New proposed pricing mechanism for RON95 not feasible: Mohamad Irwan Serigar

The new pricing mechanism proposed by a certain party for RON95 to be based on the actual production cost of Malaysian oil refineries denominated in the ringgit is not feasible, says Treasury Secretary-General Tan Sri Dr Mohamad Irwan Serigar Abdullah.

The country's fuel needs are still being fulfilled by imports and denominated in the US dollar, he said, noting that the current pricing framework of a managed float system based on the Automatic Pricing Mechanism (APM) has witnessed reductions in the retail price.

"Even within the existing pricing framework, the retail price of RON95 has decreased seven times while diesel has decreased five times in the period from December 2014 to January 2016 since the implementation of a managed float system based on the APM.

"In comparison with the RON95 price for December 2014, the retail price of RON95 in January 2016 has decreased by 18 per cent, while the retail price of diesel decreased by 28 per cent during the same period," he said in an article entitled "Why retail prices of petroleum products do not fall as much or as fast as crude oil prices" released Wednesday.

Mohamad Irwan said these reductions were quite in line with the quantum of reduction in refined product costs, and factor in the exchange rates.

He pointed out that the latest retail price per litre of petrol RON95 is RM1.85, RON97 RM2.25 and diesel RM1.60, much lower than the retail prices in some of the countries in the region.

He said the prices of petroleum products at retail level are not directly related to the crude oil prices but closely follow the prices of refined products, which may vary for different product types.

During the period of January 2015 to December 2015, the refined product cost for RON95 was higher than the crude oil price by US$5 to US$20 per barrel, while for diesel it was between US$5 to US$15 per barrel, he pointed out.

The refined product cost commonly used in this region refers to "Means of Platt Singapore (MOPS)" average price denominated in US dollars.

In the Malaysian context, the retail prices of petroleum products (petrol, diesel and liquified petroleum gas (LPG)) are set through the APM implemented since April 2, 1983.

Mohamad Irwan said the price of crude oil in the global market has fallen from a peak of US$110 per barrel in June 2014 to US$37 per barrel in December 2015, primarily due to excess supply.

The price has fallen almost 66 per cent in less than 18 months, causing alarm among countries dependent on oil revenue.

The large-scale production of shale oil by the United States is said to have increased output, which contributed to the downward trend in crude oil prices.

Although there has been a sharp decline in crude oil prices by as much as 66 per cent over the last 18 months (July 2014-December 2015), the same is not true for refined products, Mohamad Irwan said.

"The cost of products used in the retail price calculation based on APM is the cost of refined oil products and not the price of crude oil.

"The cost of refined products for RON95 only decreased by 22 per cent, i.e. from US$73 per barrel in December 2014 to US$57 per barrel in December 2015," he said.

Mohamad Irwan said the slower pace of reduction in the retail price was also compounded by the depreciation of the ringgit against the US dollar.

The average exchange rate against the US dollar depreciated by 23 per cent from December 2014 (RM3.51) as compared to December 2015 (RM4.32).