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This is part of a strategy to attract investments, underscoring the importance of the oil and gas (O&G) sector in the economy.
For oil producing countries, such as Norway, the United Arab Emirates and Malaysia, the significance of these resources in economic development cannot be overstated.
Oil revenue has gone into financing large and small-scale infrastructure and social projects in many countries, including Malaysia.
Oil and gas yielded a revenue of US$4.3 trillion (RM19.8 trillion) globally in 2023, according to market research service provider IBISWorld.
Oil and gas are among the big revenue generators in Malaysia, accounting for up to RM300 billion in earnings annually for the country.
Tax revenue derived from oil and gas is used by the government to invest in various projects, from education and healthcare to infrastructure and welfare programmes.
Petronas, the national oil corporation, has also contributed directly to many social projects, according to Yugendran Sivakumaran, an analyst at the Bait Al Amanah research institute.
“For instance, it has invested millions in the education system in Malaysia,” he told FMT.
The spillover effect
The discovery of oil has also led to the development of upstream and downstream industries.
For instance, many companies are involved in exploration, such as Hibiscus Petroleum, which has a production sharing contract in Sabah through its subsidiary, SEA Hibiscus Sdn Bhd, and Eversendai Engineering, whose subsidiary Eversendai Offshore specialises in complex fabrication projects for the O&G sector.
Downstream, many companies are involved in the sale and distribution segment.
Among them are Gas Malaysia, which distributes natural gas to residential, commercial and industrial customers.
Other companies provide logistics as well as engineering, procurement and construction services.
For instance MISC Bhd, which operates liquefied natural gas, petroleum and product vessels, specialises in energy transportation.
Many of these industries would not have been developed if not for the O&G sector, Yugendran said.
Non-oil producing states such as Johor have also benefited.
Economist Niaz Asadullah said Johor Bahru, which is emerging as Malaysia’s second economic capital, can now leverage on the O&G sector to become a regional storage and trading hub.
He told FMT the Johor-Singapore Special Economic Zone will also create new opportunities for the state.
“Collaboration with Singapore, a global leader in meeting environmental, social and governance requirements, can also help develop an environmentally friendly petrochemical cluster and green economy,” he added.
Asadullah, who is an associate fellow at Universiti Malaya’s centre for research on social well-being, said revenue from the O&G sector has also been invested to build human capital.
“This has attracted significant foreign direct investments (FDIs) and created numerous job opportunities,” he added.
The retargeting of subsidies
Oil revenue has not only enabled the government to keep personal and other taxes among the lowest in Southeast Asia but has also helped to keep prices of essentials down through subsidies.
However, rising costs, inflation and other factors have now made it necessary to rethink the policy.
For instance, the government spent RM14.3 billion on fuel subsidy in 2023, up 10-fold from RM1.4 billion in 2019.
But Malaysia is now taking the cue from other oil producing countries to retarget subsidies.
Major oil producers in Africa, such as Nigeria, Ghana and Kenya have removed oil subsidies.
In Nigeria, pump prices have risen almost three-fold to the equivalent of US$1.21 (RM5.70), in Ghana it is US$1.16 (RM5.46) and in Kenya it is US$1.36 (RM6.40).
In Norway, a big oil producer in Europe, the average price of petrol is €1.72 (RM8.66) per litre, inclusive of road, carbon and sales taxes.
In Malaysia, the subsidy for diesel was removed for owners of private vehicles on June 10, raising pump prices from RM2.15 to RM3.35 per litre.
The rationale
The decision to adopt a targeted subsidy mechanism has garnered wide support.
Among groups that have voiced support for the subsidy retargeting is the Consumers Association of Penang (CAP).
CAP president Mohideen Abdul Kader told Bernama on June 12 that the subsidy should only be for those who need it.
“It should not go to everyone regardless of their economic status,” he said.
The Malaysian Institute of Economic Research said the policy to reduce or withdraw the subsidy will reduce price differentials at border areas.
The low price of fuel in Malaysia has encouraged smuggling of the commodity to neighbouring countries where prices are much higher.
When announcing the subsidy retargeting, second finance minister Amir Hamzah Azizan said fuel subsidy has led to leakages that have cost the government billions of ringgit over the years.
The retargeting of the diesel subsidy is expected to save the government up to RM4 billion a year.
Amir Hamzah said the savings will be utilised to provide quality public infrastructure and more comprehensive social protection.
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