How does the gomen decide petrol prices in Malaysia? We tried to calculate on our own

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Once upon a time, our petrol price used to change a few times a year, then it was every month, then even more recently it started changing every week. Yes, for those of you who didn’t hear, our petrol price has been changing every week since the start of April this year.

And every time there’s a price change, a certain someone’s Facebook usually will kena bomb.

But after years of pumping petrol into our cars, some of us would still be wondering how da heck does the gomen kira the price of petrol!? Because sometimes when the global price of crude oil goes up, petrol price goes up, and other times when crude oil prices goes down, the price of petrol still goes up. So wadaheck is going on?

And that’s exactly why we’ve decided to write this article. The problem is, it’s actually difficult to even start discussing this issue because….

 

The gomen has a different reason every time the price of oil goes up

In January earlier this year alone, the gomen had TWO explanations as to why the price of petrol went up.

A) The price of petrol is based on the price of crude oil

We should mention that crude oil and petrol are not the same thing. We actually learned that the hard way from making a mistake in one of our past articles. Petrol is something that is produced from crude oil (and if you want to refer to them both, the term used is “petroleum”). With that in mind, it would make sense if the price of crude oil goes up, the price of petrol would too. And that’s what this gomen guy said.

“With the current strengthening of the US Dollar against Ringgit, the cost of purchasing crude oil will also increase. Hence, the surge of the retail fuel price in Malaysia.” – Datuk Lokman Noor Adam, Finance Ministry strategic communications director, as quoted by The Star, 30th December 2016

But the thing is a few days later, another gomen official said the opposite…

B) The price of petrol is not based on the price of crude oil

“The price of petroleum products at the retail level is not directly related to the crude oil price. The retail price closely follows the price of refined products, which may vary for different product types.” – Tan Sri Dr Mohd Irwan Serigar Abdullah, Secretary General of Treasury, Ministry of Finance, in an article on NST, 7th January 2017

If you look carefully, you’ll see the two statements were made a few days apart! In other words, according to gomen, it’s not just the price of crude oil, but the price of producing petrol that affects the price.

Actually, we’re more inclined to go with the 2nd one. It seems that there are quite a few factors involved when it comes to calculating the price we see when we go to the petrol station, and because these factors keep changing, we thus have the “managed float system”, or just float system for short.

 

What in the world is this managed float system that determines our oil prices?

Some of us may have never heard of it, or may have heard of it and not really understood what it meant, but the managed float system has actually been around since the 90’s now. But this article mentions that Malaysians might not be very familiar with the term because of government petrol subsidies, which basically absorbed the differences. And ever since the subsidies were removed, our managed float prices have been calculated using the Automatic Pricing Mechanism (APM).

And according to Khairy Jamaluddin, here’s the formula of the APM:

Price of MOPS + operation costs + profit margin for oil companies + profit margin of petrol dealers + alpha = PRICE OF PETROL PER LITRE

 

Please don’t freak out by all the terms just yet, let’s go through them one by one.

• Means of Platts Singapore (MOPS): The Means of Platts Singapore is basically a calculation on petrol prices done by a company based in Singapore called Platts. They are one of the few companies in the world that does different kinds of complex calculations, and one of these is the price of refined oil.
• Operation costs: Various costs (including things like transportation) which the gomen has set at 9.54 sen per litre.
• Profit margin for oil companies: Set by the gomen at 5 sen per litre
• Profit margin of petrol dealers: Also set by gomen at 12.19 sen per litre
• Alpha: The difference between the MOPS price and the actual price transacted between oil companies and refineries. Set at 5 sen per litre

In other words, quite a number of the things above are fixed by the gomen. And according to MalaysiaKini, there are only 2 main variables that affect the formula, which is the MOPS price for fuel, and the exchange rate in which the MOPS is published (we gotta convert it to Ringgit). So in other words, this is the formula:

Price of MOPS (in Ringgit) + 9.54 sen + 5 sen + 12.19 sen + 5 sen = Price of petrol per litre <remove>

TLDR: Profit margins are fixed and we get our oil prices from smart people in Singapore and then convert to ringgit :(. 

But does the gomen actually use this formula?

Well, as far as we can tell, the price of MOPS can be by week, or month, or even year. So it’s possible that instead of using a monthly average, they now use a weekly average.

So let’s try it out using the numbers we see above. 

 

Our Malaysian petrol price at the moment changes every Thursday, but from the numbers in the table above, we can safely say that the price for RON95 last week was between 57-58 Australian cents. So to be safe let’s set it at 57.5 Australian cents (because the table above states the price in AUD). But we also have the other variable which is the exchange rate right? Based on this chart, last Thusday the exchange rate was about RM3.30 per Australian Dollar. So let’s fill in the blanks.

(57.5 cents x 3.30) + 9.54 sen + 5 sen + 12.19 sen + 5 sen = 221.48 sen / RM2.21 per litre?

That actually does not add up with the gomen’s most recent number for RON95 which was RM2.27 per litre, BUT if you change the exchange rate by even .1, then the final price changes quite a bit. So we might be getting it slightly wrong. Oh there’s also one last element that we forgot to mention about this whole petrol pricing thing which may explain why the number we got differs from the actual number.

 

The gomen has never released the actual formula

Back in 2014, the previous Domestic Trade, Cooperative and Consumerism Minister, Dato’ Seri Hasan Malek, is reported to have said that the gomen was looking into releasing the formulas for calculating the prices of RON95 and Diesel to the public.

“We shall seek approval from the Ministry of Finance first and then we will include a simplified version of the calculations on our website.” – Dato Seri Hasan Malek, previous Domestic Trade, Cooperatives and Consumerism Minister, as quoted by The Star

But it seems that it never came to pass, and the new Domestic Trade, Cooperatives and Consumerism Minister, Dato’ Seri Hamzah Zainuddin even said that he was not aware that his predecessor even said such a thing. And doesn’t that seem to indicate the actual formula isn’t available to the public just yet? And that could actually be one of the reasons why so many Malaysians don’t fully understand where these prices come from.

In a previous article, we actually brought up how the new weekly price system itself left a lot of people unsure of what to expect.

“Unfortunately, the government has not provided a clearer picture of the new measure (weekly petrol price), and what we see is one that lacks some key information.

As a result, people begin to imagine and speculate as they try to analyse the boon and bane of the new policy.” – Article by Sin Chew Daily, on Free Malaysia Today

A month on, there is still very little that we know about this new weekly price ceiling. And one can wonder if Malaysians don’t understand because there are powers that be that don’t want us to understand. So whether it’s a weekly or monthly petrol price, perhaps one thing that would make it easier for Malaysians to accept the petrol price isn’t the price itself, but rather a clear understanding of how the prices are calculated. In other words….