On a National Oil Policy

Oil has recently been very much in the news, not only in Malaysia, but throughout the world.

After the Dewan Rakyat adjourned on Dec. 21 for the Christmas and New Year recess, the Minister for Primary Industries announced the same night government approval for price increases for petrol, diesel and fuel oil. Premium grade petrol went up by 34 cents a gallon, regular petrol 24 cents a gallon; gas oil and diesel 11 cents a gallon, and fuel oil 5 cents a gallon.

These are pretty hefty increases, and set in motion a new round of increases in transportation and haulage costs and price rises in a whole range of goods, the end of which we have not seen yet.

The Minister for Primary Industries, when making the announcement of price increases for the oil products, said that the increases should not contribute to higher prices for manufactured products and he said that the government would deal severely with any attempt at profiteering. Such government assurance is hollow and meaningless.

For what powers has the government to stop manufacturers from raising their prices. The government has neither the powers nor the political will to be tough against profiteers, whether foreign or local capitalists.

Kerosene is a good example. Although the Minister said that there should be no increase in the price of kerosene at 71 cents per gallon, the fact is kerosene has gone up by 10 cents a gallon. The Government has only proved its impotence to maintain its own price levels.

We are now told that the Government proposes to include kerosene as one of the controlled items. I have great reservations that kerosene can be bought at 71 cents a gallon, unless the government is prepared to take firm action to help the poor, who are the worst hit by increase in kerosene price.

In fact, events of the past weeks have shown that even in items subject to price control, the government has not been able to maintain the controlled price, or ensure adequate supplies.

Thus, flour throughout the country have been sold under the counter at 35 cents to 40 cents a kati, and not at the 30 cents controlled price. Even at this higher price, flour is not readily available in sufficient quantities to meet the demands of housewives to prepare for the coming festivities.

I know that flour does not come under the Ministry of Primary Industries. I am mentioning this to show that government assurances about preventing a chain of new price increases after it has approved a new price increase for a particular key product, like petroleum, has invariably failed.

Two days after the announcement of these price increases, the Persian Gulf oil-producing countries announced that from January 1 this year, the price of oil would go up by a further 112 per cent. As a result, the five of the seven international oil majors who among themselves monopolised the entire Malaysian oil market are in conference for another round of price increases for their petroleum products, at even higher rates than the December increase. These five multi-national oil corporations which monopolized the Malaysian oil market are Shell, Esso, Mobil, British Petroleum and Caltex.

In allowing the December oil price increases, the Government has failed to take all relevant considerations into account with a view to benefit the Malaysian masses.

The government acted as judge in approving the oil increases. But it heard only the collective representations from the oil monopolies, and gave no ‘fair hearing’ to the consumers and the public. This one-sided approach can only give rise to questions as to whether the government was in command of the full facts about the complexities of oil pricing policy before giving the approval, or whether the government had collaborated with the oil companies against the interest of its citizens.

If the government is acting on behalf of citizen interest, then why should the whole matter of oil increases be shrouded in such great secrecy, which can only benefit the oil monopoly companies?

There was a report that the Ministry of Primary Industries had asked each company to present its own case as to how prices should be raised, and that the five oil companies had no prior consultations with one another as a deliberate policy to allay fears of collusion and to avoid arousing anti-trust feelings.

I do not know on what basis this report was made, whether it came from a source in the Ministry of Primary Industries or from the oil companies. But I am surprised as to the extent to which some persons can be so naive and gullible.

If we take the trouble to study the behaviour of these international oil majors, not only in Malaysia but in various parts of the world, we will find out that these international oil majors, sometimes called “The Seven Sisters”, had colluded in various parts of the world to maintain the maximum profit levels and profit margins in pursuit of their goal of profit maximisation. As responsible Malaysians, we must assume that the five Multi-national oil corporations will act true to character and would seek to collectively fix as high a price level as possible, whether such meetings were held in Malaysia or outside.

The Ministry of Primary Industries should in future tear away the shroud of secrecy attending such discussions and requests for oil price increases by the international oil companies, and give the consumers and public a fair hearing of their objections to any proposed price increases.

Only then would the Ministry of Primary Industries been seen as acting as an impartial judge in holding even the competing interests of the oil companies and the consumers, and not as at present, to be a government for only the oil monopoly companies.

Before the government approves another round of oil price increases, I would like to submit to the government’s consideration three aspects which it should have taken into account before approving the December oil increases. The government should consider all possible ways and means to avoid oil price increases, because of its highly inflationary effects, especially at a time when inflation has become the No. 1 economic problem in Malaysia running at over 10 % this year.

