Wednesday, December 10, 2014

THE OIL PRICE


As posted by Dr. Mahathir Mohamad at Che Det on December 08, 2014

1. The price of one barrel of crude fell from US$110-00 per barrel to US$70-00.

2. Is it true it will have no effect on us (Malaysia) or that it will be good for us?

3. When the Government budget for 2015 was launched, it was premised on the price of oil being US$110-00 per barrel.

4. Obviously the Government expected its oil revenue to contribute to the budget based on this high oil price. Is it possible that the effect of the low oil price on the Government’s budget will remain the same, or will improve now that oil has gone down to US$70-00?

5. Petronas contributes to the Government a substantial sum by way of dividends and petroleum tax. Will Petronas contribution remain the same when it earns less from sale of oil, LNG and gas?

6. The oil and gas businesses which have grown very big lately was based on high cost to be paid for by high profits from oil. The capacity for payments of contracts at the old rate must be affected.

7. The lower price of oil must affect the servicing and payment of debts by producer. They have to sell more in a weak market. Profits must go down if not disappear completely. Taxes for the Government will consequently go down.

8. Unless the Government cuts its spending, the deficit must become bigger. The claim that it will not increase the deficits need to be explained.

9. When the Government reduces expenditure, a lot of businesses will suffer. Profits will go down and with it the taxes. Government revenue must decrease because of reduction in Government expenditure.

10. The pump price of petrol would only go down if subsidies remain. But the capacity to subsidise would be lowered because of less earnings and contribution by Petronas. Without subsidy the pump price will remain the same for motorists and industries. It might even go up as the Ringgit has depreciated. So the people will not enjoy the benefit from lower crude prices?

11. We import much of our raw materials and components for our industries. Mostly they are priced in USD which is now costly. We will have to pay more Ringgit for our imports. This will negate the benefits from the depreciation of the Ringgit.

12. I think we should not dismiss lightly the effect of falling oil prices. Share prices in the USA have gone down by considerably. Can we sustain our share prices, especially those concerned with the oil and gas business. Remember we went into this business when costs were high. Our expectations is that returns would also be high.

13. When returns go down due to the lower oil price, will share prices remain the same? As usual, the first to run will be the foreign investors. The locals will be left to shoulder the problems.

14. We have not yet signed the TPPA. Have we worked out what would happen when there is a massive flight to quality of foreign capital.

15. Incidentally, there is a new call for higher minimum wage. Increase in minimum wage must be accompanied by increases in wages above minimum to retain parity. Costs of production will go up and prices will go up also. We will become less competitive in the market, domestic and foreign. Some businesses will fold up. Unemployment will increase.

16. I think we should think carefully before we comment on the oil price.