Petrol Price Analysis: The case of Malaysia

Petrol price is the headlines of today as our deputy PM mentioned about the rise in subsidy and hint on the hike of oil price. This will be the headline of Malaysia at least until the end of the year. Air Asia also started the oil surcharge a week ago.

However, very few people in Malaysia seems to understand this problem and will just complain about any adjustment in the petrol price especially petrol price hike. Because of that, I will try to analyse the scenario of petrol price in Malaysia and try to justify the subsidy spending of our government.

As of 11.30 AM today (16/5/2011), the WTI crude oil price is trading at US$98.78 / barrel.

So what's that in Malaysia RM/litre petrol price?

Since 1 oil barrel = 158.99 litres and RM / US$ = 3.0385 as of the same time, crude oil price in Malaysia is at:

(98.78 / 158.99) x 3.0385 = RM 1.888 / litre.

Currently the RON 95 petrol is sold at RM 1.90 / litre while the RON 97 is sold at RM 2.90 / litre.

So, what's the problem when crude oil price is below the selling price of RON95 and RON97?

Of course there are processing and refining costs of crude oil but these costs are fixed costs and are minimally affect the actual costs of per litre petrol. The variable costs of labour is also way too small to include in our estimation.

Since Malaysia is a oil producing country, and when crude oil price is below petrol selling price, why do we need a price hike?

The significant costs of petrol firms in Malaysia such as Shell and Caltex are non-operating costs such as marketing costs, advertising costs, etc. They spend way too much on marketing and advertising that caused their total costs and average costs to rise beyond crude oil price. Subsidy therefore will rise as well.

So back to our question: should petro price rise in Malaysia?

No.

Instead of lowering subsidy and increase the petrol price, government should control or eliminate the marketing and advertising costs of oil firms. By doing so, per litre petrol cost will drop significantly and the current petrol price can be maintained.

The fear and threat of inflation has forced Bank Negara Malaysia to have a rate hike of our Overnight Policy Rate by 25 basis point to 3 percent. This is undoubtedly increase the saving rate as return of saving increase.

Since the equilibrium of Macroeconomics is all about Expenditure = Saving or Injection = Leakages, with the increase in saving, the public expenditure (subsidy) will not be a big problem now as compared to inflationary force.

In the end, using economic analysis or simple mathematics calculation, I think petrol price should not be rise and the opportunity cost of increasing petrol price surpass benefit of reducing subsidy.

The Death of Motion Picture

Today, in my opinion, motion pictures, aka movie, is dead.

Not dying but dead.

The reason is simple. People do not watch good movies anymore. They prefer garbage over good movies. As a result, our cinema is flooded with tons and tons of garbage and only handful of good movies.

The main reason this phenomenon happens is because of obsession to action for those who watch movie. For some reason, action is the most important element in a movie and they willing to pay their hard earned money to watch anything with action, crappy or not.

They totally ignore other (more) important aspects of movie, such as acting, directing, pace, dialogue, story, character development, detail linking main plot etc.

As a result, nowadays we are flooded with movies like Transformers (1 and 2), green hornet, 2012, clash of the titans, G. I. Joe and other superbly crappy movie that have nothing but action scenes which I personally do not think they manage to excel at.

A good action movie does not have to be flooded with action scenes. Look at some great action movies such as die hard, star wars or Indiana Jones. The action scene in these movies are few and far between which will create suspense and excitement.

Of course in the last 5 years, we do have several great action movies such as Avatar, The Dark Knight, Inception, kick ass etc. but the ratio of bad action movies and good action movies is at amazingly high level.

Nowadays, the only way a movie can make the box office list is either action movie or animated movie. The rest, although they may receive critical acclaimed, will never get anywhere near the top. Movies such as The Way Back, 127 Hours, The King's Speech and social network did not really shine in the ticketing department.

Looking ahead, I do not see anyway this scenario will change. Action movies (no matter how crappy they are) will rule the world of motion pictures. With the release of Transformers 3, X-men first class, pirate of the Caribbean 4, and captain America, let just hope that they will not be that bad!!

6 / 2 (1 + 2)

Recently such a mathematics question suddenly becoming a hit on and off the internet. Everybody seems to have the answer and everybody is confident of their answer. Various mathematics experts commented on it and it continues to be a hot topic.

The biggest problem with this question is the answer, 1 or 9. Some say 9 is the answer as:

6 / 2 (3) = 3 (3) = 9

which follows the order of operation, BODMAS which stand for branket, order, division and multiplication, addition and subtraction or PEMDAS which stand for parentheses, exponential, multiplication and division, addition and subtraction.

However, from my point of view, which I am certain I am correct, the answer should be 1.

WHY???

The reason is simple. Let me first tell you why 9 is incorrect. Most people think that since 2 is not in a parenthesis with (1+ 2), then we should do 6/2 first before multiply by 3 in the parenthesis but this is incorrect.

