Potential changes of fuel price in Malaysia if crude oil price continues to fall

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Brent crude oil was quoted at US$79.41 on Friday when Malaysia announced its recent 20 sen per litre petrol subsidy cut from Oct 2 – a fall of almost 31% since its highs of US$115.06 earlier this year. The decline is largely attributed to a slowdown of global economic growth, especially in China, along with a stronger U.S. dollar that is further driving down the cost of commodities that are denominated in it.

Some experts are beginning to see US$80 levels as “a new normal”. Others, however, wonder if prices would indeed stabilise at current levels and slip lower from here, or move higher again in spite of forecasts of lower global oil consumption ahead. Already, there are reports of the oil-producing OECD countries possibly having an emergency meeting to discuss the weak oil price that will hit their coffers and budgets instead of waiting for their next scheduled meeting on Nov 27.

Jeffery Gundlach, a renowned bond investor and the CEO of US-based fund management company DoubleLine, believes that the price still have more room to fall. “I’m convinced that Saudi Arabia wants the price of oil at US$70,” said Gundlach.

Other experts say the price of oil will remain weak over the medium if the Organization of the Petroleum Exporting Countries(OPEC) does not cut its supply. OPEC is responsible for around 40% of crude oil supply worldwide.

Whether or not Saudi Arabia and other major oil producers will cut production to prop up prices, the broader concern is the state of the global economic recovery and its impact on growth for export-dependent countries like Malaysia.

Whatever happens, one thing seems rather certain: with Malaysia determined to cut its fiscal deficit and rationalise blanket subsidies. RHB Research said Malaysia turned into a net oil importer this year when it imported a net amount of RM3 billion in the first eight months of 2014 compared with a net export of RM2.1 billion in the same period last year. "We estimate that for every US$10 per barrel fall in the average crude oil price, government revenues would be reduced by RM4 billion, but this would be mitigated by a corresponding reduction in expenditure through a lower fuel subsidy bill, with a potential reduction of RM2.5 billion," it said in a statement Tuesday. What’s more worrying than the possibility of pricier petrol at the pumps, though, is the possibility of Malaysians actually paying cheaper prices at the pump without subsidies. This would happen if oil prices fall further, some economists say. 

Malaysia is believed to have assumed an oil price of US$100 per barrel for Budget 2015, down from US$110 per barrel for Budget 2014. RHB Investment Research executive chairman Lim Chee Sing, for one, reckons it may be tougher for Malaysia to achieve its 3% budget deficit targets in 2015 should oil prices remain at US$80 levels, all else being equal. He calculates that every US$1 per barrel drop in crude oil prices would cost the government about RM650 million in revenue, excluding the potential savings from fuel subsidies. In other words, a decline of crude oil price by US$25 (from the US$105 estimated for 2015) to US$80 per barrel will result in a reduction of revenue of RM16.25 billion (6%); at US$70 per barrel, it would mean a loss of RM22.75 billion (8.3%); at US$60 per barrel, a loss of RM29.25 billion (10.6%).

“Increasing government revenue would be a challenge under an environment of falling oil prices, which is projected to account for 28% of government revenue next year,” says Lim to the question of whether it was really that tough for the government to reduce its budget deficit at a faster rate than planned and have a surplus way before year 2020.

Nevertheless, it said Petronas might maintain its dividend payment at RM27 billion temporarily to help the government next year until the full-year implementation of the Goods and Services Tax (GST) in 2016.

Furthermore, it said the lower crude oil price could affect oil and gas investment activities in the country, whereby the impact could be seen perhaps in 2016 if Petronas decided to delay its investment due to a prolonged low crude oil price. "The impact in 2015 would unlikely be significant given that most of the investment had been committed and would unlikely be cancelled or delayed," it said.

RHB Research said although a delay or cancellation of oil and gas investment could impact on the country's economic growth in 2016, it was expected to be manageable given that export growth would likely improve and could turn out to be stronger than expectation due to lower crude oil prices.

The government will discuss the possibility of introducing a sales tax for RON95 petrol if global crude oil prices continued on a downward trend at a Fiscal Policy Committee meeting next Wednesday, said Deputy Finance Minister Datuk Ahmad Maslan in a report by Bernama. He gave an example of charging a sales tax of RM0.58 per litre if the price of RON95 fell to RM1.72 per litre, which would bring the total price for the consumer up to the current price of RM2.30 per litre. RM0.58 is a hefty 33.72% out of the RM1.72 example price given, but we don’t think a fixed 33.72% tax is what the minister meant. 

Although Bernama’s report doesn’t specify any formula in particular, we think the intention is to keep the RM2.30 price fixed, and just collect the difference as a tax. According to the minister, the government paid RM23.5 billion in 2013 and RM21 billion in 2014 so far to petroleum companies for petrol subsidies, it needs to recoup the amount. A fuel tax would allow for this.

So, do you think will fuel price still going up on next year?