Thursday, April 10, 2008

Fuel Subsidies and Prices


The Two RON-nies…
The Government is reportedly considering a proposal to introduce RON95/RON99 petrol, an "upgrade" from RON92/RON97 currently on sale at pump stations, as the means to address its growing burden of maintaining heavily subsidised fuel prices.

The principle here is "two-tier product and pricing" and "cross-subsidisation". This is workable IF low income and high income fuel consumers are effectively segregated via the consumption of different petrol grades, hence different prices, with the latter group "subsidizing" the former group.
However, we noted that virtually all cars on the roads these days can run on RON95 petrol, which means a mechanism that involves subsidized RON95 price and partially-subsidised or non-subsidised RON99 price is virtually ineffective in containing the Government’s fuel subsidy costs. Reading between the lines, we suspect the real motive is to raise fuel prices, with RON95 cheaper than RON99, creating the "price subsidy illusion" on the part of the public, with the ultimate objective being cutting or containing the amount of fuel subsides incurred by the Government.- Aseambankers

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