OREANDA-NEWS. September 12, 2013. In light of the recent subsidy rationalisation by the government of Malaysia, we would like to clarify on the concerns and misconceptions brought up by certain members of the public, which carries the expectation to enjoy consuming petroleum products (especially gasoline and diesel) at minimal price, in line with our status as an oil producing nation.
 
Crude oil is a mixture of hydrocarbons that exists in liquid form in natural underground reservoirs, and needs to be explored, developed and produced. The quality of crude oil found in different reservoirs differ from one another, which can be simplified to range from sour crude (least expensive) to sweet crude (most expensive).
 
On average, Malaysia currently produces around 467,000 barrels/day of crude oil. It is worth noting that the Tapis blend of crude found within the Malaysian waters is considered to be one of the highest qualities of sweet crude in the world; thus fetches a considerable premium over the average blend. To illustrate, the price of commonly traded Crude Oil Brent blend is USD 115.38/barrel (price as at 30 August 2013), whereas the Tapis blend commanded USD122.96/barrel during the same day.

Crude oil has to be processed at petroleum refineries before it can be sold as petroleum products for the consumer consumption. The most commonly known petroleum products are gasoline and diesel. The refineries in Malaysia are generally more complex refineries with the ability to process cheaper sour crude into gasoline and diesel at the same quality required for domestic consumption.
 
It is a common misconception that we are able to produce cheaper petroleum products (gasoline and diesel) if Malaysia were to produce and consume our own crude, as the domestic Tapis blend is the most expensive crude feedstock. This is different to nations such as Saudi Arabia and other Middle East countries thatproduce cheap sour crude in large quantities.
 
As such, by exporting its Tapis blend and importing the lesser quality sour crude for its own domestic consumption, Malaysia has benefitted further by reaping higher value for its crude oil natural resource whilst ensuring energy security for its own domestic consumption.
 
As Malaysia exports and imports different blend of crude simultaneously – similar practice can also be seen in other oil producing nations – we are inevitably susceptible to the changes in global crude oil prices. Over and above the price of crude oil, the petroleum product prices needs to factor in logistics, infrastructure as well processing costs.
 
Despite this, the current retail pump prices of petroleum products in Malaysia does not reflect the real cost of producing the commodity as it does not track and reflect the changes in crude costs. Reason being, the difference and impact of crude changes has been absorbed by heavy government subsidies.  
 
As illustrated in Graph 2, crude oil price has been on the upward trend due to geopolitical uncertainties especially in the Middle East such as Syria and Egypt. Despite this, pump price of gasoline and diesel retailing in Malaysia has remained flat, at the expense of a growing subsidy amount. Heavy subsidy is an unsustainable expenditure in the long term. Additionally, it promotes energy inefficiency and imprudent consumption.