Sunday, July 20, 2008

Should Malaysians pay more for oil price?

Should we pay more for oil?


1. Scarce resource. Oil just like coal, steel & other form of minerals are finite resources. There is no other way better than the price mechanism to allocate them. Furthermore oil crisis is not faced by Malaysian alone, but worldwide. Some countries face more severe oil price hike but their economy are still able to grow

2. Increase in efficiency. Facing higher costs of production resulting from oil price e.g. transporting goods, people demanding for higher wages etc will inevitably force firms to be more efficient in their operation even when there is less or no competition

3. Reduce congestion. Paying 41% more for petrol will force households to travel prudently & cut unnecessary journey. This will help to ease the congestion & thus contribute to lower accident statistics

4. Reduction in pollution. As Malaysian & the rest of the world travel lesser, it will contribute greatly to the environment in terms of reduction of carbon emission. Also there will be greater usage of public transport, thus significantly slash the number of cars on the road. Process of global warming will be slowed down

5. To avoid sudden increase in future. It is much better that we pay high price now, than to pay higher price in the future. Suppose that in these 5 years we maintain the RM1.92 per liter system with heavy subsidy from the government, there is a possibility we have to pay RM12 per liter after 5 years if the oil price is extremely high & the government suddenly have to remove the subsidy. By then Malaysians will not be able to cope with a sudden 600% increase in oil price

6. Opportunity costs. Continuous subsidy by Malaysian government means there will be many next best alternatives forgone. Penang’s second bridge, number of schools, improvement in public transport & etc are just few of them.

However (evaluation),

1. Malaysia as net exporter of oil. Just like many oil producing countries such as Qatar, Nigeria, Venezuela, Iran & etc their oil price is cheap, so why can’t we? The country produce 625, 000 barrel of oil with 400, 000 for local consumption & the remaining for export

2. Low per capita income. In forums & debates many people often refer to Norway, Switzerland, the States & many other developed countries as having oil price much higher than us & yet they can cope. But the politicians forget that their per capita income some is as much as 10 times ours. Hence the comparison is meaningless

3. Using public transport is no way out for Malaysians. With poor public transport network & availability, people will be late for work, business appointment cancelled recklessly etc. As a result, people will drive once again & the road will become congested. Furthermore people prefer to travel in their own space which is more comfortable

4. Various macroeconomic problems. As oil price increase, people will be forced to change their lifestyle such as eat lesser outside, do lesser shopping, travel lesser etc. This means lower consumption which is harmful to economic growth. Bear in mind growth is often associated with increase spending onto goods & services in the economy. Unemployment will also increase as firms observed that there is a fall in profitability

In person, I would agree with the Government's unpopular decision to increase the oil price in accordance with the workings of price mechanism

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