Any number before a parenthesis is called coefficient or parameter. In mathematics, we should solve the parameter first before solving other operation. To better emphasize my point, let's replace the (1 + 2) with (x), so the problem will be:

6 / 2 (x)

Now since 2 is the coefficient of x, so we should solve 2 (x) first which equals to 2x and then solve the rest which is

6 / 2x = 3 / x

Since x = 1 + 2 = 3, so

3 / 3 = 1

Singapore General Election 2011: Good Job Singaporean!!

Finally, after more than 4 decades as a nation, Singapore residents realize and show their government how they feel which is something they did not manage to do for the last 15 times.

Singapore government is not a bad government. There are countless governments that are way worse than them.

However that's not the point. The point is government is inefficient and the smaller the government, the better that nation will be.

We all know that Singapore government is among the biggest government in the world for their nation and the closest to socialism for a democratic government. They control most of the resources of Singapore through their massive state owned firm called Temasek group which hold most of the blue chip firms of that nation. As a result, Singapore government spend around 75% on operating spending and the rest on development spending since 1965 (the last budget, budget of 2011 - 73.8% on operating spending and the rest on development spending).

This scenario can happen primarily of the "amazingly" high wages received by Singapore public servant. As we all known (look at my previous post), Singapore prime minister, Lee Hsien Loong, is the highest earning executive political leader in the world with US$3,122,982 ( S$/US$ = 0.807 as of today) which is ridiculous for an economy that only has an annual GDP of US$ 245 Billion (2010). That is especially ridiculous when that data is compared to the wages of other political leader around the world (refer to my earlier post).

Furthermore, Singapore economy are not as well maintained as many people thinks. Refer to the Macroeconomic objectives, we can see why:

1) Stable economy growth.

Singapore economy are growing fast but not stable. Refer to subprime crisis of 2007/8, their economy shrank more than 10% which is an indicator of poor and unstable economy (compare to their nearest economy, Malaysia, which only shrank by 3.5%). This is mainly due to their dependency to international trade and amazingly high labour and capital mobility which may be good during healthy economy scenario but not during crisis.

2) High employment.

Singapore unemployment rate in 2010 was 3.1% which is around the same Malaysia (3.4%) and much lower than unemployment rate of 8.9% for US during the same period.

3) Price stability

Singapore inflation rate in 2010 was 2.8% which is slightly higher than most economies during the same period but not significantly. (Malaysia = 0.6%)

4) External Balance.

Singapore is excellent in international trade. The Balance of Payment of Singapore for 2010 recorded a surplus of around S$57 billion. The current account excel with surplus of more than S$67 billion. This is an indicator that Singapore net export is superbly contributing to their economy.During the same period, balance of payment of Malaysia is around RM80 billion surplus.

Equally distribution of wealth, high productivity, sound currency do not yield excellent result for Singapore too. Singapore is not particularly good with Gini coefficient (indicator of income gap) of 42.5 which is the highest in Asia beside Hong Kong (higher Gini coefficient = higher income gap). Malaysia has Gini of 37.9 which is way better than Singapore. Amazingly 42.5 is even worse than many poor third world nations such as Trinidad and Tobago (40.3), Sri Langka (41.1), and cambodia (40.7).

High productivity of labour also does not shine for Singapore as one third of Singapore population are foreigners and majority of that are from Malaysia. As a result, productivity of labour in Singapore is insignificant.

Sound currency. Singapore dollar is a resilient currency against major currencies in the world including USD, Euro and Pound but it is not particularly brilliant compared to major asia currencies such as Ringgit, Rupiah and Baht. From January 2006 until May 2011, SGD appreciates between 0-6 percent against China RMB, Malaysia Ringgit, Cambodia Riel, Indonesia Rupiah and Thai Baht.

So, Singapore economy are not particularly and significant better than their neighbour such as Malaysia but yet the Prime minister of Singapore receives 40,700 percent higher wages than Malaysia prime minister (US$ 7640). This is clearly the sign of socialism or communism where Government control majority of resources and private sectors are discriminated.

TO CONCLUDE, WELL DONE SINGAPOREAN IN THE LAST GENERAL ELECTION. WHETHER YOU DECREASE THE MAJORITY OF THE RULING PARTY BECAUSE YOU SEE THE PROBLEM FACED BY SINGAPORE IS NOT IMPORTANT. THE POINT IS PAP NOW KNOW THAT SINGAPOREAN STARTED TO CHANGE. THE PROCESS MAY TAKE TIME BUT EVENTUALLY THE RULING PARTY WILL NOT ACT AS A SOCIALISM GOVERNMENT AND THIS WILL SURELY BE A POSITIVE CHANGE FOR SINGAPORE

Malaysia & Hong Kong(or probably world)'s Highway Drivers!!

I am terribly dissapointed with the drivers on highway of Malaysia and Hong Kong (since I used these 2 only). Their on the road attitutes are unforgiving and downright crazy. They complain all the time about collisions are caused by external factors (such as road condition, weather etc.) but in reality, majority of the collisions are caused by drivers themselves. Since I used the services of highway all the time, here are the top 5 reasons why collisions happens.

Number 5: headlight off during rain.

