Malaysian Oil Subsidy

[__earth]

Currently, the government back in Malaysia subsidies some cost of fuel for the consumers. Do you guys think the government should lift the subsidy and let's the consumer faces the oil price?

Here's some background. In the recent month, crude oil price has been booming and its expected to set a record price by this coming spring or summer.
The boom is caused by several factors, most notably the recent production cap by OPEC. The reduction by OPEC has been challenged by the US but OPEC has proved itself to be resilient to outside pressure.

[__earth]

Currently, the government back in Malaysia subsidies some cost of fuel for the consumers. Do you guys think the government should lift the subsidy and let's the consumer faces the oil price?

Here's some background. In the recent month, crude oil price has been booming and its expected to set a record price by this coming spring or summer.
The boom is caused by several factors, most notably the recent production cap by OPEC. The reduction by OPEC has been challenged by the US but OPEC has proved itself to be resilient to outside pressure.

[topdog]

haha
http://i.a.cnn.net/cnn/2004/images/05/18/top.gas.prices.ap.jpg

[masterof_none]

(I forgot a lot of things about econs now, But this one sounds interesting, so I'll try. )

In terms of agg. demand, I think lifting subsidy doesn't make any difference in the country's economy, since, the G component in aggt demand merely being subtracted, and transferred to the C comp.
In the end, the aggt. demand would stay the same.

Since oil play a big role in the economy in the world, saving the consumption, I think, is the best option, to avoid paying excessive amount for too little oil. If this thing continues, inflation would occur.
If inflation occured at the same time of economic recession (which , I think, on its way to recovery, based on the recent econ. data), stagflation would occur.

Not sure whether stagflation would do any good in this kind of economy, but I think, inflation would most likely happen right now.
However, given a weak dollar (resulting from, maybe a weak economy) , and the fact that malaysian ringgit has been tied to the US, we actually enjoy a cheap cost in terms of import.
So, couple with our savings in oil, I think, Malaysian economy can pick up pretty quick.

So, the conclusion is, the govt, need not to transfer the burden of paying higher oil to consumer, rather, must try to find ways to reduce the consumption of already high price of oil to avoid inflation (or. maybe, stagflation).

[chenchow]

I guess the public should share partially the cost of the inflating petroleum with government. Subsidy came to more than a billion Ringgit right now a year and I think it is not that healthy in the long run.

Since the escalation of petrol prices, government has increased the price of petrol from RM1.35 to RM1.37. I would think that perhaps a price between RM1.40-RM1.45 would be more appropriate, since the cost has increased by more than 35% in US (not too sure whether there is increase in other parts of the world).

[__earth]

There is a hint that this oil crisis might be passing though the price will probably not fall back to its previous level.

Anyway, concerning the oil subsidy granted by the govt to the consumer, I am so much against it.

My opinion on aggregate demand, is that a lift of subsidy will affect the aggregate demand. Reason is -- while I am not sure whether subsidy is considered as part of the government component of the GDP, but assuming it is ?- consider the following.

My first point - the consumers face a price after subsidy, which is lower than the market price. While it is true that lifting the subsidy merely transfers resources from the government component to the consumption component, the consumers will face an increased price.

According to the law of demand, demand will fall with a higher price, given all things are the same. The demand for oil should fall. In effect, the aggregate demand will shift backward by reduction in consumption. The size that was transfered to the consumption component will be reduced. This will lead to a lower GDP (unfortunately).

But, an equilibrium point at the market price is efficient when compared to the equilibrium with the subsidy ? which means, less resource is wasted.

By wasted, I'm not saying an increase of consumption is a waste, I saying that the deadweight loss (I am not sure whether it is legal to use that term here) is reduced.

Second argument ? a follow up to my first argument - by lifting the subsidy and let demand fall, this will actually help reduce the current oil crisis. One of the few ways to weather this crisis is to reduce aggregate demand (with the aggregate supply unchanged). A reduced aggregate demand will help lower the price of which is already record breaking. But then, because Malaysia has only about 24 million of us Malaysians, this third argument might not be of any significance.

Third point - the government mainly gets money through taxes. In a way, that subsidy is the consumers? money. Therefore, letting the consumers actually pay for the market price of oil, will you said masterof_none, is merely a transfer of wealth, or rather, a retransfer.Despite this, my first point still stands because demand will still fall when the consumers actually face the higher market price.

The crux point of my third argument is, the consumers should not feel burden if the subsidy is lifted. I feel, if the consumers complain, it is caused by a physiological rather than an economical one. This would probably make the one that lifts the subsidy to be very unpopular.

