THE continued rise in the price of crude oil could stifle the recovery of global economies and most say Malaysia would not be spared, even though it is a net exporter of oil.
The threat of a US-Iraq war has resulted in a tight supply of oil, pushing prices up to levels not seen in years.
Malaysia exports Tapis crude oil which was trading at US$34.40 on Thursday. The UK Standard Brent crude was trading at US$32.80 per barrel while light sweet crude stood at a high of US$37 per barrel.
Vigilant analysts say it could hit US$40, or more. Over a span of a year, the price per barrel of oil has increased over 50 per cent. The last time oil prices were at such levels was back in November 2000 when it was hovering at around US$35 per barrel.
Given that Malaysia is a net exporter of oil, every US dollar rise in oil price will result in a gain of US$54 million.
However, if the rise in oil price persists, it would have implications on the US economy, and hence global economies including Malaysia will feel the pressure.
A head of research at a local house says : Let's not forget that rising oil prices will affect the willingness of our (Malaysia's) trading partners to loosen their purse strings. Although government will derive higher revenue from the sale of oil, the impact is still unconstructive because overall demand for oil exports has been reduced.
End March, Malaysia will announce several pump priming measures aimed to cushion the country from short-term negative effects of a war and its threat to the economy.
But analysts also say that the US clearly would want to keep the price of oil below US$30 per barrel as high oil prices accompanied by a depressed dollar would be a recipe for a double dip recession.
Historically, persistently high oil prices gave rise to recessions in the US. This in turn will obviously have a marked impact on global economies. It is for this reason that most expect the war issue to not drag on any further and if there is at all one, to be rather brief.
The threat of war in Iraq has brought about a US$5 war premium to the price of oil in recent months due to fears over tight supplies.
And as the equity market is very much influenced by the general sentiment over the threat of a war, the Kuala Lumpur Stock Exchange could feel an impact. After all, as an analyst puts it: It only takes a tiny bit of negative news to get the selling going.
K & N Kenangas head of research Seow Choong Liang in a report says the continued rise in the price of crude oil is threatening global economic growth once again and Malaysia will not be spared even though it is a net oil exporter. Prices at the pump may have to rise again, and more sharply this time, which will put the brakes on economic growth.
Malaysia a net exporter
Another analyst agrees. As Malaysia is a net exporter, the oil effect will be compounded. Even manufacturers who are not direct oil producers will be affected.
All seem to agree on one thing though. In the event war is waged, the oil prices are likely to come down and equity markets that have been oversold are likely to recover. History, at least, seems to have proven that.
Going by the Gulf War in 1990/1991, the start of the war witnessed a fall in oil prices as the realisation that US would win the war quickly sank in. On the outbreak of war on Jan 17, 1991, the oil price fell US$10 to below US$20 per barrel and had stabilised at that level.
A local house says in the previous Gulf conflict, the uncertainties during Iraq's occupation of Kuwait had kept market at oversold levels.
The Kuala Lumpur Composite Index (CI) fell from 611 points on the day Iraq invaded Kuwait and stayed at around the 480-level during the occupation of Kuwait. But the outbreak of war saw the CI rebounding to 560 in the 40 days of the war and in five months, made up for its earlier loss.
The company likely to feel the biggest impact from this trend would be Malaysian Airline System Bhd (MAS) that will inevitably be bogged down by higher fuel costs and possibly weaker demand.
Less serious casualties would be Tenaga Nasional Bhd and Malaysian International Shipping Corp Bhd (MISC), both of which burn oil as fuel. The latter, however, may be able to pass some of the increased costs to customers.
On the other hand, national oil company Petroliam Nasional Bhd (Petronas) is expected to increase crude oil production to capitalise on the high price. In December, Malaysia's crude oil production increased to 745,6000 barrels per day (bpd) from 736,900 bpd.
Needless to say, Petronas will be a beneficiary of the rising oil prices. Analysts contacted say that the operations of Petronas are sensitive to three primary factors namely crude oil prices, sales volume and exchange rate.
For the financial year ended March 31, 2002, (back when oil prices reached their all time high in Nov 2000), turnover increased by 21 per cent to a record of RM73.4 million. Net profit also increased to RM16.49 million from RM12.64 million.
The higher prices, and increased volumes due to stronger demand, especially in the region, translated into generally improved margins for the group.
Analysts, therefore, think that if the high prices are maintained at current levels, the effect will definitely be positive for Petronas, although not necessarily for the whole country.
Did you find this article insightful?