0115 966 7955 Today's Opening Times 10:00 - 20:00 (GMT)
Place an Order
Instant price

Struggling with your work?

Get it right the first time & learn smarter today

Place an Order
Banner ad for Viper plagiarism checker

Low Oil Prices in Malaysia Causes

Disclaimer: This work has been submitted by a student. This is not an example of the work written by our professional academic writers. You can view samples of our professional work here.

Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Tue, 17 Oct 2017

Table of Contents (Jump to)

Introduction

Objective

Causes of Low in Oil Price

The Winners

Transportation

Electric Utilities

Consumers

Flexible packaging

The Losers

Oil service companies

Plantations

Conclusion and Recommendation

References

Introduction

Malaysia is become a net importer of oil since 2011. The volume of exported oil is still less than the volume imported oil for local consumption (V, 2014). Malaysia continue to be net exporters of Liquefied Natural Gas (LNG) products. When taken together with LNG only can say that Malaysia is a net exporter of oil and gas. The figure 1 below shown Malaysia oil production versus consumption between years 2008 to 2013.

Source:United States Energy Information Administration

Figure 1

Starting June 2014, global crude oil price was fall sharply and it will effect some sectors in Malaysia such as transportation, oil service company, and so on. In this report, we study that why the global crude oil price will drop sharply and which sectors are gain or loss during low oil price in Malaysia.

Objective

  • To identify the cause of low oil price in Malaysia.
  • To analyse which sectors are winners and loser of low oil price in Malaysia.

Causes of Low in Oil Price

The crude oil price has continuing to decline from US$ 115 a barrel in June of 2014 to around US$50 recently.The price of oil has thus fallen by approximately 50 per cent. The Figure 2 below shown the brent crude oil price changed since year 2014.

Figure 2

Oil prices fell sharply to their lower due to the production war between Organization of the Petroleum Exporting Countries (OPEC) and the United States (US) oil boom from shale oil producers. From mid of 2014, the United States has become a main producer of shale oil and gas. One of the main drivers of lower oil prices is gas and oil is extracted from shale formations using hydraulic fracturing or fracking. (Bowler, 2015)

When oil prices began falling from second half of 2014, many expected OPEC to reduce production to support prices. Instead, OPEC’s decision to maintain output levels at 30 million barrels per day signalled a significant change in the cartel’s policy objectives from targeting an oil price band to maintain market share. This decision may cause to weak global demand and strong supply.

The lower oil price effect Malaysia’s petrol price fall. Starting from 1st December 2014, Malaysia’s subsidies of RON95 petrol and diesel were eliminated and set the petrol prices are now based on a managed float system. (Lee, 2014)

The Winners

In fact, the direct beneficiaries of lower oil price are broadly, the transport and utilities sectors. The consumer sector benefits indirectly.

Transportation

  • Airlines

The airline companies will be main beneficiaries of the fall in oil prices, as fuel costs account for approximately 50% of the airline sector’s total cost. Given that airline margins are meagre at the moment, the reduction in fuel cost will have a significant positive impact on earnings. However, in view of the intense competition within the industry currently, certain airlines company will decide to reduce fuel surcharges or ticket prices benefits to passengers.

For example, AirAsia removes fuel surcharges and reducing travel costs due to lower oil price. They believe that removes fuel surcharges and reducing travel costs not only benefit to passengers and also huge boost to the tourism industry. (B.K.SIDHU, SIVANANDAM, ZAINAL, & CHEAH, 2015) In 2008, AirAsia removed the fuel surcharge for all of its flights, but restored it in 2011 due to fuel prices rose sharply. According to AmResearch aviation analyst, every US$1 per barrel fall in jet fuel impacts AirAsia’s earnings by 2.4% in FY15. (TAN, 2014)

Besides, lower oil prices also boosting airline stocks. Early in July, shares of AirAsia Bhd have risen 6.5% to close at RM2.47 from RM2.32, while AirAsia X Bhd’s share price was up 13.7% to 79 sen from 69.5 sen and Malaysian Airline System Bhd shares have risen 24.4% to 25.5 sen from 20.5 sen.

