My previous media statement on the weaknesses of the current fuel price setting mechanism received mixed reactions from the public. If anything, it highlights how the public hardly understands the modus operandi of the retail fuel industry, in particular the separate roles of the oil companies (the likes of Petronas, Shell, Petron and BHP) and the petrol dealerships.
Features of the Retail Fuel Industry
The oil companies own the bulk of the petrol stations and retail fuel assets in the country. They appoint dealerships (usually small enterprises or small companies) as contractors to operate the stations on their behalf.
The main features of the retail fuel industry are as follows:
1. The petrol dealerships are remunerated by way of fixed commissions on every litre of petrol and diesel they sell. The rates are currently 12 sen for petrol and 7 sen for diesel set by the government. Therefore, the monthly revenue depends mostly on the volume of fuel sold each month.
2. In order to get the stock of fuel to sell to the public, the petrol dealerships have to pay cash upfront to the oil companies. Depending on the size and location of the petrol stations, the amount each station has to fork out for each fuel stock purchase is in between RM100,000 to RM200,000. The frequency of fuel stock purchase also varies with the size and location of the petrol stations; some stations have to re-stock every 3 to 4 days, others can survive with weekly re-stocking.
3. The fuel stock management at each petrol station is decided entirely by the oil companies. The oil companies monitor the stock level at each station on daily basis and schedule stock deliveries accordingly in order to maintain a minimum stock level set by the government. Petrol dealerships cannot refuse a stock delivery decided by the oil companies.
4. On top of the upfront cash payment for the stock purchase, the dealership also pay fixed charges to oil companies in the form of rental, maintenance, credit card charge and other charges.
5. Petrol dealerships also have to bear other operating costs which include electricity, utilities and manpower cost.
Since the government has designed the retail fuel industry that way, a new problem arises with the implementation of the managed float system as petrol dealerships stand to incur losses each time there is a price revision. They have to sell at a cheaper price to consumers when the fuel stock was purchased at a higher price earlier on from the oil companies.
BN Does Not Want To Bring Down Fuel Prices Closer to Market Price
In a market scenario that anticipates crude oil prices to continue to plummet for the rest of the year, Malaysia has to wake up to the reality that more and more petrol dealerships will soon find it uneconomical to continue running the petrol stations. This has to be handled with proper in-depth planning to avoid a disruption to the supply of fuel to consumers.
Given the financial loss that petrol dealerships have to bear each time there is a downward fuel price revision, it is convenient for Barisan Nasional to use this excuse not to effect a more regular downward fuel price revision to bring our fuel prices more in line with the market prices. In fact, Barisan Nasional has been victimising petrol dealerships as a scapegoat to avoid a weekly downward fuel price revision because a monthly revision (as practised now) brings in almost a billion ringgit in hidden taxes a month.
The fact is consumers have been paying a much higher fuel price than the market price since 1 December 2014. We also have been paying hidden fuel tax since (though most people do not realise this in the euphoria of the plunging fuel prices).
For example, the latest market price for 6 January 2015 (based on price report by Platts and using government’s fuel price formulae) for RON95 is RM1.64 per litre. Unfortunately, because RON95 price is only set once a month, consumers end up paying a much higher price of RM1.91 per litre. Given that Brent crude oil price has hit below USD50 per barrel this week and may touch USD40 per barrel by the end of the month, the equivalent market price for RON95 is expected to come down to RM1.40 per litre by 31 January 2015. Unfortunately, consumers will continue to pay RM1.91 per litre with a hefty 50 sen per litre going to the government as hidden fuel tax by the end of the month.
It is in the best interest of Barisan Nasional not to revise the fuel price on weekly basis in order to keep collecting the hidden tax. For December 2014 alone, Barisan Nasional had collected an estimated RM633 million hidden petrol dan diesel tax. Based on the current market projection, Barisan Nasional will collect an even bigger hidden tax by the end of January 2015, which I estimate may reach RM700 million.
Therefore, Barisan Nasional will capitalise on public’s lack of understanding of the retail fuel industry (the rules of which they decide for themselves) to make the petrol dealership the convenient scapegoat in warding off any public pressure to effect a weekly downward fuel price revision. It is easy to convince the gullible public that such a weekly price revision will hurt the petrol dealership when the real motive is to collect hidden tax. If nothing is done, the public will pay the ultimate price yet again by being hoodwinked to fork out substantially to subsidise the government.
