Friday, January 9, 2015

Dark Side of Declining Oil Prices

 
 
 
 
 
 
 
 
 
 
 
 
European benchmark Brent oil sank under $50 on Wednesday for the first time since April 2009, battered by OPEC’s stance on maintaining its current production levels, market oversupply, weak demand and the strong greenback. In morning London deals, Brent North Sea crude for delivery in February plunged to $49.66 a barrel.
 
And US benchmark West Texas Intermediate (WTI) also for February tumbled on the same day to a similar low at $46.85, having already collapsed under the symbolic $50 level on Monday.
 
This is certainly not good news for Malaysia!
 
The country is already walking precariously on the plank that is dangling over the sea. Malaysia is almost reaching the edge and we are about to be pushed into the deep waters below to drown. Optimism has long evaporated; hope is fast disappearing; and the reality that we are heading into a fiscal black hole becomes more apparent.
 
Budget 2015 was drawn up on the assumption that crude oil price would average $110 for 2014 and $105 for 2015 in the world market. Surely now, the government have no choice but to go back to the drawing board and revise the Budget. All their numbers have flown the coop.
 
Forty percent of government revenue comes from oil and gas. The plunge in price would unavoidably slice revenue and this means a bigger budget deficit is well-nigh a certainty.
 
State-owned Petronas is the largest single contributor to government coffers – the country’s “piggy bank”. For those who are ignorant, Petronas funded Putrajaya, the KL Twin Towers and other mega-projects in the country.
 
In 2013, the national oil company posted a net profit of RM54.11 billion (RM49.92 billion the year before). But even so, the dividend payout to the Government came down by RM1 billion to RM27 billion.
 
Believe me, 2014 is not expected to match these figures. If you are still doubting me, last month, the company have already said they would lop dividends by more than 37 percent if oil prices stayed below $75 a barrel.
 
And if Petronas makes less money, they will not only contribute less to the government but they will start a chain reaction – the company themselves will spend less, which will eventually affect the economy as a whole, and Malaysian consumers end up even more worst off.
 
On Wednesday, Petronas have “indicated” that they may slash local capex by 30 percent. In late November 2014, president and group CEO, Shamsul Azhar Abbas had already warned that capital expenditure could be cut by 15-20 percent this year because of the drop in oil prices. Who is to say that if oil prices continue to go south, the cuts won’t get any deeper?
 
According to Shamsul, every $1 change in oil prices has a RM1 billion impact on pre-tax profit (The Sun, January 08, 2015, p 16).
 
Malaysians, brace yourselves because 2015 is likely to be a very challenging year! Difficult times are ahead! Stay strong!

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