Malaysia PM braces party for rise in fuel prices

KUALA LUMPUR, Nov 6 (Reuters) Malaysia's prime minister has braced his ruling party for a rise in fuel prices, saying a hike cannot be avoided while crude oil trades at record highs.

Malaysia maintains some of Asia's lowest petrol and diesel prices, fixing them well below market rates and paying subsidies to fuel retailers to compensate them for the difference. With crude racing towards 0 a barrel, the cost of subsidies has soared.

''What people have been asking is will there be a fuel price increase? Oil prices have reached 0. We can't avoid it,'' Abdullah Ahmad Badawi told members of his ruling party on Monday night.

Abdullah was speaking at a briefing meant only for the hundreds of delegates attending this week's assembly of the United Malays National Organisation (UMNO). His remarks were tape-recorded by one of those who attended the briefing.

Malaysia spent 15 billion ringgit (4.5 billion dollars) a year on fuel subsidies, comprising 8 billion ringgit in direct price subsidies and 7 billion ringgit in foregone taxes, he said.

''The petrol and diesel subsidy will reach 20 billion ringgit in 2008 if there are no price increases,'' he added.

Malaysian pump prices for petrol, at just above 50 US cents a litre, are about half those in Singapore and less than China, which recently raised prices by 10 per cent.

Malaysia is a net exporter of oil, but cheap fuel and electricity prices are driving up demand just as domestic production tapers off.

Daily output of crude and condensates fell 4.4 per cent to 506,500 barrels for the year to end-March.

''Demand is growing at 6 per cent a year. Malaysia will be a net importer by 2011,'' Prime Minister Abdullah said.

ELECTION TIMING The government is widely expected to call a general election early next year, to capitalise on a raft of state construction projects launched in the past 18 months, but some analysts doubt it will risk the polls so soon if it has to raise fuel prices.

''The public will not be very understanding,'' said political analyst Ooi Kee Beng of Singapore's Institute of South East Asian Studies, predicting a fuel price hike by January.

''The opposition will play that up, which might mean that elections might be a bit later.'' Abdullah's government has vowed not to raise fuel prices before the end of this year, but he sowed some doubts over this pledge in his briefing to party delegates.

''We don't know what will happen in the remaining two months,'' he said, referring to the crude oil price.

Some UMNO delegates agreed on Tuesday that fuel subsidies were unsustainable but said the phase-out must be gradual.

''I know the opposition will exploit this issue in their election campaign. We have to face it,'' the delegate said.

Fuel prices are pivotal to Malaysia's economy by helping to keep living costs and interest rates low and to buoy domestic demand.

Annual inflation stood at 1.8 per cent in September.

The last time the government raised fuel prices, by about 20 per cent in February 2006, it helped to drive inflation to a seven-year high of 4.8 per cent within a month.

The prime minister also told delegates yesterday that the country could not simply rely on state oil company Petronas, which is making record profits, to pay more of the subsidy bill.

Abdullah said Petronas, which sells gas domestically at heavily discounted rates, needed to reinvest its cash to explore for new oil reserves offshore because local fields were maturing.

''If Petronas continues to subsidise us, Petronas can't move (abroad). It may have to close shop,'' he said.

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