A Fair Fuel Price Setting Mechanism for All
I have been consistent in championing a reform of the retail fuel industry especially with respect to a fairer fuel price setting mechanism. I have expounded previously that a fairer fuel price setting mechanism will have to ensure that:
1. Petrol and diesel prices are revised on a weekly basis to ensure that the public pays the market price and benefits from the low crude oil price scenario
2. Hidden petrol and diesel tax collected is kept to the minimum level (by ensuring the retail price follows the market price as closely as possible). Any petrol and diesel tax collected due to a difference in retail and market prices cannot be spent except for the sole purpose of stabilising the petrol and diesel prices in the future. The tax collected so far must be put separately in a fund enacted by Parliament
3. A fixed subsidy of 30 sen per litre is given to the public to honour the principle that the hydrocarbon wealth of Malaysia is shared directly with the people. This will reduce petrol and diesel prices even further
4. Petrol dealership can continue to operate as an integral part of the retail fuel industry without being unfairly burdened with financial risk (as is the situation now)
By right, the responsibility to ensure there is an effective forward planning to cope with sudden changes to the fuel market (and the necessary adaptation of the industry rules set by the government) lies with the Finance Ministry and Domestic Trade, Cooperatives and Consumerism Ministry. Unfortunately, we live in a country where a minister’s silence has become a key criterion to keeping his job in the Cabinet so we have not heard any proactive solution to the current problem.
I have taken the liberty to engage the public and the industry with the hope of advocating a fairer fuel price setting mechanism for all. Therefore, I urge the relevant ministries, the oil companies, representatives of the petrol dealerships and consumers to convene an emergency roundtable discussion immediately to consider a complete overhaul of the retail fuel industry in Malaysia.
Move to Consignment Based Retail Fuel Industry
The key reason why petrol dealerships are currently susceptible to immediate financial loss each time a downward fuel price revision takes place is because they have to buy upfront the petrol and diesel stock as determined by the oil companies. This concept whereby petrol dealerships have to buy the wholesale fuel stock exposes them to a financial risk as they are forced to keep an expensive fuel stock in a volatile market environment.
In other countries (for example Australia), the government allows the retail fuel industry to operate on consignment stock basis (as opposed to Malaysia’s wholesale stock basis). This means the petrol dealerships do not have to fork out cash to buy the fuel stock as the stock belongs to the oil companies until it is sold to the consumers. In a way, the consignment stock basis reflects the fuel retail industry better because the petrol dealerships do not own the petrol stations and only collect commission on the volume sold on behalf of the oil companies.
If Malaysia moves to implement a consignment based policy, the key features of our retail fuel industry will be as follows:
1. A petrol dealership only acts as an agent who sell an oil company’s petrol and diesel. As an agent, it collects commission only and does not have to buy the stock
2. Any fuel price change will not adversely or positively affect the petrol dealerships financially because ownership of the fuel stock remains with the oil companies. The petrol dealerships are remunerated by way of a fixed commission based on the volume of sales
3. The oil companies only lose or profit financially from a change in fuel price once a year during an annual stock take. Even then, it is only a paper gain or loss as the stock holding is revalued based on the market price against the cost at which it was initially booked
The oil companies in Malaysia have had a strong financial footing all this while that they will not have any problem to change to a consignment stock if instructed by the government. For example, Petronas is estimated to rake in an operating profit of RM500 million from its petrol station operation for the financial year 2013 (based on information in Petronas Dagangan’s 2013 Annual Report).
With the implementation of a consignment based retail fuel industry, Barisan Nasional does not have any more excuses not to effect a weekly downward price revision. The existing excuse that a frequent fuel price change hurts the petrol dealerships will be invalid. When fuel prices are revised on a weekly basis, we should be paying around RM1.60 per litre for RON95 this week instead of the exorbitant RM1.91 per litre. Most importantly, the public does not have to subsidise the wasteful expenditure of Najib Razak’s administration through a hidden petrol and diesel tax that we have been paying since December 2014.
The ball is in Barisan Nasional’s court. I have no doubt most of them do not have a clue of the issue I explain here but the ministry officials and the industry leaders understand full well what I have proposed. I purposely speak of the plight of petrol dealerships first before putting forth my suggestion of the necessary overhaul because I expect some Barisan Nasional leaders to foolishly accuse me of flip flopping and championing the cause of the rich – so that I can prove today how little they understand the important economic issues that affect the public’s life every day.
It is imperative that the rules for retail fuel industry set by the Ministry of Domestic Trade, Cooperatives and Consumerism are changed immediately to implement a consignment based system. This will in turn allow for a weekly fuel price revision to be effected immediately.
The refusal to move to a consignment based system is a confirmation that Barisan Nasional intends to keep the petrol and diesel prices artificially higher than the actual market prices in order to collect the massive hidden tax.
Vice President & Secretary General of KEADILAN
Member of Parliament for Pandan
8 January 2015