. It is claimed that it is a form of assistance based on social justice.

By and large, in order to make the price of oil more affordable, governments provide subsidies, which cause the price of oil to remain fixed below free floating market rates.

Undeniably, one of the adverse effects of subsidies is market distortion, which cause the price of the commodity does not reflect its actual cost. It jeopardizes the GDP as it would lead to excessive fuel consumption and wastage in addition to unhealthy practices such as illicit trade, cheating and smuggling.

Ironically, the idea of subsidy is polarized of the view that subsidies should be removed and the main justification is most subsidies implemented do not effectively benefit the targeted poor rather; the poor are being exploited. The subsidy will reduce the funds available to assist the poor and the rich who feed fat on the subsidy.

This school of thought argued that countries that subsidized fuel has tremendous negative impact which cause demand to continually rise steeply, threatening to outstrip the growth in global supplies.

It is argued that if subsidy not implemented properly which cause a large difference between subsidized and market prices, not only corruption rampant, any effort to reform the system will be suppressed. Moreover, if oil prices increase, the policy of heavily subsidizes oil prices may suffer as the cost of the subsidies will consume ever-larger amounts in their budgets.

Subsidies are "opportunity costs" which prevent the government from allocating more to national development to benefit a larger segment of the population.

Developed economies rather than subsidizing the fuel, often place a tax on every liter of petrol sold, to discourage over-consumption by the rich.

The ideal policy is that general subsidy applying to everybody should be removed and replaced with more targeted subsidies to help out the low-income households.

Undoubtedly, the new petrol pricing mechanism is the ideal policy but the development of an application model for effective implementation by having strong; informed opinions should be the first priority.

The authority should also need to make cost effectiveness as an ultimate priority in its revised policy toward the new petrol pricing mechanism to avoid the critica
l strings attached or hidden agendas.


Anonymous said...

please help my pocket by reducing petrol price

Anonymous said...

Hello. And Bye.