The finance ministry is considering two alternative mechanisms to reduce the impact of volatility in international crude oil prices on the consumer prices of diesel and petrol after the dismantling of the administered pricing mechanism (APM) in the petroleum sector on April 1. The ministry is planning to do it through an "oil fund" or by adjusting duties.
After March 31, the consumer prices of petrol, diesel, PDS kerosene and domestic liquefied petroleum gas (LPG) are likely to move in line with international prices. While the impact of volatility in the international oil market on PDS kerosene and domestic LPG will be taken care of by subsidies, for petrol and diesel the volatility will be reflected in their consumer prices. The experience in the initial years of deregulating the prices of transportation fuels in Thailand and Philippines during the 1990s showed, while, the retail selling prices were inelastic in the downward direction, they adjusted quickly upwards.
Therefore, the finance ministry considers it necessary to devise a suitable mechanism to cushion the impact of volatilities in the international oil market on the domestic consumer prices of petrol and diesel.
Under the "oil fund" mechanism being followed in Thailand, the oil marketing companies make adjustments with the "oil fund" to contain the domestic prices at the levels considered desirable by the government in situations of high oil prices. Under the mechanism of adjusting the duties being followed in Malaysia, the consumer prices are linked to the product prices in the international market. However, increase in the product price in the international market is absorbed by varying duties and taxes. Subsidies come into play when duties and taxes have been brought to the zero-level and the domestic price is still high.
