Fuel subsidy to offset higher oil revenue


THE rising price of oil due to the Russia-Ukraine conflict may increase the government’s revenue but it also would increase the budgetary requirement for fuel subsidies. 

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid believes the conflict would result in volatility in the crude oil prices especially the oil and gas (O&G) sector has been experiencing an underinvestment situation since the sharp fall of oil prices in 2014. 

He said additionally, Russia is among the top O&G producers globally, so that would mean possible disruption in the global supplies is quite likely and therefore, it accentuates the crude oil prices further. 

“Perhaps, the prevailing condition could accelerate the capital expenditure among the oil majors to reap the benefit of higher crude oil prices. On budget, yes. It will help the government’s revenue but it also would increase the budgetary requirement for fuel subsidies,” he told The Malaysian Reserve (TMR). 

“On one hand, it’s good because higher crude oil would increase but there is a need to relook at rationalising the fuel subsidies. However, it can be very tricky as inflationary pressures are building up. It’s a delicate balance altogether,” he said. 

The Brent crude oil index reached US$100 (RM420) per barrel for the first time since 2014 as Russian forces launched an attack on Ukraine, increasing the likelihood of international sanctions that could further disrupt energy markets. 

Oil prices have steadily risen for more than two months driving up oil prices more than 40% from their early-December lows. 

Russian President Vladimir Putin said he ordered a “special military operation” to protect the people of the Donbas separatist region, but said Russia will “aim for demilitarisation and denazification of Ukraine”, according to a Bloomberg report. 

He said Russia doesn’t plan to “occupy” its southern neighbour, but that Russia must “defend itself from those who took Ukraine hostage” — the US and its allies who had crossed Russia’s “red line” with expansion of the NATO alliance. 

Following this development, Prime Minister Datuk Seri Ismail Sabri Yaakob said the evacuation process is underway for 11 of Malaysian nationals in Ukraine. 

He said eight Malaysians are in Kyiv and three are outside of the capital. 

Meanwhile, MIDF Research director and head of research Imran Yassin Md Yusof expects the escalation of the Russia-Ukraine conflict will lead to an upward pressure on global O&G prices. 

“One of the main reasons is that Russia is a significant producer in both commodities. This will be even more so should there be sanctions on Russia. 

“In terms of Malaysia’s budget, we can expect higher revenue given that Budget 2022 was based on a lower oil price assumption. Hence, we believe that the budget will be unaffected,” he told TMR. 

Putra Business School Assoc Prof Dr Ahmed Razman Abdul Latiff said European countries are dependent on Russia’s supply and there is a chance for oil price to increase if economic sanction was made against Russia. 

“Even if there is no sanction, such uncertainty will also cause the oil price to increase. Therefore, it is possible that Petroliam Nasional Bhd might benefit from such an increase. 

“However, I don’t think this crisis will be prolonged so any benefits gained from such a price increase will be temporary and not going to affect our budget too much,” he said.