An Unpopular Position on Petrol Hike – Real Income, not Relative Price

Let me first state clearly that I drive and love to drive, therefore a victim of the petroleum hike.

And I do not suffer from Stockholm Syndrome.

However, personally I would not protest against petrol hike – at least not demanding for the fall of petrol price to its original level. Equipped with little understanding of economics, I stand to be enlightened – but here’s why I take such an unpopular position.

First, the price until yesterday was artificially kept low. This encouraged people to spend more than they would if they had to pay full. If Malaysians deserved that because we were endowed with petroleum, then many foreigners had been free-riders either through traveling or smuggling.

From a green perspective, this had led to excessive consumption – which was an externality (side-effect that others bear) to the planet. Reduction of subsidy on petrol therefore is environmental friendly as it pushes up its relative price, encouraging people to spend less on petrol and save or spend more on others.

Secondly, even if we insist to keep the petroleum price at its previous level, it may not be possible or desirable. If its global price is going up, are we going to subsidize no matter what? There is no such thing as free lunch. Ceteris paribus (other things being equal), a bigger part of our national budget would be used to subsidize petrol users at the expense of education, health care and other expenses.

Is that what we really want? Is it really social justice to subsidize petroleum for the rich who drive large vehicles of 3000 cc or above? If the government cut the subsidy later, how much would it have to cut? Cutting too little would be of little help but cutting it sufficiently may be even harder to swallow by the public.

I therefore support the rise of petrol’s relative price – making it more expensive to discourage consumption. Returning to the old price level is not a solution in the longer run.

Having said that, however, if petrol hike leads to hike in the prices of everything else, i.e. inflation, the relative price of petroleum will be restored. What we have then is a pure fall in real income – we become poorer in all sense and therefore cut our petroleum consumption. It hurts both the poor and the economy in general. Such outcome, while green, is clearly undesirable.

An acceptable solution must therefore strikes to maintain the real income of the poorer people – as far as possible – while increasing the relative price of petroleum. In other words, we should have equal – as far as possible – buying power overall as before, only petroleum becomes more expensive.

To do this, the nominal income of the people must increase. The rebate offered by the Abdullah Government is clearly pointing to that direction but the amount is however too small to arrest the fall of real income.

But there is a larger question: you can’t talk about market price when it is convenient. As smart Malaysiakini have pointed out: “Let me pay market price for cars too!” In other words, the petrol hike must come in a comprehensive package. For example, car price and highway toll fee should fall.

We can change our lifestyle, so must the government, as Consumer Association of Penang rightly suggests!

A annual rebate of RM 625 for small car owners and that of RM 150 for motorcyclists are too small to compensate for the income-reduction effect.

The people have the right to know where the millions saved would go. The money should be spent in subsidizing the public transport system – buses, Commuter, LRT, Monorail – in the immediate short term and upgrading it in the longer term. A Malaysiakini reader, “tmdtwg”, has offered some brilliant suggestions.

Most importantly, the windfall enjoyed by Petronas must be shared by every Malaysian. I see nothing wrong in every Malaysian enjoying some petroleum dividend. After all, our petroleum reserve is a natural endowment and it is not nobler to be kept in the hand of the state (or worse, some unaccountable officials whose integrity is not beyond question), than in the hand of individual citizens.

In fact, Petronas should not be managed as an off-budget public enterprise. Dr M may be right to say that the Government has enough money to keep the subsidy, but I would not thank him for hiding the management of Malaysia’s petroleum money from the public for years.

Now, if the demand of the Coalition against Inflation (Protes) is to have a better package deal (via managing the fall of real income) to cushion the impact of price hike – from subsidy to public transport, incentives to the use of alternative energy, petroleum dividend to reform of Petronas’ management – rather than to revert to the old price level, I would like to join its rally on July 12.

2 responses to “An Unpopular Position on Petrol Hike – Real Income, not Relative Price

  1. What you’d suggest is easier to say than done.

    For those can cope with this orchestra of all-level basic commodity price hike comfortably i.e. it merely make them less richer, this will be in no way to change their behavior or lifestyle to one of more energy friendly. 2-pack smoker still puff 2 pack a day and price is not a factor.

    If you can barely sustain with you peanut pay even before this, then the question of excessive consumption is a non-issue.

    It is unbearable for the poor and the government lied to me. That’s convincing enough to take me to street.

    Furthermore it is a lot of fun. Take it as some light entertainment.

  2. I totally agree with most what you said CH. We should stop nagging about the fuel price hike.

    However I think we also should stop nagging about Petronas not being transparent. Although we are an oil exporter, our production can be considered peanuts as compare to UAE, Eygpt, Brunei etc especially if we compare exports per capita. In other words, we have bigger population for every barrel we export.

    According to http://www.nationmaster.com/graph/ene_oil_exp_net_percap-oil-exports-net-per-capita , we are at same level with the UK in terms of export per capita… and UK’s fuel price is at RM10/liter? Can we say government of Malaysia has been doing something right all this while then?

    Even now people have been asking for some piece of Petronas cake. I don’t think Petronas can be managed so well like right now if people were to scrutinize every move by the top executive.

    Don’t get me wrong, I am all for cheap fuel but lets be give government some credit for doing the right things too🙂

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