The government should endeavour to avoid oil price increases by considering:

1. Reducing the government duty on petroleum products;

2. Compelling the international oil monopolies to absorb the increases; and

3. Substituting the import of Persian-gulf oil by making use of our own oil production.

1. Reduction of government duty on petroleum products

The government imposes a very heavy duty on petroleum products, so much so that some 60% of the price of petrol paid by the consumers go to the government’s coffers.

The government should do its part in stabilising the present price of petroleum products by reducing its petroleum duty.

2. Compel the oil monopoly companies to absorb the price increases

The five international oil majors which monopolised the Malaysian oil market had made great profits in the past, and they can well afford to absorb the increased costs of selling oil in Malaysia.

Thus, one of the five international majors, Esso, made a net profit of $47 million in the five years from 1968-1972.

What the oil companies want to maintain is as high a profit margin as before, if not higher. The government should impress on the multi-national oil corporations that they should not blindly pursue the goal of profit maximisation, regardless of the harm to Malaysia. The oil companies have a responsibility to Malaysia to help contain inflation and should be satisfied with a lower margin of profit.

When I asked earlier whether the government, in approving the oil price increases in December, was in command of all the facts and data pertaining, to the economics of oil pricing, I was not trying to disparage the competence or efficiency of Ministry of Primary Industries officials.

On the other hand, it is a well-accepted fact that the oil monopoly companies keep their oil pricing policies a well-guarded secret, and many governments and countries were overcharged for their petroleum products without knowing it. India is a good example, and she discovered this by accident.

In studying the requests for oil increases, the government must not only look at the operations of the multi-national oil corporations in Malaysia, but in its international context.

For the net profit of a Malaysian affiliate of any of the multi-national oil corporation is only a part of the total profits made by the international oil major from the Malaysian operations.

Thus, the Chairman of Esso, in his 1972 Annual Report, said that for 1972, the company made a net profit of $13.1 million, which was a modest 9.4% return on capital employed.

In actual fact, the real annual rate of return on the investment is very much higher than 9.4% and the net profit is very much more than $13.1 million.

Although the Malaysian affiliate of any of the five international majors is concerned only with refinery and marketing operations, we must not forget that it is part of the international oil major’s world-wide monopolistic control over oil.

A characteristic of the economics of the international oil industry is that profitability in the industry basically stems from the sale of crude oil.

A study a few years ago estimated the production costs of crude oil in the Middle East at US10 cents per barrel.

At that time, the price of crude oil per barrel was less than US$2. This was before the recent series of price increases, which has brought the price of crude oil upwards by ten-fold. However, the increases in the price of crude oil barrel arises from the demand from the Arab oil-producing countries for a greater take from the oil revenue, and not because of any appreciable increase in the production cost of crude oil.

Historically, the principal mechanism which has served to buttress the international oil majors’ monopolistic control over the world’s crude oil has been their high degree of vertical integration. That is, by ownership of affiliated refining and marketing companies in various oil-importing countries, each company has secured ‘captive’ outlets for the highly profitable crude which cannot be won away by competitors.

The essential point about an affiliate in any country is that its need must, by the very logic of international corporation, be subordinated to profit maximization for the company as a whole. For the parent organization to operate the affiliate in any different manner would be out of character of the behaviour and ethos of multi-national corporations, which are concerned with the total profits of the corporation rather than with an individual affiliate’s position.

Thus, the affiliate companies are charged higher prices by the parent company than would be paid by independent companies, not only for crude oil, but also for transportation, managerial services, etc.

In this connection, it is worth noting that the international oil majors own outright close to 40 per cent of the world oil tanker fleet, and they charged inflated rates which are over and above the prevailing shipping rates.

Thus, the affiliate companies, in other words, the consumers of the oil-importing countries, are overcharged at every stage of the petroleum process. Thus, the profits that a multi-national oil corporation makes is not merely the profit of the refinery and marketing operations, but also from the crude oil, transportation, managerial service which is more significant.

In this connection, we can learn from the lessons of the first major oil refinery in Thailand. It was reported by the Far Eastern Economic Review on March 20, 1964, that the Thai refinery, backed by Shell, was to be operated for 10 years by the Thai Oil Refinery Company after which it would be handed over lock, stock and barrel, to the Thai government. Shell experts estimate profits conservatively at around US$2 million a year.

The estimated capital cost of the refinery was $28 million (US) and a $2 million a year profit would only be a seven per cent per year return on this investment (as compared to the 9.4% return reported by Esso last year).

