With the international price of a barrel of oil nudging USD100 a barrel mark, Malaysia, with its long history of of subsidizing consumer prices for petroleum products, is being forced to re-consider its policies. Earlier this month, Malaysian Prime Minister Abdullah Badawi declared that the country would have to restructure its fuel-subsidy scheme, acknowledging that high energy prices made them "difficult to maintain."

But as is commonplace when government subsidies become entrenched, strong opposition from those that have been benefiting from the relatively cheap fuel in the country has made lowering the subsidies politically risky. Thus, just weeks after the Prime Minister made his comments the government has seemed to back off.
 
Last week, Malaysia's official news agency, Bernama, reported that Finance Ministry Parliamentary Secretary Dr Hilmi Yahaya assured Parliament that the government would not be taking drastic action in removing subsidies and that a detailed study would be undertaken before any changes were made. Indeed, the government will likely postpone a decision until after general elections, which are expected in early 2008.

The government's cautious attitude is not surprising given the wide-spread criticism and street protests that erupted when it last lowered fuel subsidies by 8 U.S. cents per litre in 2006. The protests, mainly staged in front of Kuala Lumpur's iconic Petronas Twin Towers, went on for months before eventually being broken up violently by riot police.
 
In order to defuse public opposition, Prime Minister Badawi has assured the public that this time around subsidy cuts will be aimed at wealthy Malaysians and not the general population. Speaking at his ruling party's general assembly in early November, Badawi explained that the government planned to restructure subsides to target those Malaysians that needed them, saying that "the rest can pay."
 
Opponents of fuel hikes allege that because Malaysia is a net fuel exporter, rising fuel prices have meant record profits for Petronas, the state-run energy company. They cite this and the low income of a majority of Malaysians as reasons why the government should keep fuel fuel prices low through subsidies.
 
Critics also point to the generous agreements granted by the national power corporation (TNB) to the country's private independent power producers (IPPs). Under these so-called ‘purchase or pay agreements', TNB has to pay the IPPs for contracted energy amounts regardless of consumer demand. This has forced TNB to purchase surplus electricity to a tune of almost USD700 million, money that critics say could be used to offset the proposed fuel price hikes. The Malaysian government has tried to renegotiate the power purchasing agreements between TNB and the IPPs, but negotiations broke down in March of this year.
 
However, supporters of the government's plans counter that even after last year's price hike, Malaysian's enjoy some of the lowest gasoline prices in Southeast Asia, at around 50 cents U.S. per liter: about half the amount paid at the pump in neighboring Singapore. It is argued that these low fuel prices have exacerbated the subsidy problem by encouraging overconsumption.
 
Proponents raising fuel prices closer to international prices, such as Petronas president Hassan Marican, insist that the country's massive fuel subsidies are not sustainable in the long term. As reported previously in Subsidy Watch, in September of this year Mr. Marican indicated that the government's fuel subsidy policy was not correcting the economic imbalances it was meant to deal with and instead benefited wealthy Malaysians who could afford large automobiles and high energy-consuming goods such as air conditioners.
 
At the time, Mr. Marican was responding to crude oil prices near USD80 per barrel, which by September had cost Malaysia over USD4 billion in fuel subsidies. With prices now hovering close to USD100 dollar per barrel, Deputy Prime Minister Najib Razak has said keeping the current subsidies will cost the government an estimated USD10 billion in 2007. Mr. Raza has argued that this level of subsidization is wasteful and could be better invested in new economic capacity and increased output.