Managed float system gives flexibility to consumers to enjoy cheaper fuel

The government's move to scrap petrol and diesel subsidies and decide on a managed float in determining retail fuel prices based on global crude oil prices will provide the flexibility for consumers to

enjoy cheaper fuel given the current oil price slump.

Oil and gas industry analysts believe there is a strong possibility for the price of RON95 to be lower than its current subsidised retail price of RM2.30 a litre and RM2.20 per litre for diesel, once the new pricing mechanism commences on Dec 1, 2014.

The government will decide the price of petrol and diesel through a managed float, based on the Automated Price Mechanism (APM) and currency rates, similar to the system used to determine the price of RON97 since July 2010.

Under the system, the government would calculate the average price for a particular month and set it as the price for the following month. According to Domestic Trade, Cooperatives and Consumerism Minister Datuk Seri Hasan Malek, the average RON95 price from Nov 1 to 19 under the APM declined to RM2.27 per litre.

This was lower than the retail price of RM2.30 per litre.

If the lower price of RON95 continues until Nov 30, 2014, then the price of petrol would be lower than the pump price of RM2.30.

Another plus point of this mechanism is that the people can be be sure that oil prices will be at a fairly constant level, at least for another few months, as analysts are expecting the weak global oil prices will last for another two years with a mid-term projection of between US$80 and US$90 per barrel.

The managed float system is most commonly used in the international financial environment whereby central banks would attempt to influence their countries' exchange rates by buying and selling currencies.

Given that the new mechanism also comes hand-in-hand with the abolishment of fuel subsidy, Alliance Bank Malaysia Bhd Chief Economist Manokaran Mottain said this would greatly assist the government in meeting its fiscal deficit target of 3.0 percent.

"One third of the government budget revenue comes from the oil and gas sector (2015 estimate: RM60 billion), while fuel subsidy cost accounts for 8.5 percent of operating expenditure (2015 estimate: RM20 billion)," he told Bernama in response to the announcement to determine the petrol price through a managed float.

Affin Hwang Investment Bank Vice President and Head of Retail Research Datuk Dr Nazri Khan lauded the move, saying it could ease the people's burden and potentially combat inflationary pressures.

"We hope that when fuel prices decline, retailers and traders will also do their part by not increasing prices unnecessarily," he added. - Farhana Poniman