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Oil Price And The Global Market Economics Essay

Oil plays a very important role as a source of energy in the world market. There have been many studies and researched conducted to determined the relationship between the oil price fluctuation and macroeconomic variables to global economy.

OIL, OIL PRICE AND THE GLOBAL MARKET

Oil has become a major indicator to economic state of many countries including developed and developing countries. According to Basher & Sadorsky (2006), oil is the lifeblood of modern economies. However, the oil price is known for its volatility. Ever since the collapse in oil price in 1980 the oil price has been volatile. This was preceded with an oil price shock in1973 where the price reached $40/barrel. The collapse later kept the oil price as low as $20/barrel until 2001. After which, the price gradually increase over the years until it reached its peak of $147/barrel in July 2008. This was then followed by a collapse in price where it reached as low as $35/barrel.

The oil price and petroleum products are determined by the international market based on the supply and demand forces for oil and petroleum products. For example, if there is an increase in demand but not enough supply, the logical way to solve this would be to increase the price. This is the basis that lies behind the supply and demand forces. This goes in hand with Hamilton (2009) findings as one of the causes for the oil price hike in 2007-2008. He further stated that the increase in demand is coupled with the higher world economic growth. Nevertheless, the demand growth and supply growth was not in proportion. This led to demand being more than supply which drove the oil price higher. Between 2003 and 2005 the world gross domestic product (GDP) growth was 9.4% in total. One of the drivers to this increase is the increase in world oil consumption of 5 million barrels per (approximately 6%) during the same period. The following two year (2006 & 2007) saw a higher total GDP growth (10.1%). One of the main drivers for this growth is the significant growth in the Chinese economy. On average China’s growth contributed 4.9% of world GDP. It emerged as the third largest imported of oil (Hamilton, 2009), where its share of oil consumption alone increase by 870,00 barrels per day. The latter fall in oil price was due to the decrease in demand for oil For example, towards the last quarter of 2007 the US’s consumption decrease by 122,000 barrels/day, Europe’s consumption decrease by 346,000 barrels/day and Japan’s consumption dropped by 318,000 barrels/day.

Source: U.S. Energy Information Administration [1]

The previously high price of oil has encouraged more efficient energy mix. The many increase is the use of natural gas as source of energy especially in electricity generation and transportation. The high energy price had its share of influence in the increase in overall cost of goods and service. Higher oil price made transportation become more expensive and this additional cost were transmitted to the end users (customers), leaving them with lesser opportunities to save from their disposable income.

OIL AND MALAYSIAN ECONOMY

Malaysia is regarded as one of the emerging countries and it has one of the strongest economies among the Southeast Asian Nation (ASEAN) region. Compared to the developed countries, the developing countries are more energy intensive. Therefore the demand for oil in emerging markets is higher. Its GDP grew at an average of 8% between 1970 and 1980. In between 1980 and 1990 it had an average growth of 5.2% and 6% growth between 1990 and 2005. However, its GDP reached as high as 9% before the 1997 Asian financial crisis. It severely affected the Malaysia economy and was the worse since mid 1980s.

After the independence in August 1957, Malaysia’s main economy was based on agriculture. In the 1970s Malaysia started venturing into industrial activities. In 1985, the government implemented industrial plan which led Malaysia into a major transformation of its economy structure. This was when Malaysia shifted away from agriculture into manufacturing. The manufacturing sector than became the largest GDP contributor. It was the driving force behind the growth of Malaysia. The rapid growth in its economy increases the demand for oil as source of energy particularly for electricity generation and transportation.

