| | Background
The recent drastic hike, and the likely entire pullout of fuel subsidies come August strikes me as panic mode, mainly because it is political suicide for UMNO. It tells me one thing: The Fed Government is desperate and must already have their backs to the wall to make such drastic changes.
As of today, I am made to understand that Malaysia is a net oil exporter. So theoretically, Petronas (and hence, Fed Govt) should be generating a Net Cash Inflow from the prices of oil.
So in a worst case scenario where as of today, our country’s bank balance is at zero (we’ll call it the Fuel Subsidy Account), everyday that we are exporting more fuel than we are consuming, the balance in the Fuel Subsidy Account should increase, allowing us to build some sort of cushion in the slow dismantling of fuel subsidies.
Hence, something hidden is/has happened beyond recourse that is causing such panic seen in the Abdullah administration.
Theory
What if Petronas has been speculating in oil futures contracts that is now proving detrimental to them. If my theory is true that they have locked in contracts months ago to supply oil at a certain price that is now below the market price, then it may explain why our Fed Govt is in panic mode.
Imagine for example, that in one contract 6 months ago, Petronas speculated that the price of oil would not climb past $100 per barrel and locked in a contract for a Buyer to purchase them at $120 per barrel, thinking they would make a killing of $20 per barrel.
6 months later, the price is now $138 per barrel. Petronas is now supplying at $18 below market price to this Buyer.
Now, lets say the price of extracting oil is only $50 per barrel. So even if the oil was sold below market prices, Petronas’ profit is still none too shabby at $70 per barrel for supplying oil at $120 per barrel.
But since Petronas profits are used by our Fed Govt to offset the cost of imported oil, this is where the problem begins. The Fed Govt is paying for oil at current market prices.
If that were really the case, even the profits made from being a net oil exporter in volume may not be able to offset the cost of importing oil. So forget about even building up a surplus in the Fuel Subsidy Account. It’d be a steal if we didn’t have to dig into our foreign reserves just to subsidize the price of fuel.
And I think this may explain why the panic mode in the present administration. Instead of the administration having the luxury of taking staggered steps to expose Malaysians to real world prices, they are forced to put their own political career on the line, drop the fuel subsidies like a hot potato, and pray it doesn’t get any worse than that.
While everything is so uncertain for now, one thing is for sure. I do not wish for the theory to be proven true.
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| | Posted 6/8/2008 3:12 AM - 227 Views - 2 eProps - 1 Comment
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