Friday, May 1, 2009

Reducing Oil Prices

The Deputy Prime Minister had said that the lowering of price of petrol would cause the country to be bankrupt and takeaway funds, which is to be used for construction of buildings and bridges. In addition to the statement by the Party’s Secretary General, Tan Sri Khalid Ibrahim, we wish to highlight the following: -

1. The increase in the oil prices, which hit USD100 per barrel yesterday, is due to higher demand over supply. The demand is further increased by countries, such as China and India. The price increase is further caused by natural disasters such as, hurricanes and floods. Since the increase in oil price is not caused by increase in the costs of production, oil companies have been making and are expected to make huge profits.

2. PETRONAS has reported a record breaking revenue of RM184 billion with the profit of RM76 billion for the year ending 31st March 2007. For the 6 months period ending 30th September 2007, it has recorded a profit of RM42 billion. The subsidies according to the PETRONAS Treasury would amount to RM9.76 billion. Government subsidies after 2006 would amount to RM9.76 billion at USD75 per barrel and economist has suggested that this may be up to USD12.2 billion if oil prices hit USD100 per barrel.

Therefore, the subsidies would not cause the country to be bankrupt as suggested by the Deputy Prime Minister.

The revenues from PETRONAS under section 5 of the PETROLEUM DEVELOPMENT ACT, is controlled by the Prime Minister. The revenues had been used for image enhancing projects such as the construction if the PETRONAS Twin Towers, Putrajaya, for building the Sepang Circuit and for staging the Formula 1 event.

Petronas also subsidies processed gas for independent power produces (“IPP”). These IPP are privatized projects. The IPP sell the electricity produced to Tenaga Nasional and make huge profits. The people ultimately pays for this when the costs is passed on to them by Tenaga Nasional Berhad. Tenaga Nasional Berhad announced the profit as at 31 August 2007 is RM139.8 million.

The revenues of PETRONAS have also been used to bail out failed projects. Bank Bumiputra is an example where billions has been used to bail out the bank more than once.

The African Development Bank in a paper prepared in 2006 with regard to the high oil prices and the African economy made the following observations: -

“The prudent use of oil windfalls require appropriate governance structures which are based on transparency and accountability. It is important that the extra oil revenue be used to increase the set off production possibilities through investment in physical (e.g. infrastructure and human capital). Moreover, given that oil reserves are exhaustible, appropriate provision should be made for future generations to benefit from the current high price of oil. Specifically, there must be build in mechanism for control, reporting and evaluation of oil revenues and operations. Some oil producing companies are adopting policies to that effect. For example, the Nigerian government has created a special holding account for temporarily increases in oil revenues so as to smooth government spending and to reserve some of the windfall revenues for infrastructure developments. The African Development Bank has recommended such mechanisms for better involvement of civil society through all the decision making process.”

The African Development Bank has further recommended that the oil revenues should be invested in projects which yield the highest social rates of returns, such as education and infrastructure and not in prestige enhancing projects. Moreover, it added care must be taken that the extra oil revenue does not accrue only to some segment of the population while the living standard of others remains unchanged or worsen.”

It appears from the African Development Bank’s report that some of the oil producing countries in Africa has established transparent mechanisms for the control reporting and evaluation of oil revenues and the use thereof.

With regard to the second point of the Deputy Prime Minister that the revenue of PETRONAS had been used for constructing buildings and bridges, we wish to point out the following concerns in the construction and repair costs of such projects as set out in the Annexures attached hereto.

We call on the Deputy Prime Minister to provide us with an account on the oil revenues receives since 1974 and the manner in which the proceeds have been used.

3rd January 2008

William Leong Jee Keen
Treasury General

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