Heat on oil prices

  • Business
  • Saturday, 26 Feb 2011

Amid the increasing pressure on global crude oil prices, Domestic Trade, Cooperatives and Consumerism Minister Datuk Ismail Sabri Yaakob has attempted to pacify Malaysians by assuring them that the Government was weighing all options to avoid increasing the prices of fuel specifically RON95 which is the lower range of petrol and diesel.

He asserted that the current situation was still manageable without having to increase the prices of RON95 and diesel, which were sold at RM1.90 and RM1.80 per litre respectively. At the same time when he made that statement, global crude oil prices were already trading above the US$100 per barrel level.

As of yesterday, however, crude oil prices have somewhat receded to trade below the US$100 per barrel level on the Nymex. But ongoing political tension in the north African and Middle Eastern (Mena) regions is expected to continue putting upward pressure on the price of the commodity.

Ismail said even if the efforts to stabilise the prices of RON95 and diesel meant having to spend more subsidy for fuel, the Government would be willing to do so in order to alleviate the burden of the rakyat.

He acknowledged the fact that if fuel prices were to go up, prices of other goods, especially food, would go up in tandem, and hence placed a greater burden on local consumers whose purchasing power was already being squeezed.

To most political observers, it is not surprising that that the Government's subsidy rationalisation programme would be temporarily halted to accommodate its effort in stabilising fuel prices, especially in view of an upcoming general election.

But such measure would only put more pressure on the Government's fiscal position, which has been in a deficit for more than a decade.

Last year, the Government's fiscal deficit stood at RM43.3bil, or 5.6% of the country's gross domestic product (GDP). It's an improvement compared with its fiscal deficit of RM47.4bil, or 7% of GDP, in 2009, thanks in part to its subsidy rationalisation programme that started in the second half of 2010.

The Government has allocated RM10.3bil as subsidies for fuel under Budget 2011 , but its computation then was made based on an average crude oil price of US$85 per barrel.

“If the oil prices rise to US$130-US$140 per barrel, the amount of subsidies could balloon to RM18bil-RM20bil,” CIMB Investment Bank Bhd chief economist Lee Heng Guei said in his recent report.

While there is a sense of jubilation that the world has emerged out of the most serious global economic crisis in the history of capitalism since a year ago, in reality, life has not gotten any easier for most people.

For one thing, the salaries of most people have not increased much - at least not at a rate that could keep pace with the rising cost of living.

Inflationary pressure has been building up since last year due to the rise in prices of food and commodity. There are several factors contributing to that. One is the prolonged poor weather conditions that have affected the output of agricultural products and mineral resources.

There is the massive liquidity - as a result of excessive monetary easing measures adopted by many governments around the world to combat the recession - flowing into the global commodity markets and the property markets of several emerging economies, and hence pushing up their prices. A genuine rebound in the aggregate demand as the global economy recovers further puts upward pressure on prices.

Now, the uprising in Mena - which has its roots in high unemployment, especially among the youths; growing poverty and rising food prices - is raising international concerns over the supply of crude oil.

And many fear the phenomenon would eventually lead to permanently higher oil prices, and thus, set off a vicious cycle of inflation, which could dampen economic growth.

Already faced with the prospects of moderating growth prospects this year, Malaysia's policymakers are increasingly challenged by the need to formulate effective strategies that could ensure continued economic growth and alleviate inflationary pressures.

Some economists believe that the country's inflation growth as measured by the consumer price index (CPI) is already getting close to Bank Negara's tolerance threshold.

CPI for January showed an increase of 2.4% year-on-year (yoy). Assuming there's no drastic change to the global markets, economists believe Malaysia's CPI for the full year will show an average growth of 3% yoy, which is higher than the 1.7% yoy growth in 2010.

It may be hard to gauge how the global events would pan out eventually given the rising uncertainties, but one thing for sure, we have to be prepared to face difficult times ahead.

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