One study indicates however that the key to the major’s seeming largesse lay in the crude oil profits to be derived from this 40,000-barrel-per day refinery. Even taking a conservative figure of US55 cents per barrel as after-tax profit, the crude oil profits for this refinery would amount to about US$7.S million per year, or over a ten year period almost three times the initial investment.

The real annual rate of return on investment would thus be over 30 percent per year rather than the 7 per cent. Moreover, after the ten year period was up and the government owned the re finery, there would still be a hope of being allowed to continue as crude oil suppliers, particularly since the company was the ‘donor’ of the refinery.

I do not know what has happened to this refinery, with the recent announcement of government takeover of oil marketing operations by the Thai government, but this should make the government and the people more cautious of sugar-coated multi-national corporation operations and projects.

For decades, the international oil majors had made billions of dollars for themselves and their countries, especially the United States of America, by on the one-hand, denying the Arab oil-producing countries their rightful share in the revenue from their oil resources; and secondly, by overcharging the consumers in oil-importing countries through their monopolistic manipulation of prices on crude oil, transportation, and other stages of the petroleum process through their affiliate refineries and marketing organisations.

Now, the Arab oil-producing countries have united to demand a more equitable take of their oil earnings. All that the international oil majors would do is to pass on the increased price to the consumers in the oil-importing countries while maintaining their high profit margin, if not increasing it further.

It is time that the oil-importing countries, especially in the under-developed countries where such monopolistic price-fixing is more prevalent because of the overwhelming monopoly position of the international oil majors, get together to re-ex amine the entire oil pricing policy of the multinational oil corporations, not only at the refinery and marketing levels, but also the preceding levels concerning the prices of crude oil, transportation, managerial services, etc.

Malaysia on her.own should conduct an inquiry, to ensure that Malaysians are not made to slave for the profits of multi-national oil corporations and foreign economies.

In this connection, I would suggest that the government establish an Oil Industry Commission, to publicly go into the whole question of oil pricing at every level by the multi-national oil corporations, in Malaysia. Let the international oil majors, Shell, Esso, Mobil, British Petroleum and Caltex, produce facts and figures fo the Malaysian public to justify their present oil price levels.

I am convinced that if the Malaysian affiliates of the international oil majors are made to behave as responsible corporate citizens of Malaysia, and not to exploit Malaysian consumers for the greater profits for the parent corporation, there is considerable room for the oil companies to absorb the increases in the price of crude oil.

The Malaysian government must put the interests of the Malaysian consumers before the interest of foreign companies and multi-national oil corporations and protect Malaysians from the monopolistic practices of the oil combines.

If the oil companies would not act as responsible corporate citizens, and help to contain inflation by settling for a lower profit margin, then the government must be tough and break their monopoly practices. The DAP will support the government all the way in such anti-trust measures. Another way to break this monopoly is to permit the independent oil companies, what is called the international oil minors, to come into the Malaysian market to break the monopoly of the five of the “Seven Sisters”.

The Prime Minister, the Deputy Prime Minister and the Minister for Primary Industries have repeatedly said that Malaysia need not worry about our oil supplies, because Malaysia is one of the most favoured nations recognised by the Arabs.

Here, I would like to ask whether the Minister is, aware that although there should be no drop in oil supplies because there is no cut in our normal requirements, the various oil companies in Malaysia have started cutting down supplies to their dealers. Thus Shell has imposed a reduced quota on lubricants, while British Petroleum and Caltex are reducing petrol supplies to the dealers.

The Ministry should immediately cause an investigation to be made to find out why petroleum supplies to the dealers and consumers are being slashed by the oil companies, when there should not be any drop of supplies. This is not a responsible corporate behaviour.

3. Substituting the import of Persian-gulf oil by making use of our own oil production

The third method to stabilise and even bring down the oil prices in Malaysia is to substitute Persian-gulf oil by making use of our own production.

Malaysia produces 100,000 barrels of petrol and fuel a day, while we consume some 85,000 barrels, in other words, we have a daily excess of 15,000 barrels from our daily consumption needs.

It is estimated that with more oil strikes and natural gas finds, we will be producing about one million barrels a day by the end of this decade.

Unfortunately, Malaysian consumers are not benefitting from the fact that Malaysia is producing more oil than she needs, for we export the oils that we produce while import those that we need.

We must formulate a national petroleum policy with two basic aims:

1. To generate a cheap and fundamental source of power to bring about enormous economic and technical changes, as fuller electrification of the rural areas and cheaper goods and lower cost of living in the country.

