Thursday, June 5, 2008

Price Hikes Will Spark Hyperinflation

My friend wrote an opinion for today's MalayMail but we're not sure if it will be published. I thought the article was brilliant, so here it is in its entirety for your reading pleasure.

By U-En Ng

According to preliminary estimates, the revised fuel subsidy scheme will save the government some RM4bil annually. This involves raising the price of RON 97 petrol from RM1.92 to RM2.70 per litre and diesel by one ringgit to RM2.58 per litre (there has been no word yet on RON 95).

This is a courageous step towards the principles of trade liberalisation that underlie the all government’s latest economic initiatives, but the new increases have caught many by surprise.

Senior Ministers had been sending out mixed signals over the weekend: Prime Minister Datuk Seri Abdullah Badawi denied there would be a review of petrol prices until September, while Domestic Trade and Consumer Affairs Minister Datuk Shahrir Abd Samad sought to prepare the public for eventual parity with world market prices by August at the earliest.

Few therefore expected an immediate review--fewer still the enormous margin over the old prices (petrol by 41 per cent, diesel 63.3 per cent) that the revised scheme entailed—and, immediately after the announcement of the new rates, long queues formed at petrol stations throughout the country from Kuala Lumpur to Kuching.

Comparisons will undoubtedly be made between the estimated RM4bil savings and the RM46bil net profit Petronas posted for the financial year ending March 2007--a figure that is likely to rise even higher this year as the oil and gas corporation capitalises on high world prices.

While Malaysia is still a net oil exporter--at least until 2011-- the government will be asked why it is unable to detach a small percentage of the oil and gas producer’s profits to hold down retail prices at least until the world oil market stabilises enough to support a free-floating price model.

And if, as some analysts like George Soros predict, oil prices have been driven to stratospheric levels partly as a result of futures market speculation, this bubble will eventually burst. Surely Petronas alone yields enough more than cash to sustain a temporary defence of the current regime?

Instead, the government intends to mitigate the price rise by issuing a RM625 cash rebate to owners of any vehicle with an engine capacity at or below 2,000cc (2,500cc for trucks). The annual handout translates into RM52 a month, but this turns into a negligible sum when a full 60-litre tank will now cost RM162 to fill.

Abdullah hoped that Malaysians would not “demonstrate over this”, but the government’s attempts to assist lower-income earners via the cash payout has the true effect keeping it in the status quo, while middle- and upper-income earners will see a drastic erosion of their purchasing power.

And consumer prices were a key issue at the recent general elections that saw the Barisan Nasional lose its two-thirds majority.

If fuel alone were the problem, Malaysian consumers would likely absorb the impact with moderate grumbling. The latest measures, however, were announced together with a review of electricity tariffs that will see household rates rise by 18 per cent and businesses by 26 per cent by July.

Fuel and electricity are Malaysia’s two principle sources of energy (as is also the case with the rest of the world), and price increases at source will undoubtedly lift downstream prices beyond levels acceptable to a society already reeling from high food costs and the hyperinflationary effects of earlier increases.

The entire supply chain, from manufacturers, to distributors and retailers will now face the prospect of a “double-whammy”--paying a quarter more on their electricity bills as well as bearing the drastically higher price of fuel.

The resulting cost increases will undoubtedly be passed on to the consumer, and might in turn precipitate a crisis in domestic production as demand for some goods falls through the floor with the diminution of real income.

The effects of inflation, let alone hyperinflation, are unpredictable at best in a country that recently avoided paying a RM900 minimum monthly wage. At worst the combined effect of these latest developments will set a match to the powder keg of social discontent.


  1. please grease your butt, we're all getting it. :P

  2. Not hyperinflation, although it will be high by our standards, but stagflation due to combination of the twin evils of cost push inflation & slowing world economy.

  3. well stagflation is a possibility if we were exposed enough, but i don't think we are. and i don't think our income will allow it anyway: we'll keel over and die before we get there.

  4. This is just hulkrage in 10,000 words. Without expletives. Or block-letter words. Except for RON.


    Frankly, I find it amusing how people will call upon Petronas to "defend the country" and "ensure cheap petrol" But then the same buggers go buy their petrol from anywhere BUT Petronas. So Alanis, no?

  5. I buy petronas petrol all the time, but yesterday couldn't manage to go there cause too many people. Like pasar malam. Went to Shell instead but had to queue also. Got some pictures of the chaos in my blog.

  6. I was highly amused at the people who burnt even more petrol while queuing up for petrol last night. Way to go, suckers.

  7. Article with 1 huge flaw.

    High income group WILL NOT be affected at all. High income group are well shielded from commodities price increase. To them, buying 1 less luxury item will offset ALL the inflation effect.

    The harder hit are none other than lower income group. The "handout" can hardly help them, when all the necessity price increase drastically.

    Because on top of the "food chain", high income group are will getting more on pay back when the inflation monster rampage. That's why we see poor will getting poorer, and filthy rich become richer.

  8. I wonder if credit card companies have raised the maximum amount of fuel that can be pumped in 1 transaction. Alot of us cannot pump full tanks in 1 transaction already.

  9. moo_t, if you mean by high income the 50 or so people and their families who each have a net worth in the 100s of millions, then sure they are fairly well shielded.

    But if you mean those who earn a few hundred thousand each year, then they are in the same boat as the rest of us when 100k devalues to 80k or 75k and bank credit freezes up. Kids will have to attend local colleges, and they'll have to trade-in their porshes for beamers.

    They will still be relatively "rich" compared to the rest of us, but in reality their high incomes will have been converted into middle, while the middle into low, the low into a pile of dung, and the poor into oblivion.

  10. FA,

    True, car is cheaper down here, but medical is not free lar... You forgot our Taxation Law at Uni harr... They charge us 1% Medicare Levy from you assessable income, that will be like $2000 net pa. In the need, you pay high fuel, high interest rate for car loan n mortgage, high living cost, high tax and at FY end you might still be payable for tax.

    Rent in CBD already $700-800 pw for 2 bed compared to last time when you were here it was $450-550.

  11. Fucking stupid article... sorry le, many assumptions that can not make it. I rather hear your rant, than another pretentiously intelligent article about the fuel issue.

  12. i feel the pain back home... geez, lots of people will be eating at mamaks now.
    it all boils down to missmanagement of the gov... this probably occur long long time ago when malaysia was actually growing... malaysia is stagnant now. sad, sad, sad...
    i think the better way to relief the tax is actually just tax the higher paid... such as those taking home 15-20k/month and above...

  13. Sigh, there goes my plan of buying a laptop.

  14. [...] uploads the article of a friend who tackled the impact of higher oil prices on the economy: “The entire [...]


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