  • Shipping and logistics

As cargo volumes have trended upwards and the oil price continues to fall, carriers are take profits. In turn, the cost of fuel does not only effect the logistics company, but also the shipper and the profit source of the shipper as well. If it costs more for the freight carrier to transport the freight, the shipper is going to be charged more to make up for this. If the shipper is going to be charged more to transport the freight, the receiver is going to be charged more to make up for their added costs. This means the products are going to be sold to consumers at higher costs to make up for the higher transportation and fuel costs. However, lower fuel cost never happen these case if logistic companies maintain their shipping charge. Logistic companies which could benefit in Malaysia include Pos Malaysia, GD Express Carrier Bhd, Tasco Bhd, Tiong Nam Logistics Holdings Bhd, Konsortium Transnasional Bhd, and Freight Management Holdings Bhd. (Low, 2015)

Electric Utilities

Tenaga National Berhad uses oil and coal to produce electricity. Tenaga National Berhad is seen as a beneficiary of lower crude oil prices because cheaper fuel means that lower electricty generation cost.

According to the Associated Chinese Chambers of Commerce and Industry of Malaysia president Lim Kok Cheong,Tenaga National Berhad could save about RM730 million this year based on the downward trend of natural gas, oil and coal prices. Therefore, staring from 1st March 2015 until 30 June 2015, electricity tariffs will be cut by 25 sen per kWh (5.8%) from 38.53 sen/kWh to 36.28 sen/kWh for Peninsular Malaysia and reduced by 12 sen per kWh (3.5%) from 34.52 sen/kWh to 33.32 sen/kWh for Sabah and Labuan. (SUE-CHERN, 2015)

Consumers

Lower oil price benefit to consumer spending. Consumers can spend more on other goods and services due to the increase in disposable income and lower logistics costs from reduce fuel costs. Some of consumers likely spending on imported goods, but much will benefit local businesses.

Starting from January 2015, the drop of 35 sen for both RON 95 and 97 plus a 30 sen drop in diesel has resulted in thenew priceof RM1.91, RM2.11 and RM1.93 per litre following inflation rate was decrease to 1 percent from 2.7 percent in previous month. Figure 3 shown Malaysia inflation rate in 2014 and January 2015.

Figure 3

Consumers spending will effect on economic growth but depend on whether consumers decide to save or spend the windfall. Normally households with high debts might be inclined to use disposable incomes to pay down debt rather than increase their spending. (Walker, 2015)

Flexible packaging

For plastics and packaging, the relationship between crude oil prices and resin prices are positively correlated. The recent slump in crude oil prices has sent raw materials resin prices on a downward trend. It could mean lower resin and plastic raw material prices, which would be significant as raw materials make up 60% of production costs. Moreover, plastics and packaging companies to show EBIT margin expansion when resin prices fall. In addition, however a drop in resin price will have a positive effect on the downstream or longer contract lead time players especially for players like SCGM, DAIBOCI and SLP (Huey, 2015 ). Plastics and packaging companies adjust the selling price of their products according to latest raw material prices. If the oil price continue to drop, it will be surely be benefit for these companies.

The Losers

The sectors that will be negatively affected by the falling oil price are oil & gas sectors, as well as plantations to a certain extent.

Oil service companies

Normally oil majors cut back on exploration and production (E&P) activities when oil prices are low. Oil price should have a laggard impact on oil service companies. According toThe Star, thePetrol Dealers Association of Malaysia(PDAM) have said that prices continue to fall will lead to many of fuel dealers around the nation may have to shut down should due to high losses.

President of the Petronas Petrol Dealers Association of Malaysia, Datuk Abu Samah Bachik, has said that they were not only affected from this, but also all dealers in the country are affected.”

Because of petrol and diesel being considered as necessity items, dealers are required to possess at least three days’ worth of stock. Normally motorists waiting out from refuelling until after the new price is introduced.

