How the Trans-Pacific Partnership Agreement (TPPA) can affect us
May 8, 2014
The crash in the price of oil has left not just left thousands of families facing uncertainty, but has also shown the weak foundation the economy has been built on. Easy money from oil has made us negligent on the development of other economic sectors.
Several weeks ago, I met up with a couple of my friends who had lost their jobs in oil and gas companies. These guys used to earn monthly salaries comparable to the annual salary of the median Malaysian worker. They are, of course, highly trained professionals who surely deserved the remunerations they received. Petroleum company workers had also been the darling of our local banks and property developers. Being grounded (meant it as a pun), property developers sought them out to sell their properties to, while the banks were ever willing to finance the purchases. While everyone assumed those in petroleum would lead a life of perpetual prosperity, things took an unexpected turn for the worse once petroleum prices started falling in mid-2014 (hence, our cheaper petrol pump prices). Many of the business operations in this sector have now become loss making, leading to the downsizing of staff across the board. To add to the misery of being unemployed, these friends of mine along with many of their colleagues carry huge monthly overheads including bank repayments. Kindly allow me to dwell on this situation.
The declining price of petroleum is one of the major causes of economic uncertainty in the global as well as Malaysian economy. Hydrocarbons have fuelled the world since the beginning of the industrial revolution almost 150 years ago. For Malaysia, it has been a major source of income with Petronas being a cash cow for the government (21% of government budget in 2015). After holding steadily from 2010 at the $110 level, crude oil prices started falling in June 2014. The price of the international benchmark Brent oil has fallen from US$110 in June, 2014, to a low of $30 a barrel. Presently, it is at the $50 level. Goldman Sachs says that prices can go as low as $20, but then again Goldman Sachs also predicted that the price of Brent could hit $200. So, why did the price of crude oil fall by more than two-thirds to $30 in a year and a half?
The primary reason for the fall is an overproduction of crude oil resulting from shifts in both supply and demand related factors. Output has increased, for sure. The long term supply increase has been the result of a boom in investment in shale oil, especially in the US. The shale oil is extracted from oil shale, which is an organic-rich fine-grained sedimentary rock, and processed into fuel. The US alone now produces 4.8 million barrels of shale oil daily as a result of much investment in recent years. This is similar to the combined output of Kuwait and UAE. By comparison, Malaysia produces around 700,000 barrels per day (and also contributes about 11% of global LNG exports).
Since its inception in 1960 as a cartel, OPEC had been manipulating global crude oil prices by controlling output levels. Other producers were simply too small to significantly affect supply. However with the larger number of producers today, OPEC is no longer able to be the price maker. Saudi Arabia specifically is unwilling to cut production to allow prices to rise as this will only benefit the competition. Their short term goal is to maintain market share. Being wealthy, the situation could indeed favour them if prices were to drop further thereby driving many of the high cost producers out of the market. This could very well be the case as with sanctions on Iran having been lifted; Iran’s output could increase by another million barrels a day within months. If Mr. Donald Trump becomes President of the United States, output from the US will almost certainly rise.
At the same time, the world economy has slowed down. China’s GDP for the third quarter of 2015 grew by only 6.9% in spite of various growth inducing measures of the government. Developed countries are a poor prospect as they are in the midst of austerity measures aimed at defending their fiscal positions. Hence, investment in these countries is not expected to rise. With weaker economic growth, the demand for crude oil too will not increase. The Royal Bank of Scotland has warned that 2016 will be a “cataclysmic year,” which will be triggered by the slowdown of the Chinese economy together with a major correction in the country’s stock market. We can thus expect demand for crude oil to be weak through 2016, at least.
As there is a negative correlation between US dollar rates and commodity prices, the rise in the US dollar against other major currencies has a significant impact on oil prices. It is not just crude oil prices but a whole range of petroleum related activities that are quoted in US dollars. Therefore, when the exchange rate of the US dollar rates vis-à-vis major currencies change; crude oil and petroleum related products prices too do make adjustments.
How does the falling price of crude oil affect Malaysia? On the positive, consumers may experience lower retail prices for petrol and diesel. However, the weak ringgit has made a damper of this. On the one hand, the government’s collection from various taxes and royalties from petroleum related activities has now been hit. On the other hand, dollar exports would translate into more ringgits. The latter is good for the exporter but households will suffer due to inflationary pressures caused by the dismal ringgit, which will override the benefits derived from lower pump prices.
It is hard to say if being an oil producer has been a boon or a curse for Malaysia. The revenue from petroleum since the 1970s has given the government easy cash. Otherwise, Malaysia’s initial growth might have taken off more slowly, although other countries in the region without resources such as South Korea, Taiwan and Singapore have long achieved developed nation status without the help of natural resources. As a result of this easy source of revenue, the country might be suffering from the Dutch Disease. The focus on easy money from oil has made the government lazy thereby neglecting other sectors, specifically high value manufacturing and services. This is evidenced by the low workers’ wages in the country. Although unpopular the statement by the government’s Deputy Minister, in the presence of the weak ringgit, high prices and low wages, more Malaysians might soon be forced to look for multiple sources of income just to get by.
Going back to my friends and thousands of other highly skilled workers who have lost their jobs, I can only feel sad and offer them my sympathy. There is not much any one of us can individually do. Many have large debts to settle, and the banks have now started to treat them like lepers (We need to remember that banks are only there for us so long as we do not need them). Unfortunately, their skill is often very specific. While being very valuable in the petroleum industry, there is little demand for such skill elsewhere. They face the worst form of unemployment; economists call it structural unemployment, where there is a mismatch between the skill of the worker and the demand for such skills (remember what happened to typists with the proliferation of cheap personal computers).
With the dim long term outlook of the petroleum sector, many of the unemployed petroleum workers will not be going back to this industry even if demand picks us in the future. It is the role of the government to step in, and manage the situation. These citizens are valuable human resource, and it is the duty of the government to find ways to ensure that there is minimal loss here, both to the individuals concerned and the country. As usual, our officials are uninterested. Their only initiative is for the Human Resource Ministry to put up the following notice: “Unemployed O&G workers told to register with Jobs Malaysia.” Placement? Where? When? …………. God help us!!!
