PETROL :D

Straits Times Article: KL plans subsidy cut for higher grade of petrol

Owners of high-end vehicles will have to pay more for their fuel under a government plan to reduce subsidies for a grade of petrol used by performance cars and sports utility vehicles (SUVs), Octone 99.

The other grade often used by motorcyclists and cheaper cars, Octane 95, wil be sold at a lower price, said Domestic Trade and Consumer Affairs Minister Shahrir Samad.

The subsidy on petrol may be revised with the bulk going to the regular petrol type so that prices will be kept down for the average motorist, Datuk Sharir was quoted as saying by the New Sunday Times newspaper.

He said the Octane 95 grade could be used in most vehicles but the government would also offer Octane 99, a more costly premium fuel that is usually used in higher-end cars. Both grades have not been introduced in Malaysia.

“The goal is to have subsidies targeted and more focused at those who need it, such as the lower- and middle-income groups, and give a choice to the rich on what petrol they want to fill in their tanks,” said Datuk Shahrir.

“I was informed by Proton that a majority of cars can use Octane 95. The rich who use Octane 95 in their Mercedes, BMWs and SUVs would not get the performance that comes with the higher quality Octane 99,” he added.

He said the government would save costs by mainly subsidizing one type of fuel, Octane 95 as opposed to subsidizing two types of fuel.The proposal is being considered following meeting of the Cabinet Committee on Inflation chaired by Prime Minister Abdullah Badawi recently.

Reflections:

I feel that this is a really smart way of providing subsidy to the people in the country. Due to the rising oil prices, the Malaysian government gives subsidy based on the type of good purchased. Though both products are petrol, the types of petrol (Octane 95 - lower grade and Octane 99 – higher grade) are different. This subsidy allows consumers to pay a lower price and exchange a higher quantity. For the case above, Octane 99 is a higher- grade petrol. It can be seen as a luxury good. Only people with a higher purchasing power (OR rich people) are able to buy this good. However, the question would be how willing would they be to buy this good? Two main factors would determine how willing they would be to buy Octane 99. It is a question about car performance versus savings. Would they want to compromise on the performance of the car? As said in the passage, “The rich who use Octane 95 in their Mercedes, BMWs and SUVs would not get the performance that comes with the higher quality Octane 99”. However, if they downgrade their petrol grade to Octane 95, that would mean loads of savings for them.

The government subsidizes those that use Octane 95 with an assumption that its consumers would be those from lower-income groups/ motorists/ possess lower-end vehicles. However, this might not be true as people using higher-end vehicles (e.g. BMWs, Mercedes) might also go for the lower grade petrol. The government does not directly subsidize the lower-income groups, who are the people who are really in need of this subsidy. “The goal is to have subsidies targeted and more focused at those who need it, such as the lower- and middle-income groups, and give a choice to the rich on what petrol they want to fill in their tanks”, what would happen then if a large proportion of the rich people choose to fill their tanks with the lower-grade petrol? The government might just end up subsidizing most of the petrol-consumers again, which brings us back to square one.

Secondly, we all know that subsidies from the government come from taxes paid by tax payers. To the extent that tax revenues are used to finance the subsidy, there will be a transfer of income from taxpayers to the consumers. This decrease in subsidy on petrol would also mean that the tax payers would have to pay lesser taxes (as compared to the previous situation in which the government subsidized both the higher and lower grade petrol types). The lower income group would be very happy, as this would mean that they would still receive the subsidy without paying much tax. However, for the higher-income group, they would suffer a loss as they would still have to pay tax without receiving any form of subsidy. The tax which they pay would not benefit them in any way at all should they use the higher-grades of petrol.

In conclusion, this measure taken would help the lower-income group to a large extent, and the higher-income group to only a small extent. But, this is fair :)

-Gaomin-