2. To benefit Malaysians and not foreigners or multi-national oil corporations.

Oil found in Malaysia should benefit as broad a mass of Malaysians instead of only foreign oil companies and government revenue.

As it is now, Malaysians are not benefitting in any degree from Malaysia’s own oil production, and we are no different from a non-oil-producing country like Singapore.
The Minister said over the weekend that the prices of oil in Malaysia and Singapore should be small enough so as not to give rise to any smuggling is completely without logic and indefensible. By this argument, then we should jack up our price of rice to the Singapore levels.

The government said that our crude oil productions are not suitable to domestic requirements as our demand lies in the heavier types of fuel oils whereas our crude oil produces a greater percentage of the lighter type of oil such as gasoline.

I call on the Ministry of Primary Industries to work out a new oil strategy aimed at reducing the cost of living of Malaysians and better the living conditions of the people, comprising of the following elements:

(i) progressively reduce oil imports from the Persian Gulf states;

(ii) set up refineries to process our own crude to supply domestic requirements; and

(iii) make use of our own high-grade petroleum products for the establishment of petro-chemical industries to produce fertilizers, plastics, textiles, etc.

The proper utilisation and exploitation of our own oil resources can make great contributions to agricultural development and industrial growth. Thus, if we aim to increase the production of food and economic crops, we must plan a stepped-up increase in the consumption of fertilizers, and this is where our own petro-chemical industry based on our own oil resources come in.

I think the existing five multi-national oil corporations who have monopoly of the Malaysian oil market would not be happy to see Malaysian refineries processing our own crude, for this would threaten the profits of their international parent company from highly-inflated charges for crude and transportation It is, however, the government’s duty to look after Malaysian interests, and not the interest of the parent companies of multinational oil corporations who have in any event not only recovered their original investments, hut made great profits already.

By increasingly reducing our dependence on oil Imports, exploiting to the full our crude oil production both for local consumption and for the development of a petro-chemical industry, Malaysians should be able to not only cheaper petrol and fuel oil, but even cheaper fertilizers, plastics, man-made fibres and a whole range of other products, and earn foreign exchange from the export of petro-chemical products.

It is thus apparent that there is considerable room for the government to manoeuvre to avoid price increases for petrol and oil.

There can be no justification for any new price increases and there is no valid ground for the December increase that was approved by the government.

Before I leave the subject of oil, I wish to caution the government not to mortgage away the heritage of Malaysians by giving multi-national oil corporations and other foreign inte rests predominant rights over Malaysia’s oil resources.

The government is entering into production sharing agreements with the international oil majors, and from the reported terms of such production sharing agreement signed between the government and the Mobil Malaysian Sdn. Bhd. and three others recently, the agreements do not seem to be weighted in Malaysia’s favour.

The government must seriously consider nationalising our own oil resources, i.e. the government itself exploiting and developing our own oil resources. If international oil companies are to be permitted to exploit and develop Malaysia’s own oil resources, then Malaysians must be given effective control over, and an active role in, both the ownership and management of the oil production operations. And if this control and this active role is to mean anything, it must be overriding control and role.

There is no doubt that Malaysia needs greater local expertise, technological know-how and specialised knowledge about the complexities of oil economics and technology, if we are to fully benefit from our oil resources,and not to be misled by the multi-national oil corporations.

Last weekend, the Minister received 60 books on petroleum as a gift from the Asia Foundation. The Minister is probably unaware of the ironic implications of this gift, for it means that although Malaysia is producing 100,000 barrels a day, and hopes to produce one million barrels a day by the end of this decade, we still need a gift of 60 books on petroleum from the Asian Foundation. It highlights the paucity and scarcity of petroleum knowledge and information in the Ministry, which must be quickly remedied if we are not to be outwitted by the international oil-men.

In this regard, I propose that the government set up a petroleum institute to train Malaysians in all fields of oil economics and technology, so that Malaysians are full masters of our own oil resources.

Such an institute will also be able to bring into existence a responsible public opinion versed in oil affairs, by educating the people on a thorough understanding of the workings of the oil industry so that Malaysia’s oil interests can be properly safeguarded and advanced.

In this field, Malaysia should not rely solely on the international oil majors or the American and Western European states for help, but should draw help from all countries, including China, Soviet Russia, the East European States, the Arab states.

(Speech by Ketua Pembangkang and DAP member of Parliament for Bandar Melaka, Lim Kit Siang, in the Dewan Rakyat on the 1974 Ministry of Primary Industries Estimates on January 8, 1974)