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Increasing petrol prices

Back in October 2015 Gregers Reimann and Mickey Jensen wrote the article “Hidden cost of fossil fuels” discussing the real cost of petrol including negative externalities. In the article, they argued that the real price of petrol (Ron95) in Malaysia should be RM4.25/litre, in line with the recommendations from economists at the International Monetary Fund (IMF). This price would include a tax of RM2.20 to cover for negative externalities, such as health effects caused by air pollution from cars. With the increasing oil prices, we are here taking a closer look at the current petrol retail prices in different countries: Malaysia, Singapore and Denmark.

The geopolitical situation and sanctions against Russia have caused a sharp increase in oil and petrol prices globally. The latest prices from the 23rd of May 2022 show that the global average retail petrol price is RM6 (USD1.40).

Fig. Petrol prices, RM/litre

The graphs show that both Denmark and Singapore have some of the highest petrol prices in the world, while Malaysia, has one of the lowest prices. How can this be?

As shown in the figure below both Denmark and Singapore are applying taxes on top of the product price. The retail price in Denmark includes a CO2 tax, an Energy Tax and a Value-Added Tax, while the price in Singapore includes Petrol Duty and VAT. Most developed countries are following a similar approach. However, some countries like Malaysia are subsidising petrol. In the case of Malaysia, the petrol price is currently maintained at RM2.05/litre (USD0.47) for Ron95, keeping the price artificially low below the market value and production price.

Fig. Petrol price breakdown

Looking closer at the data from Denmark you will notice that the current retail prices of petrol are similar to the prices observed during the oil crises back in the 1970s (when considering fixed value). The latest forecasts from Denmark further estimate that the retail petrol price will hit RM12.65/litre (USD2.88, more than 20kr/litre) within the year 2022. This will likely make some people consider alternatives to the combustion engine and car usage. However, in the case of Malaysia, the fluctuations in the oil price will be absorbed by government subsidies. The price will therefore not reflect the actual market value and product price (even without considering negative externalities). This will only encourage more people to drive resulting in more congestion and time wasted.

Fig. Petrol price from 1970 - 2021, breakdown Denmark vs Malaysian annual average gasoline price (Ron95)

The high petrol price in countries like Singapore and Denmark can be a good driver for getting more people to consider alternative transportation, such as public transportation and/or bicycling. For example, by using electrical bicycles (E-Bike). By comparing the kilometre price between a conventional car and an E-Bike it is seen, that users will be able to save up to 95% for Malaysia and 97% to 99% for Denmark and Singapore respectively.

Fig. Savings per passenger mileage (km), Car vs E-Bike. The graph is using the following assumptions: Car: 5.5l/100km, E-Bike battery: 250Wh and 9.4Wh/km

While the switch away from cars sounds appealing in countries like Denmark and Singapore, it will still take time for countries like Malaysia, which is heavily dependent on cars. The highly subsidised petrol prices and a low degree of infrastructure for pedestrians and bicycles would only encourage people to use the car. Now would be a good time to consider and plan for a low carbon future.

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