Cutbacks needed, not handouts

AS each day passes, the hope for a short conflict in West Asia becomes more uncertain, with some commentators now predicting a longer period of hostilities, even perhaps extending for one to three years.

Despite this, the most likely scenario remains a shorter campaign. The senior leaders in Iran have been removed, its missile arsenal has been severely depleted and its military infrastructure has been decimated. Nonetheless, Iran still has the capacity and appetite to fight.

The biggest global economic challenge now is the choke point in the Strait of Hormuz which Iran can effectively close using drones and short-range rockets.

Even the threat of attacks on shipping is enough to stop transit flows, especially for oil and gas.

This stops the supply of 20 million barrels of crude oil per day and significantly affects Asian markets.

According to China’s General Administration of Customs, China imports 42% of its crude oil or 4.9 million barrels per day (bpd) from the Gulf region, especially from Saudi Arabia (14%), Iraq (11%), United Arab Emirates (7%), Oman (6 %), Kuwait (3%), and Qatar (1%).

Around 69% of Malaysian crude oil imports come from the Persian Gulf. This makes Malaysia the third most dependent country in Asean on crude oil after the Philippines (95%) and Vietnam (88%).

While some vessels are being authorised to travel through the Strait of Hormuz, their capacity will be insufficient to meet Malaysia’s fuel consumption demands. It is reported that seven tankers with two million barrels of crude oil have been approved to travel through to Malaysia. This is only two to three days of normal crude oil consumption.

Over the long term, many countries are projected to experience significant challenges due to the scarcity of crude oil, potentially leading to considerable instability.

Some, including the Philippines, are already coping with serious supply shortages, and Thailand and Vietnam have already introduced various policies to easy supply shortages and panic-buying.

Against this background, the response in Malaysia must be weighed cautiously. The effect on the economy in the short-term must not be overstated and comparisons with the Covid-19 period are neither accurate nor helpful.

We are not facing lockdowns, businesses are open as usual and people are working as normal.

There are no closures or shortages in the shops. Petrol prices remain unchanged for 90% of RON95 users and diesel subsidies and quotas are still in place for eligible hauliers, delivery firms and suppliers.

Even the quota for e-hailers and delivery riders is still in place and remains very generous.

Inflation is low at only 1.4% and even if prices rise, it will remain within historically normal levels. Even imported produce is cheaper than last year because of the strength of the ringgit. This means that we should not see price hikes in the shops and food stalls.

In the short-term, policymakers need not over-react.

The government is already changing the RON95 subsidy scheme proactively. Reducing the monthly quota from 300 litres to 200 litres will not change consumption for 90% of people.

Instead, it will cut hoarding and illegal cross-border resale.

What we need is a change in working patterns, especially work-from-home arrangements. Cutting just a quarter of commuters from the roads each month will save RM1bil in subsidies and help reduce demand.

Normally, to reduce demand, you need to raise the price but free-floating RON95 seems politically impossible. In this case, you need to restrict supply by reducing the quota further.

Tiered pricing can achieve this, with full subsidies on the first 100 litres, half subsidy on the next 50 litres, 25% subsidy on the final 50 litres and no subsidy beyond 200 litres.

In this model, everyone still benefits from subsidies and those with lower consumption, usually the low-income groups, get all the subsidy.

The higher prices cause behavioural changes and encourage people to economise. This will be necessary to stretch out scarce supplies.

The prolonged conflict is likely to impact numerous industries, thereby presenting significant logistical challenges globally.

The government has wisely maintained diesel subsidies and quotas for eligible hauliers and delivery firms, but the logistics industry is currently navigating two major headwinds.

First, fuel security. The primary concern for large-scale haulage is fuel availability. If supply through the Strait of Hormuz tightens further, we need to cut quotas.

The second is operational efficiency. To survive a long conflict, the logistics industry must pivot toward “collaborative logistics”, sharing load space to economise on subsidised diesel.

Hauliers must work with the government. If they can squeeze 10% more efficiency out of existing fleets, they effectively buy a 10% cushion against Gulf supply disruptions.

Stabilising the cost of moving goods helps prevent the “psychological inflation” that often leads to opportunistic price hikes in food stalls and markets.

So, calls for stimulus packages are misguided. Pushing more money into a supply constrained economy only leads to inflation.

What is needed is behavioural change on the supply side not extra money on the demand side.