Wednesday, 24 October 2007

An enlightening comment

I just got back from a small dinner gathering with some close friends so I am going to take a short cut in today’s entry. Fellow blogger Vincent left a very long comment in one of my recent post and I think his comment worth mentioning here. He is talking about how an increase in crude oil price will not benefit a net oil exporter country like ours. Quite enlightening I must say. His comments are as follows:-

Because I actually like you (I think you are better than a lot of the silly “socio political bloggers”) I shall take the time to explain how fuel subsidy works. (zewt - vincent, you're not gay right?)

Being a net exporter is actually irrelevant in many ways. In some countries where their National Oil Company is the one who runs the petrol stations, they can afford to charge the people at cost price or even subsidise the fuel significantly. I would argue that socialism is bad for business, but since it's the "people's oil" it is acceptable that they charge at cost price or a lost.

However, in Malaysia, we have loads of oil companies operating different petrol stations. Shell has the market share of about 35% while Petronas has about 32% (don't quote me on the exact figures). The rest of the market share is split out between BHP, Esso and Mobil (Projet now belongs to Shell).

Therein lies the problem. Foreign companies charge the market price. The government has to PAY them the difference between the market price and the set price of RM1.92. Which means that when the price of crude oil increases, the foreign oil companies will charge the government more and hence the government spends more just to keep the price at RM1.92.

Again, we can argue that subsidies are meant to 'help' the people. But that argument can only hold valid if the market was dominated by Petronas. But since 70% of the market share is taken up by foreign oil companies, surely it doesn't seem wise that all those subsidies are flowing out of the country into foreign hands instead of remaining within??

10-15 isn't exactly accurate. This is a case of a politician talking without exactly knowing his facts. I believe the latest figures stand at about 19 years. 10 years ago when I was in school, we were told there was enough oil for another 20 years only.

The 'discrepancies' in the figures are actually due to discovery of new wells and new technology which allows oil that was previously un-extractable to be available. Also, rising crude oil prices have made many small wells which were previously not financially viable to extract very feasible now.

I am sure you all find it informative cause I did. By the way, crude oil price hit a record high of USD90 per barrel a few days ago before settling down.

42 comments:

angel said...

I laughed at the green coloured sentence :P

If only we have an alternative oil(s) for our vehicles... hmmm... now you know why I wish I can fly like Superman... :p

-=SiN=- said...

someone poses me a question today; Currently our petrol are set at RM1.92 per litre. Where in US its about USD2.82 per gallon (3.785 litre), SG at SGD1.96 per litre and Australia at AUD1.38 per litre.

If we skip aside currency exchange rate and base solely on our general income per month/expenditure/lifestyle.. I would say most of us are paying up through our nose for fuels.

how much did our gomen pays for fuel to enabled us to purchase our current 'subsidized' petrol??

Anonymous said...

Like it or not, we need to adjust our living according to the impending new petrol pricing. My suggestion is to ask bosses to pay higher wages, bosses to ask their clients to pay more since wages has increased and likewise the clients charge their clients in similar fashion. I will give it another year or two for our economy to enter into stagflation. In about 10 years or so, we should have adjusted to the new price regime. Roti canai will probably cost RM10 per piece but hey, does it matter if our average GDP per capita is around RM100K?

Silhoute said...

zewt,
Please allow me to ask Vincent if it will help the country more by filling up at Petronas only? If that is the case then lets all do it. But I hate to think what happens to the proceeds from the profit that Petronas made, another PKFZ? Astro-nought? Sukhois? Incomplete Navy Patrol Vessels? Submarines? Ahhh the list is too long to list.

Chicken Ball said...

zewt,

Your friend got a point on the foreign operators but bear in mind that these foreign companies are incorporated in Malaysia and all of them get their fuel from Malaysia as I understand that no one got the rights to drill oil in Malaysia except Petronas.

Even IF our goverment need to subsidise these foreign companies for their "lost", I believe Petronas as a provider may always lower their prices. Why don't the government stop the price control and let us see how patroitic Petronas are?

With the oil price topping more than USD 60 per barrel for 2 years and God knows how many barrel that Petronas pump up every month.. I believe that our goverment had gain more profit than ever.

Btw, couple of months back, Petronas had started drilling in a new off-shore named Kekih. We are not dry... yet.

Hor ny Ang Moh said...

The coin have two sides, it depend on which side of the coin u like! Get ready to tighten ur belt, forgo a lot of things or prepare to work even harder or have to do all three! Starting next month mee increase by 60cts plus a lot of other increase! Life is getting harder & harder!!! Have a nice day!

j or ji said...

i like u too.
i'm a bisexual with no homosexual experience.

Shell-More Kilometres.

Huei said...

wah..so deep

um..petronas is msia wan rite? so shouldn't it be cheaper cos it's not ppl's oil?

i still say the oil is too expensive regardless of whether the gomen is paying or not..i bet they only do it for the sake of their own "breed"..u know la..our gomen likes to use our money to feed mat rempits and such!

