Oil price increase, boon or bane?

Oil price increase, boon or bane?

December 13, 2017 0 By WFTV

THE increase in the price of crude oil appears to be both a boon and a bane for Malaysia. It is a boon as the increase in crude oil price would rake in additional revenue into Malaysian coffers. It is a bane as the average consumers would now have to fork out more for petrol.

It is estimated that the price of crude oil could reach US$62 per barrel next year based on various reports, which far exceeds the Budget 2018 projection of US$52 per barrel.

Economists have alluded to the fact that when the price of crude oil rises by US$1, it is expected to rake in an additional RM300 million revenue.

The higher oil price is expected to have a positive impact Malaysia’s fiscal position as it will help to narrow the fiscal deficit gap with the hopes that the government will continue to retain the subsidy rationalisation programme.

The government should continue to prune all unnecessary expenditure and continue its prudent financial management. However, the additional revenue from the increase in the price of oil should go towards social welfare programmes.

Of immediate attention is for the government to give more towards public healthcare which includes upgrading the services at public hospitals.

Malaysians have become accustomed to the de-facto entitlement to tax-funded, publicly provided health care, but modest expenditure also impose limits on the level, timeliness and (perceived) quality of care that can be delivered which necessitates increased expenditure on public health.

The government could also use the additional revenue from the oil price spike to focus on  development expenditure, for example.

Still, there are some quarters that have suggested for the reintroduction of the petrol subsidy. This may not be necessary as it would only make subsidised oil available to those from advantaged economic settings and leading to a possible misallocation of resources.

The increase in the price of oil comes on the back of strong economic numbers that have seen the ringgit appreciating which would help reduce inflationary pressures.

This would see an improvement in the disposable income of the people, thus allowing for more imported goods into the country which would invariably lead them to have better quality products.

In addition, the rise in oil prices will also help in the rebound in the local currency which will definitely play a role in reducing inflationary risks in the country

The depreciation of the ringgit is one of the main causes of imported inflation and with the local currency strengthening, we should see disposable income rising on account of reduced prices of goods.

The appreciation of the ringgit due to the increased price of oil also comes at the time when the Malaysian economy is already doing well evidenced by the strong economic numbers that had come out in the third-quarter of the year.

While the appreciation of the ringgit would reduce inflationary risks, the continued rise in oil prices could also add to the headline inflation through the rise of domestic retail petrol prices.

The finance ministry said the government would identify “appropriate measures” to reduce the impact of fuel price hikes if the retail price of RON95 and diesel exceeded RM2.50 per litre continuously for three months.

Its aim was to ensure that inflation was under control in the short and medium term.

The government’s intervention if the oil price spikes is likely to mitigate inflationary pressures but it appears that there are more bounties for Malaysia if the oil price escalates.

Sathish was previously the Senior Analyst at the Institute of strategic and International Studies and most recently as the Assistant Business Editor in a local newspaper.