President of PDAM, Datuk Hashim Othman has said that some oil stations do run out of fuel because nobody are buying before the end of the month. But when the oil price fall, everyone rushes to buy.

President of PDAM stated that if the drop was only a few sen, they could absorb the losses but drop with the 35 sen of petrol, they are buying it high and selling it low. Several dealers were losses of between RM20 thousand and RM100 thousand in petrol price fall. (Sze, 2015)

Figure 4

Figure 4 above shown that the drop of 35 sen from RM2.26 and RM2.46 for both RON 95 and RON 97 and drop 30 sen from RM2.23 in diesel has resulted in thenew priceof RM1.91, RM2.11 and RM1.93 per litre in January 2015. However, fuel price continue drop of 21sen for Ron 95,11sen for Ron 97 and 23sen for Diesel resulted in thenew priceof RM1.70, RM2.00 and RM2.00 per litre in February 2015, respectively – thelowestfor RON 95 since September 2009.

 

 

Plantations

The lower oil price reduces the economic viability of biodiesel. It may result in higher crude palm oil inventories. The decline in crude oil prices erodes the economic viability of converting crude palm oil (CPO) to biodiesel. At oil price of US$90/barrel, we estimate the CPO breakeven price of RM2,080 per tonne, which is lower than current CPO spot price of RM2,182 per tonne. If this situation continue to exist, it may lower demand for CPO over time for biodiesel usage resulting in higher inventories. Based on CIMB analysis, every US$10/barrel change in crude oil price, will lower the CPO breakeven price by approximate RM240 per tonne. (GOH & SHARMA, 2014)

However, the production of biodiesel could be negatively affected by lower crude oil prices. If this condition persists, the low crude oil prices would threaten the economic viability of producing biodiesel.

Besides, Malaysia has sizable oil-substitute industries such as the palm oil and Para rubber industries, with the latter accounting for almost 30% of total world production. Lower palm oil and rubber prices are expected to lead to weak domestic demand. (CENTER, 2015)

Conclusion and Recommendation

From the report, we can see that the changes of oil price will also causes Malaysia some problem. Oil price dropping has drastically affects Malaysia’s economy. Malaysia is a major oil exporter country, thus the reduction of oil price have causes an economy crisis. Although Malaysia did enjoy some benefit from oil price slump, for example, lower inflation, lower costs for business, higher spending power for households (Walker, 2015). Malaysia has been importing oil more than exporting it, Malaysia are still suffering from losses because Malaysia is an oil exporter country, and most importantly Malaysia owned Petronas, when oil prices drop, the income for Malaysia also decrease which will affect the economy status of Malaysia. According to Bloomberg, Petronas has suffered a RM9.9 billion loss on oil slump (Bloomberg, 2015).

Other than that, Malaysia is a country that highly dependent on plantation sector. With the plantation sector joining the loser side, Malaysia also did suffer a huge amount of losses as the both oil and plantation sector unable to pay for income tax. It will be worst if the plantation company unable to survive through oil price slump. Huge impact will hit Malaysia.

However, there are ways to help the government to handle oil price slump situation. Government should cut their spending as oil price reduce. Through reducing spending, government can target to lower down the deficit (Perez & Harrup, 2015). By continuous effort of cutting spending over the coming years, the government should be able to survive through the following oil price slump.

In conclusion, there are lot more winner than loser for oil price slump, but it will not just affect the industry that needed petroleum. It also did affect Malaysia as it is a fuel exporting country. However, the effect that hit Malaysia will not be as huge as those oil major exporting country like Iraq, Iran, Russia, Nigeria, and Venezuela since Malaysia are importing more oil than exporting it and oil price slump still can be handle as long as preparation have been done early.