Major Export of Malaysia for the year 2009

(RM Million)

Jan-Dec

Jan-Dec

January-April

2008p

2009p

2009p

2010

Natural Rubber

8,111

4,460

1,150

2,872

Palm Oil & Palm Oil-Based Products

64,808

50,728

15,336

19,675

Crude Petroleum

43,698

25,360

6,597

11,569

Petroleum Products

28,635

19,400

5,152

6,801

Liquefied Natural Gas

40,732

31,195

13,571

12,621

Timber & Timber Based Products [5]

22,650

19,411

5,693

6,918

Electrical & Electronic Products [5]

255,360

227,778

62,302

82,441

Articles of Apparel & Clothing Accessories [5]

12,096

11,003

3,531

3,937

Other Manufactured Goods and Articles [5]

86,133

75,958

22,901

29,330

Source: Department of Statistics Malaysia [2]

Malaysia is a country that has been blessed with natural resources like oil and gas. As at June 2009, it has 4 billion barrel of proved reserve (EIA), mostly from offshore fields. Malaysia is both an exporter and importer of crude oil. The crude oil found in the Malay basin has a very low content of sulphur (≤ 0.08%) which makes it a good quality. Therefore, Malaysia exports its own crude oil which fetches higher profit and imports in the lower quality crude oil at a lower cost. Besides, Malaysia has good refineries that are able to process lower quality crude.

Apart from crude oil and petroleum products, Malaysia also exports natural gas. It exports it through both pipelines and in the form of Liquefied Natural Gas (NLG). According to the EIA, Malaysia holds the eight largest natural gas reserves. It is also the second largest exporter of LNG behind Qatar.

In 2008 exports of crude oil were approximately 320 thousand barrels per day while it imported 120 thousand barrels per day (EIA). 7.9 million metric tonnes per year. This makes Malaysia a net exporter of crude oil. However, Malaysia is only a small player in the global oil market. Its share in global market is approximately 1% of the total market. This makes Malaysia have no say in determining the world oil price. Therefore it just adapts the world price with its fluctuations.

The 2007-2008 oil price hikes has adversely affected cities and countries that are heavily dependent on oil. This has made transportation more expensive. Due to the poor public transport services, most residence relies on their own vehicle to commute. Besides transportation, other consumer goods and services also became more expensive which was an indirect effect of the increase in fuel both petrol and diesel prices. This can be seen from the huge increase in Malaysia Consumer Price Index (CPI). The CPI increase by %%%% from 105.7 (2007) to 111.5 (2008) compared to the %%%%% (103.6-2006) increase for the same period from 2006 to 2007.

Malaysians have been enjoying a lower fuel price compared to the other countries in its region due to the subsidy provided by the government. The supply and prices of petroleum in Malaysia are categorised as controlled item under the Control of Supplied Act 1961. The retail prices are only allowed to be changed upon the approval and announcement of the government. For these reason the customers do not face retail price fluctuation. Like most developing countries, these subsidies are meant to ease the consumers. The Malaysian government spent RM 8.77 billion on fuel subsidy ant this amount rose to RM18.8 billion in 2008. This was despite the review done on the retail fuel prices during the year.

OIL AND SINGAPORE ECONOMY

Singapore has the strongest economy in the region of ASEAN. It is a small country at the south of Malaysia. It has a unique location at the entrance of the Straits of Malacca. Singapore was recognised with its natural port way back in 1819s owing to its strategic geographical location. The natural deep harbour of Singapore made it possible for ship to shop and to take a break during their journey from east to west. As more and more ships found this place a suitable stop, it quickly became an active port. Traders came here for trading their goods. By the mid 1829s, Singapore became an important port in that region overtaking the long established Penang port in Malaya. As this continues it became an important trading port and was recognised by many traders.

Gaining independence from British Empire, Singapore joined the Malay Peninsula, Sabah and Sarawak to form Malaysia in 1963. However, due to some unavoidable circumstances, Singapore wanted its independence from Malaysia. In 1965 it got its independence from Malaysia and formed a republic of its own, the Republic of Singapore.

Since the first oil shock n 1973s, many studies conducted to determine the impact of oil price shocks on the economic performance of a country. Most early studies conducted have focus on the United States (US). One of the first studies conducted in this area is by Darby in 1982 Hamilton in 1983. Hamilton (1983) conducted a study on the impact of oil price shocks on the US economy between 1949 and 1972. He discovered that, out of eight post World War II recessions in the US, seven preceded with a significant increase in global crude price.



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