Thursday, June 19, 2008

Oil Subsidy, The LATAM Experience

We have been so preoccupied with the drastic cutbacks in fuel price subsidy, we haven't paid sufficient attention to what's happening in other countries. Let's have a look at some countries in Latam, some are net oil exporters, some are net importers, some subsidise, some don't. Their report card tells quite a story.

Let's look at those a bit like Malaysia, namely Argentina and Colombia. Both are small net exporters of oil, around 300,000 barrels a day. The public in Argentina and Colombia pay US$1.04/l (RM3.38) and US$1.10/l (RM3.57) respectively. Both countries still subsidise fuel products for the people. Argentina spent US$11bn a year and is grappling with an inflation rate of 9%. While Colombia spends around US$3bn a year, and they have a more manageable inflation rate of 6.3%.

Big exporters include Mexico and Venezuela. They export some 1.4m barrels a day and 2m barrels a day respectively. Naturally fuel price is heavily subsidised and cheap. The public in Mexico and Venezuela pay US$0.69/l (RM2.24) and US$0.04/l (RM0.13). Boy, don't we all want to live and work in Venezuela??!!

Mexico's subsidies total US$19bn, while Venezuela's total subsidies were US$11bn. Of course Venezuela's population is almost the same as Malaysia at 26m, while Mexico's population is nearly 110m. Hence you need to divide the subsidy with the population to get at a realistic figure.

However, the good news ends there for Venezuela because they are currently struggling big time with inflation at 32% while Mexico is chugging along nicely with inflation at just a tad below 5%. Draw your own conclusions.

Let's now look at the net oil importers, Brazil and Chile. Brazil imports 30,000 barrels a day while Chile imports 244,000 barrels a day. Brazil has NO subsidy, while Chile's subsidy is a mere US$311m. Naturally fuel price for the public there is high. Brazilians pay US$1.58/l (RM5.13) while Chileans pay US$1.35/l (RM4.38). Brazil's inflation is at a manageable 5.5% while Chile's at 8.9%.

It maybe premature to draw solid conclusions from the Latam countries' experience but seemingly the countries that practice lesser fuel product subsidies do better over the longer term. It probably has to do with working in proper competitiveness in the industrial structure of the economy when you do not have oil subsidy. I guess, in a way, you can call it the curse of having oil. If you have it, you have to do a lot better with it as it can mask inefficiency. If you don't have oil, you are already competing at international standards of efficiency, you'd probably try harder already.

p/s photos: Jennylyn Mercado


Sisuahlai said...

But sadly GDP and inflation rates are not the only measures of progress, Venezuela and Mexico have the highest crime rates in the world! We really do not want to follow the "LATAM" paths.

Victor AY said...

It's pretty ironic now to see that petroleum exporting country with high subsidy have higher inflation. I guess subsidy breeds inefficiency and wastage. The people need to be educated that natural resource is scarce and once used, it's not going to be available. We should have learned our lesson based on the excessive tin mining during the 19th century...

In addition, I've read a book (Alan Greenspan - The Age of Turbulence) that describes the symptom for the curse of oil as Dutch disease ( when Dutch was able to find some gas during the 60's. I saw Norway is doing a very good job in managing the wealth (In form of Norway Oil pension fund) that come with sudden windfall.

Let's hope that our government can come up with a good plan in tackling this issue...

BBabyB said...

Care to comment on this

1 barrel = 159 liters x RM2.70/liter = RM 429 or USD 134

On 1 hand, we are paying the full cost of 1 barrel of crude oil with RM2.70 per liter but on the other hand the crude oil only produces 46% of fuel.

Msia sells crude oil per barrel at USD130 buys back Fuel per barrel at USD134. And not forgetting, every barrel of fuel is produced with 2 barrels of crude oil.

1 barrel crude oil = produce 46% fuel (or half of crude oil), therefore
2 barrel crude oil = approximately 1 barrel fuel
In other words, each time we sell 2 barrels of crude oil, equivalently we will buy back 1 barrel of fuel.

Malaysia sell 2 barrel crude oil @ USD 130/barrel = USD 260 = RM 858
then, Malaysia will buy back fuel @ USD 134/barrel = RM 442/barrel
Thus, Malaysia earn net extra USD 126 = RM 416 for each 2 barrel of crude sold/exported vs imported 1 barrel of fuel !!!
(USD 260-134 = USD 126 = RM416)

So where this extra USD 126/barrel income is channeled to by Malaysian Govt?????????

Another analysis:

1 barrel crude oil = 159 liters.
46-47% of a barrel of crude oil = fuel that we use in our vehicles.
46% of 159 = 73.14 liters.
@ RM 2.70/liter x 73.14 liter = RM197.48 of fuel per barrel of crude oil. This is only 46% of the barrel, mind you. Using RM 3.30 = USD 1, we get that a barrel of crude oil produces USD 59.84 worth of petrol fuel (46% of 1barrel).
USD 59.84 of USD 130/barrel turns out to be 46% of a barrel as well.

Another 54% = bitumen, kerosene, and natural gases and so many more.
And this makes a balance of USD 70.16 that has not been accounted for.

So this is where I got curious. Where is the subsidy if we are paying 46% of the price of a barrel of crude oil when the production of petrol/barrel of crude oil is still only 46%?

In actual fact, we still pay for this as they are charged in the forms of fuel surcharge by airlines and road taxes for the building of road (because they use the tar/bitumen) and many more excuse charging us but let us just leave all that out of our calculations.