From my observation, majority of drivers on highway do not turn on their headlight even when we have heavy rain and darken environment. Even worse is when they turn on their dashboard light and not the headlight. What's the point? saving electricity? or just too plain stupid to notice that other cars (especially cars in front of you) may not be able to see you clearly?

Number 4: reckless heavy vehicle drivers.


This one is directed to heavy vehicle drivers such as lorry drivers. Do you know you are relatively slower and bigger than everything else on the highway so can you stay on the left all the time? What's the reason to overtake? Save few minutes? Besides, for bus drivers, do you know that buses are considered as heavy vehicle as well? can you do what lorry drivers should do?


Number 3: Signals lights

It's ok to overtake when the situation is safe but can you give some signals to other vehicle by flashing you signal lights. How hard is it to push the black cylinder on the back of your steering wheel? Based of my observation, more than 95% of overtake in highway of Malaysia and Hong Kong do not flash their signal lights when they are overtaking.

Number 2: Overtaking

It's not ok to overtake when the situation is not safe (safe to overtake = no vehicle is 2 seconds in front or behind of you on the right/outside lane). It's not ok to overtake from the left. It's not ok to overtake and block ambulances. However, highway drivers do it all the time. How much time can be safe by overtaking a car? How sure are you that you can overtake safely? Why gamble lifes of you, your love one and other drivers simply to save 5 minutes?

Number 1: Speed

Everybody knows higher speed = lower reaction time = more likely to have collision = more likely to have more severe collision. You may think that your reaction time is fast and relatively safer when drive fast but you can always do better if drive slowly. Which one is more important, save 5 minutes or safe arrival? altough the chance of collision may be small but why take the chance? the opportunity cost of driving fast is too high that probably only stupid people will choose to do it.

Of course other attitute problems not mentioned here can also cause collision but these are the 5 that happens most often from my observation. The biggest problem for highway safety is attitute problem can be on everyone regardless of their race, religion, education background, work, gender etc.

So did you do any of those actions and if you do, ask yourself, it is worthy?

How Long Does It Take?

How long does it take before Ben Bernanke realise that inflation is the main concern of world economy for the next 10 years. How long does it take before Ben Bernanke realise that US is getting close on the famous "liquidity trap" that hit Japan around 2 decades ago. How long does it take for Ben Bernanke to realise that prices of everything around us are heading for the sky? How long does it take before Ben Bernanke understand the concept of "artificial demand" and scarsity?

How long does it take, Ben?

The answer?

Never!

Why?

Well Bernanke is a Phd holder in Economics. Although he is a full-blooded Keynesian, I am sure he heard one thing or two about classical, neo-classical, monetarist and new-classical theories of potential GDP and Ricardo Equivalence etc.

He announced yesterday that FED will keep the stimulus going indicating that the key interest rate will be held at 0-0.25% range for god know how long.

He also said "if inflation persist or if inflation expectations begin to move, then there's no substitute for action....... we will have to respond"

Well Mr. Bernanke, why do you think gold prices rise above $1530/oz? why do you think silver rise above 48.50/oz? Why do you think every commodity (marketable or not marketable) rise at least 50% from their low (most even exceed the previous high and historical high) eventhough economy is going marginally better (well according to Bernanke, at least)?

Inflation expectation has been going up to the moon. US dollar is going to thru the floor. All the signs you need for an outbreak of inflation.

However, the smart people in the Federal Reserve do not think so. They still think inflation / inflation expectation is under control and each month they announce inflation rate using their "formula" that only insane people will believe.

So what should we do to protect ourselves from the rage of inflation, liquidity trap (in US) and the insanenity of Bernenke?

Well historically, when a nation is experiencing hyperinflation (or very high inflation), financial assets tend to rise faster than the inflation rate.

So, put your money on inflation protected assets. precious metal is the number one choices (as mentioned by me many many times already). Gold can't exceed 5000? silver can't exceed 500? Let wait and see!

Besides that, choose commodity that their demand has been artificially increased yet the supply is going nowhere. Grains such as wheat, corn, rise and barley would be nice choices as well.

Manage you money well or get trap in the dead sea of inflation!

Most Eventful Month In My Life!!!

April of 2011 will go down as the busiest and most eventful month in my life. Good, bad, happy, sad, busy, pain...... everything!

Finished 4 papers in which 2 of them will be published, 4 comprehensive examination (in which one of them going to the dustbin as garbage already), learned superbly hard and amazingly boring theories, studying econometrics methods that are complicated as hell (anybody who is expert in nonlinear panel analysis please help me), preparing for 2 more seminar in the month of May which require more fine-tuning, and had an motorcycle accident 2 days ago.

Anybody can beat that? I am interesting to know!

Anyway, the accident kinda slow me down little bit as both of my legs are bruised and in quite severe pain. The right one has been burned by the exhaust pipe result in second + third degree burn.

Since I can't move around so much, finally I have time to write something here after abandoning it for so long.

Hopefully the coming months will be full of exciting stuffs and less of the bad stuffs (No ADVANCE MICROECONOMICS PLEASE!!!!!)