Fourth, a green bias - lower demand, lower pollution, better air, happier me.

So, in conclusion, reinitiating my earlier stance, I am against the subsidy.

[masterof_none]

According to the law of demand, demand will fall with a higher price, given all things are the same. The demand for oil should fall. In effect, the aggregate demand will shift backward by reduction in consumption. This will lead to a lower GDP (unfortunately).



However,the effect on consumers, of the rise and fall of the price, depends on the elasticity of demand of oil itself. It's a movement along the curve. A drop in the price of oil, would create very small reduction in the demand of oil. (although, granted, it would fall somewhat.. maybe ppl would take LRT to go to work, instead of cars).

I don't have the exact figure about how elastic the consumption of oil, but, a hint from the power of OPEC, that can swing the price up and down overnight at their will, appears that the demand for oil is highly inelastic. So, when the price of oil get shifted higher, people would still pay for their gas to go to work, etc. So, in the end, like I said before, inflation would most likely occur in the economy.


Second argument ? the government mainly gets money through taxes. In a way, that subsidy is the consumers? money. Therefore, letting the consumers actually pay for the market price of oil, will you said masterof_none, is merely a transfer of wealth, or rather, a retransfer though my first argument still stand because demand will still fall when the consumers actually face the higher market price. The crux point of my second argument is, the consumers should not feel burden if the subsidy is lifted.

however, even if govt do not subsidize the consumers, taxpayers still have to pay taxes according to their income bracket, right?
Govt. may instead may spend in something else, maybe increase spending on education. But, I think, by subsidizing the oil, at least for now, could cover up potential inflation that could build up in the economy that result from the increase in the price of oil + its highly inelastic demand.
I think, it falls back on how elastic the demand of oil is.

[Thirdshifter]

I don't really follow Malaysian economy closely but the United States maintains an oil reserve for emergencies. In 2001, Bush directed the Secretary of Energy to fill it to 700 million barrels from the 592 million that were in it at the time. It currently contains 660 million barrels of oil and is gaining at a rate of 170,000 barrels per day. Oil is selling for $40 a barrel.

The President could liquidate the petroleum reserve at a rate of $35 per barrel and take in 23.1 billion dollars, simultaneously alleviating 5% of the budget deficit (plus eliminate the cost of storing it) and bringing down the price Americans pay at the pump.

The Strategic Petroleum Reserve is unconstitutional and should be eliminated.

[__earth]

However,the effect on consumers, of the rise and fall of the price, depends on the elasticity of demand of oil itself. It's a movement along the curve. A drop in the price of oil, would create very small reduction in the demand of oil. (although, granted, it would fall somewhat.. maybe ppl would take LRT to go to work, instead of cars).

I agree that the oil elasticity of demand seems to be low.
But, with subsidy, there is still deadweight loss. With the removal of subsidy would eliminate the deadweight loss and this lead to efficiency.

however, even if govt do not subsidize the consumers, taxpayers still have to pay taxes according to their income bracket, right?
Govt. may instead may spend in something else, maybe increase spending on education. But, I think, by subsidizing the oil, at least for now, could cover up potential inflation that could build up in the economy that result from the increase in the price of oil + its highly inelastic demand.
I think, it falls back on how elastic the demand of oil is.

Here, I disagree on inflation. Inflation would only occur if the aggregate demand goes up. In our scenario -- at best if consumption doesn't fall -- aggregate demand stays the same.
On taxes, this would help reduce the Malaysian budget deficit since expenditure is cut, like you have said.

[masterof_none]

ahha!, I just realized that the inflation is determined by the change in aggt. demand.

(I just realized this when I was laying on the bed after posted, and thought, "well, does the consumption of oil is big enough to trigger inflation? Ah, it must moves the aggt. demand first" )

However, the hike in both oil and american interest rate "does" trigger the concern about inflation:

http://utusan.com.my/utusan/content.asp?y=2004&dt=0527&pub=Utusan_Malaysia&sec=Ekonomi&pg=ek_01.htm

About oil reserves, I'm not too sure about Malaysian govt.'s policy on that. I think we don't do things like Americans, stocking the oil,
since we do have our own oil well in T'gganu & sarawak , enough to supply the entire Malaysia's oil.

[chenchow]

I think Malaysia does have some oil reserve, although it is not up to the magnitude of US. Perhaps, I should call it inventory... We need to spare in case of any needs. Plus we import oils from abroad, while we export the oil that is gotten in Malaysian water.