No oil for economic gears

SHOCKS to the global economy do happen from time to time, and it does seem that each iteration of a black swan event is a different bombshell to what has happened before.

For us in Malaysia, the biggest black swan event was the Asian Financial Crisis. The stock market collapsed and so did the ringgit against the US dollar.

Then came the Dotcom bust. After a few years of rabid investment and speculation, the rug was pulled from the semiconductor industry leading to a massive sell-off in share prices globally as the impact was predominantly felt in the United States but cascaded throughout the world. Remember, when the United States sneezes, the rest of the world catches a cold.

There were many other events such as Sept 11, the Global Financial Crisis (GFC) and Covid-19 that shook global markets, especially the US market.

The SARS outbreak was localised to a few countries and crude oil prices hitting US$148 a barrel in 2008 were trigger points, some say, to a global slowdown that preceded the GFC.

Now, we are faced with yet another global turbulence. The war in Iran has sent crude oil prices parabolic and back in swings not seen before. The 1973 oil shock by account was more severe on the upside, but the impact now is having broader economic repercussions.

That is because the world is more deeply intertwined with supply chains that are spread across different countries. Then, there are the more sophisticated manufacturing processes that derive the factors of production from what the oil and gas industry gives through its feedstock such as chemicals.

Longer rerouting of ships to avoid the area of conflict adds to costs and delays.

So, are we to get really worried over the war in Iran and its consequences on Malaysian businesses?

It’s a mixed bag because of how interrelated businesses and economies are today.

The negatives do speak for themselves over just how higher energy costs will affect the country.

As for direct fuel cost, that is somewhat insulated because of the direct subsidies that are given by the government. Even though the price of Brent crude oil had spiked to above US$120 a barrel, fallen to the US$80 range and climbed back up to US$100 a barrel, the effect at the pump is not really felt. Much of the petrol and diesel consumed in Malaysia is subsidised and its effect is muted on the broader economy.

The Malaysian government’s fiscal position will be hurt by the brunt of subsidies and there is a limit to just how much Malaysia will gain from higher crude oil prices as we are an exporter of oil and gas. How that will hurt through the fiscal deficit bears watching.

Then, there is the impact through imported goods that might see higher costs as a result of bottlenecks created

by the Strait of Hormuz being throttled at the moment.

Inflation will likely rise in such an event as much of our food is imported and the indirect consequence of higher food prices overseas will filter its way into Malaysia.

Higher shipping costs will also translate into a higher cost of goods eventually.

Then, there is the impact on electricity. In terms of supply, Malaysia is fortunate that much of our coal and liquefied natural gas imports are from Indonesia and Australia.

But they will come at a higher cost as the price of both commodities is higher as a result of the war.

Energy prices in Malaysia

are now adjusted every month, although there is a cap over just how much it can rise in a month. But that permitted rise is substantial and there could very well be higher electricity prices that will also weave their way into inflation and affordability concerns.

In terms of winners, there are a few. Petrochemical companies will gain as their profits are usually pegged to what the price of Brent crude oil is. So, the higher Brent crude oil rises, so will their profit.

Shipping companies too will benefit as a result of higher fees.

The overall impact from the war will also be linked to the duration of the conflict. The longer it goes on, the deeper will be its influence. Then, there will be the overall impact on the government as welfare payments may rise or even pump-priming attempts should the effects of the war translate into much weaker global growth.