Lucius Maximus said...

zewt,
really enjoy ur blog. especially when u touch on the economic issues n how the rich or the govt ripping off the people, but yet again u didnt go the the extreme 'hammer n sickle ideology' like some blogs. ur pal vincent really got a point there to ponder. and yes our oil reserves may last a bit longer than projected, with new deposits being discovered and more efficient technology utilised (whats more if we got the ambalat block from the indonesians?).

p/s: i am not gay...

Angie Tan said...

very enlightening indeed. *think*

i wonder if certain researches into alternative fuels will be drummed down because it will affect the bottom line for these oil companies? hmmmm...

jamy from kopitiam said...

Oil will not stop at US$90, $100 is soon to come.

I wrote in many Malaysia forums that oil will be US$60 soon when it was US$30+ and then I say it will be US$80 soon and now I am saying it will be US$100 soon.

We are living in a very interesting time. super hyper inflate.
someone here said it is stagflation, he/she could be right.

I have been spreading my gold and silver gospel for at least 3 years now. At this kind of era, the only way you can help yourself is find hedge tools, gold and silver are 2 best hedge tools now.

You won't die one lah even roti chanai is $10, you just have to buy less LV bag loh :):).

Ehon said...

don u agree that everything *IS* increasing in a sense? i believe that even the standard of living.. cos irregardless of how we complain, we've live thru it so far. and we're still surviving and still nothing's changed.

Manal said...

Remember that back to the future movie car? u can feed the oil tank with any (organic) rubbish that acted as biomass that will then decompose and convert to fuel in the form of natural gas.

I hope such remarkable engine will soon be materialized in the near future, together with many other green-inventions like fuel cell that runs on hydrogen power and all.

sharlydia said...

i'm just changing my mind to upgrade my proton to a brand new civic...coz i may not be able to afford the petrol, shucks!!!

Tunku Halim said...

Looks like Peak Oil may be coming, no? Well actually everyone agrees Peak Oil is coming, only a question of when. Then it's time to get really depressed . . . :(

Helen said...

I don't have anything intelligent to add coz I have no idea how it works. THis is enlightening though...

Hope Vincent can answer some of the questions posed by the other commentators. :-)

alan zed said...

hurm, very enlightening...

Princess Eileen said...

Seems like the only people that will gain from this oil price hike will be people working in this industry. I guess maybe I should go back huh...

rinnah said...

Looks like the only way is up for oil prices...

Thanks to Vincent for enlightening us all!

may said...

and I hope in another 10 years' time, they'll re-predict it to be another 19 more years before we run out of oil. or that we've found another source of energy for transportation... the iPort maybe?

Terra Shield said...

Oh wow! Who is this Vincent dude?
A very enlightening post indeed!

vincent said...

silhoute: Well, technically yes. But not in the way you think. Filling up in Petronas stations would increase their profit, and in turn help our country. But I believe Petronas' function, just like any other business entity is to maximise shareholder return, shareholder here being the government. They will pay taxes, and issue dividends. But Shell and Esso pay taxes as well. In my opinion, it would help the country by increasing Petronas' market share, and like I said in the article, it would then make more sense in terms of fuel subsidy.


chickenball: Not true. There are many oil companies drilling oil in Malaysia, along with Petronas. The difference is, when the wells are drilled by other companies, Petronas acts as a 'custodian' and gets some royalty. But a good bulk of the money still goes back into foreign coffers after the oils companies pay the government royalties and tax as well.

If the government stops price control as you said, each and every oil company will start selling petrol at market price. And it is ridiculous to ask any company to make a loss just to be 'patriotic'. It just makes zero business sense to do that.

zewt said...

angel - maybe we have... but the powers to be just refuse to release it. imagine the economic meltdown.

-=Sin=- - i think if you go to caltex... they put up a banner telling you how much the subsidy is... forgotte how much though.

anon @ 7.31am - hahaha... that would be something like hong kong... a country which i will look into tonight.

Silhoute - be my guest, and i think he answered you.

Chicken Ball - it puzzles me too, though vincent has his comments on this. but then again, if the govt only subsidise petronas, i think all the other giants will leave... means no investment in malaysia... which is bad.

hor ny - mee increase 60 cents? got news? hmmm...

j or ji - i like u too... and man U.

Jules said...

Hi Zewt. I found your entries are really interesting (I know many others will agree with me). May I have your permission to copy your blog entries and circulate to my friends via email.

zewt said...

huei - yeah, i would think petronas would be able to reduce its prices if they want to. but they cant kill off other players like shell, etc... else no investment in malaysia.

Lucius Maximus - yeah, with petronas getting more rigs... more money for some ppl to suck... dont u think?

p/s: i am glad you're not gay.

Angie Tan - hehe... that is a conspiracy isnt it?

jamy - nah, buying gold is no longer the way to go. i will be blogging about what is more valueable than gold in my next few entries.

ehon - yes, that is basic economics. everyone needs an increment and every company needs to grow. it's the big guys feeding on the small guys... reality.

Manal - no way... the powers to be will never allow it... it's a conspiracy really.

sharlydia - hahaha... such drastic move eh? the civic is indeed tempting. i would have gotten one if not becos i walk to work now.

zewt said...

