Fuel prices have been on the rise around the globe since the world’s slow return to normalcy. In Europe, consumers saw one of the highest power bills since the turn of the decade last year. On the back of on-going global conflicts and restricted fuel supplies, consumers are feeling the pinch of a fresh crisis.

Global conflict threatens energy security

“The energy crisis could be prolonged for at least two reasons. One is the uncertainty of how the Ukraine-Russia conflict will unfold or when it will be resolved,” explained Dr Shankaran Nambiar, at Malaysian Institute of Economic Research (MIER).

Demand for fuel is also recording a high following a long period of depressed demand for goods and services

“The Russia-Ukraine conflict could possibly see Russia cut down its gas exports. The US could also impose severe sanctions on Russia, which in turn would result in retaliatory action. These actions and responses are likely to have an impact on energy availability – directly, through the shortages that result, and indirectly, through the uncertainty that arises,” he continued.

Demand for fuel is also recording a high following a long period of depressed demand for goods and services. Countries have just begun their recovery plans, and demand for fuel is expected to continue picking up in the years to come.

As countries boost production, balancing high demand against limited fuel supply will be a tough game to manage on the back of slowing gas reserves and restricted oil sales.

“The current energy scenario is fairly complicated and fraught with risks. With the prevailing state of geopolitical uncertainty and the potential fuel shortages, we can only expect bottlenecks on the supply side; the demand side is likely to be more upbeat for most countries.  This set of conditions will translate into higher energy prices – if the situation were left to the market,” said Dr Nambiar.

ASEAN markets protected by subsidies

In Southeast Asia, where energy markets are traditionally run by state-owned enterprises and controlled via government interventions, the fuel shock hasn’t been as steep. In Vietnam, special tax cuts against high petrol prices have been hailed as a beneficial move by analysts.

Malaysia’s own Imbalance Cost Pass-Through (ICPT) mechanism has also bolstered customers against sudden price shocks. Under the last ICPT announcement by the Malaysian Energy Commission, domestic consumers enjoyed a rebate of two sen per kWh without any surcharge, despite higher fuel and generation costs in the second half of 2021 resulting in an additional generation cost of RM1,672 million.

“Fuel prices have been rising, and while economic theory would suggest that subsidies are interventionist and distort markets, the actual practice is not as straightforward.  Most countries realise that to pull back on fuel subsidies can have serious repercussions.

“There has long been a fuel subsidy culture in most APAC countries, and to withdraw the subsidies could result in political instability or even civil unrest,” commented Dr Nambiar.

Nevertheless, consumers have been cautioned to brace against price hikes to come, as government coffers slowly deplete.

“On the fiscal side, the Malaysian government is already burdened with having had to support expenditure to cushion the negative impact of the Covid-19 pandemic and its fallout. The pressures on the fiscal system will necessitate passing the cost of energy to the consumers, be they households or companies.

“As a consequence, it is only likely that there be some pass-through mechanism. Surcharges that reflect international energy prices are therefore inevitable in future,” he said.

Malaysians to brace against high prices

In Singapore, petrol pump prices reached a new high, while household electricity bills soared amidst on-going geopolitical tensions with Russia. According to Dr Nambiar, Malaysians should be similarly prepared for such a scenario, although the process may be more gradual due to the country’s political situation.

“Government debt has been rising, the budget deficit cannot keep on going up; there is a point at which the Malaysian government will have to take the problem of balancing the budget more seriously.  So, it is not sustainable to keep supporting electricity users,” he said.

Between June-December 2021, the Malaysian government spent RM715 million to maintain the two-sen rebate for electricity users, drawing from the country’s Electricity Industry Fund (KWIE) for support. The upcoming ICPT announcement, set for the period of July to December 2022, will determine whether that support is maintained.

“If at all support is to be extended, it will end up being more targeted. This will mean that some consumers may have to bear some of the burden of price increases in the face of rising energy prices,” said Dr Nambiar.

The cost of sustainable energy

Against the back of the energy and climate crisis, Malaysia has pledged to be carbon neutral by 2050, with plans to phase out coal and incorporate more renewable energy into the grid over the next two decades. This transition, however, will not come without a cost.

“Carbon neutrality is a commendable goal; but there is a cost to its implementation. The transition from more conventional sources of energy to renewable energy will entail costs in terms of the acquisition of technology, replacement costs and other administrative costs.

“Some of the technology and equipment that has to be acquired will be paid for by the implementing agency; but some of it will have to be borne by consumers,” said Dr Nambiar.

He continued, “The three tenets of the energy trilemma – affordability, sustainability, and security of energy – are not compatible in the sense that they involve trade-offs. Achieving sustainability and energy security have a cost; naturally, this will mean energy prices will go up.

“By the same token, if energy were to be kept affordable – or, rather, cheap – then we would not be able to adopt the technological shift necessary to ensure that we have sustainability. Something has to give way.”

It would seem that the path ahead for ASEAN is one fraught with change. For a region that has been dependent on government subsidies for so long, that change will most importantly require a mindset shift.

“There are going to be dramatic changes in the energy scenario.  Some of it will be necessary, some of it will be desirable and others less so.  In any case, consumers will have to brace for rising energy costs, particularly electricity costs,” concluded Dr Nambiar.