References

B.K.SIDHU, SIVANANDAM, H., ZAINAL, H., & CHEAH, C. (27 January, 2015). Airlines take off surcharge. Retrieved from The Star: http://m.thestar.com.my/story.aspx?hl=Airlines+take+off+surcharge+&sec=news&id={F42417DC-89F6-4CF2-A4DE-EEBF419EB571}

Bowler, T. (19 January, 2015). Falling oil prices: Who are the winners and losers? Retrieved from BBC News Business: http://www.bbc.com/news/business-29643612

CENTER, S. E. (2 February, 2015). Impact of lower oil prices on Asian economies . Retrieved from bangkokpost: http://www.bangkokpost.com/business/news/464181/impact-of-lower-oil-prices-on-asian-economies

Chong, P. K. (27 February, 2015). Petronas Turns to $2.7 Billion Fourth-Quarter Loss on Oil Slump. Retrieved from Bloomberg: http://www.bloomberg.com/news/articles/2015-02-27/petronas-turns-to-2-7-billion-fourth-quarter-loss-on-oil-slump

GOH, K., & SHARMA, R. (29 October, 2014). Implications of lower oil prices. Retrieved from CIMB: https://brokingrfs.cimb.com/pvVOK7qzQm7D38tVub3Qc_9GpjvO5PSHWl-CGccM1fXEsOcFtpTwE2RFUqYbGcZ8skyIiI3LuWQc8A2.pdf

Huey, O. M. (22 January , 2015 ). Plastics & Packaging Corporate Day. Retrieved from bursamarketplace: http://www.bursamarketplace.com/index.php?ch=44&pg=158&ac=10766&bb=research_article_pdf

Lee, J. (9 December, 2014). Fuel prices in Malaysia to fall further – Ahmad Maslan. Retrieved from http://paultan.org/: http://paultan.org/2014/12/09/fuel-prices-malaysia-fall-ahmad-maslan/#ixzz3TO9gSykO

Low, G. (4 February, 2015). Low oil prices no big boost to earnings. Retrieved from theantdaily: http://www.theantdaily.com/Main/Low-oil-prices-no-big-boost-to-earnings

PÉREZ, S., & HARRUP, A. (29 January, 2015). Mexico Prepares to Cut Spending as Oil-Price Drop Hits Revenue. Retrieved from The Wall Street Journal: http://www.wsj.com/articles/mexico-prepares-to-cut-spending-as-oil-price-drop-hits-revenue-1422588716

Reporters, F. (11 MARCH, 2015). Khairy calls for lower electricity tariffs. Retrieved from FreeMalaysiaTodayNews: http://www.freemalaysiatoday.com/category/nation/2015/02/04/khairy-calls-for-lower-electricity-tariffs/

SUE-CHERN, L. (12 February , 2015). Is electricity tariff cut a ‘bribe’, asks Guan Eng. Retrieved fromTheMalaysian Insider: http://www.themalaysianinsider.com/malaysia/article/is-electricity-tariff-cut-a-bribe-asks-guan-eng

Sze, G. (2 January , 2015). Petrol stations may close if prices fall further – PDAM. Retrieved from paultan.org: http://paultan.org/2015/01/02/stations-may-close-fuel-price-drop/#ixzz3TO0oa74m

TAN, Y. (15 November, 2014). Oil reprieve for AirAsia. Retrieved from The Star: http://www.thestar.com.my/Business/Business-News/2014/11/15/Oil-reprieve-for-AirAsia-In-ringgit-terms-every-drop-of-US1-per-barrel-should-help-create-RM12mil-in/?style=biz

V, P. (21 November, 2014). Has Malaysia become a net importer of oil? Retrieved from FocusMalaysia: http://www.focusmalaysia.my/Markets/Has Malaysia become a net importer of oil?

Walker, A. (26 February, 2015). Cheap oil: Asia’s winners and losers. Retrieved from BBC News Business: http://www.bbc.com/news/business-31444344

Page | 1


To export a reference to this article please select a referencing stye below:

Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.
Reference Copied to Clipboard.

Request Removal

If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on the link below to request removal:


More from UK Essays