Tunku Halim - some are already very depressed :(

Helen - he did... very kind of him.

alan zed - indeed...

Princess Eileen - nope... not ppl working in the industry... it's ppl who own the industry.

rinnah - yup... good that you have a kelisa eh? :)

may - actually... the discovery of oil has spark so many conflicts in this world... things would have been so different without it.

Terra Shield - some dude... hehe.

vincent - thanks for replying dude... anyway, if free market is introduced, i think some big boys will actually sell at a loss to monopolise the market and kill off smaller players, dont u think?

Jules - I just checked with my fiance who bears the same name as yours that you're not her. As for copying for e-mail... i would prefer if you just send them the link... but if you think copying the whole post is better... then i guess you can still do that but do include the link to this post as well. may i know which entry you're forwarding though?

Anonymous said...

even if it hit 10.00/litre, at least...

it will help reduced the nos of vehicles on the road.

less vehicles, there will be less road accidents

Michael Song said...

no choice lar... they need more money, another tour to space confirmed already mar... so wat to do? more ppl go space, can lead good example for the coming generation mar...

lynnwei said...

hhmm....it does make sense what u're saying here....

hhmm...

bongkersz said...

interesting point to ponder.. er, i like you..r post too zewt.. muahaha! too much gheyness in this blog lately.. why eh? haha.. joking lah dude.

zewt said...

anon @ 10.22pm - i doubt it... ppl will still drive... malaysians will still drive.

michael song - this space thing is really getting to my nerve.

lynnwei - from vinvent :)

bongkersz - gay means happy u know... kakakakaka...

Cocka Doodle said...

All foreign companies drilling and producing oil within malaysian waters has to go into a PSC (production sharing contract)with Petronas on a 40%-60% basis.

The capital outlay for 'wildcatting' activities, rig building and production is borne by the foreign coy while Petronas for doing 'fark-all' gets 40% for every barrel produced.

And no, I do not buy Petronas fuel because of their racist policies... from hiring right down to doing business with them.
If you are a non-bumi company, one has to work with another bumi company under their so-called VDP (Vendor development program).
usually, these VDP mark up tremendously for doing 'fark-all' and not really adding value to their services. Studies has shown that Malaysia cost more than any other countries in the region to produce oil, supply oilfield equipment/machineries, and services owing to such VDP practices.

But come to think of it, the whole country is like that too. If you are not a 'govt-registered' supplier to any of these statutory bodies, you have to go thru one of them. THESE ARE INDEED THE COST DRIVERS!!

Chicken Ball said...

i wonder.... had the cost to drill oil increase from year 2004 - 2007?

stocktube said...

as much as the govn would like to do away with the subsidy, it can't simply because the buying power of citizens are simply too low ...

this is what you get if you created artificial "wealth" by subsidising fuel in the first place ... you just need an incompetent govn to cause the inflation (fuel hike anyone) to escalate to release the real market situation ...

when the subsidise bubble burst, you're in trouble ...

H.C. Tan said...

oits me finally not in msia adi haha

zewt said...

cocka doodle - i am painfully aware of what you said. i have done some petronas licensing advisory before and boy oh boy... the regulations are just so... well... *sensitive*. what to do, we are living in malaysia... says it all.

chicken ball - certainly increased... but just dunno how much.

stocktube - yeah, it creates a 'driving' culture in malaysia.... as though everyone can afford a car, which is not really the case. without bursting the bubble... we are already suffering.

HC Tan - good for u.

kayatan said...

Zewt,

I can wait to read what is better thing than gold and silver :).

Marketwatch.com just reported that gold future close at highest level since 1980.
Gold US$ 785/oz and black gold(crude oil) US$9.87/barrel today.

I am always looking for other profitable asset class to invest other than gold. Gold and silver has been giving me 400% the last 2 years.

In case I do not visit your blog when you write your next post about better investment than gold, please email me.

Thank you in advance.

zewt said...

kayatan - will certainly do.

Jules said...

Hi Zewt,

Replying to your query. I forwarded your entry on the fuel subsidy. Ok, will forward the link instead of the blog. I am not that IT-savvy. Did not think of this method.

zewt said...

Jules - i guess i shouldnt be very picky when ppl are willing to forward my stuff... :) thanks for putting the link :)

PrincessJournals said...

oil price always make me pening. i dont understand how come the price is controlled by the US.

when i was working and earning my own moolah(back in KL), i spent a lot on material stuff but i also kno how to save. now tht im not working and living in socal, i make sure tht hubby brings his own lunch to work. i tell u, it saves us a lot of money every mth since the apt is already taking 1/3 of our income.

i wanna tell u a story tht happened last sunday, abt gas price. the gas price was 2.99 on sat so when we were driving on sun, i let out a shriek. tht almost gives hubby a heart attack. when he asked me, "what?" i told him the price has gone up another 4c and now costs 3.03. lol! i didn mean to shriek tho.

zewt said...

princessjournals - hahaha... only 4c and you shriek eh? well... what if the price here increases by RM1 buck... i think ppl here will ... i really dunno. one thing... we will go back to our driving habits in no time.