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FIN 533




8TH JUNE 2020

This article is posted in The Star on 15th of April 2020, that have been written by Intan
Farhana Zainul. The topic of the article is ‘Earning Risks for Local O&G Firms’. In the past
few month, there were breaking news about coronavirus. The coronavirus pandemic was first
identified in Wuhan, China, in early December 2019. It started to spread to nearly every
country including Malaysia in a blink of an eye. It was confirmed to reached Malaysia in
January 2020. The cases reported was remained relatively low until localised clusters began
to emerge in March, where they were gathered for Tablighi Jamaat that held in Sri Petaling,
Kuala Lumpur. Within a few weeks, Malaysia had recorded the highest cumulative number
of confirmed COVID-19 infections in Southeast Asia.

On 13 March 2020, Prime Minister of Malaysia announced the measures to combat the
outbreak, by 16 March, a nationwide “Movement Control Order” (MCO), intended to
mitigate the spread of COVID-19 through social distancing. Malaysia’s movement control
order (MCO) has been extended until we are confident that COVID-19 outbreak is
completely under control. Based on the article, we know that due to the COVID-19 outbreak,
oil prices have dropped and created a monstrous calamity for countries that strongly rely on
oil production for their economic survival. The outbreak has slowed the world economy and
consumer consumption.

The sudden drop in oil values is also because of price war between Saudi Arabia and
Russia in response to the effect of COVID-19 outbreak. This causing demand for oil
consumption become lower. Furthermore, citizen of Malaysia also cannot go anywhere and
all the flights are blocked from leaving and entering Malaysia. All the restrictions are the
biggest contribution for fuel and other oil products. Thus, it forced down the wholesale price
of oil. The finance Ministry said the price of RON97 petrol will drop by 36 cents to RM1.74
per litre, from the previous RM2.10 per litre while RON95 will drop 38 cents to RM1.44 per
litre from RM182 per litre and diesel will be reduced by 12 cents per litre to RM1.75 per litre
from RM1.87 per litre. Our government will continue to keep an eye watching the impact of
changes in global crude oil price.


Based on the article, I agree that the lower oil prices will greatly give positive effects on
consumer where they are able to spend their money more on other goods. It also helps to
reduce the cost of living. For example, if a household owns a car or other transport that it
relies on oil, they do not need to fill the petrol. However, fall in oil price also could bring
hardship to the economy. If there is only small fall in oil prices, it does not hit oil countries
too much, but, because of COVID-19 outbreak, the fall in oil prices is so severe, and it put a
danger to the oil producers. Usually, falling oil prices have given advantages to the global
economy. But this time is very different due to COVID-19 outbreak which making most oil
production uneconomic. This unequalled loss could have serious effect for country finance
and state of the country economy.

In the article stated that, falling oil prices putting pressure on its dividends to the
government which the national oil company said. The Malaysia’s movement control order
(MCO) and lockdown make the executives and vendors to manage new projects and some
ongoing production activities which is disruptions in manpower, services and the supply
chain. The national oil company also said that there will be an increasing risk of some
projects that is being delayed due to lockdowns implemented globally and in Malaysia.
Petronas central business is refining, production and distribution of oil and gas, together with
producing refined products. The price of its refined products has a huge impact on the
earnings of the company. Based on upstream division, I can say that, the higher the price of
crude oil and gas, the better the profit and vice versa. While based on downstream division,
profit depends on the spread between the cost of the commodities and the selling price of the
end products. Thus, when price of oil is falling, the spread becomes more widen and
downstream margins improve, even if at the end the selling price tracks the movement oil
crude hydrocarbon.

Furthermore, The Institute for Democracy and Economic Affairs (IDEAS) mentioned that
Malaysia may lose RM30.9 billion in fiscal revenue if the price of oil remains low, which it
could strain the country’s finances. Malaysia also expected to lose US$1.7 billion per annum
in new capital investment. This is because of oil demand has dropped by cause of COVID-19
outbreak and citizens have been ordered for Movement Control Order (MCO). Besides, I
think Malaysian country’s Oil & Gas sector should require to discover plan in reducing costs

and monetize the current resource based, along with investing in building effectiveness in
renewables to create and protect jobs in energy sector in Malaysia.


As a conclusion, what I learned from the article is decline in oil prices could have benefits
of encouraging firms to stop oil eradication from new areas. In addition, falling oil prices also
could cripple the growing markets for renewable energy and reduce the attractiveness of cars
which use many options of fuel sources. Normally, falling oil prices have been advantageous
for the global economy. However, this time is different because the oil price is falling to a
level which is making most oil production become wasteful of money or uneconomical.
Many oil producers are probably to lose notable amounts of money. These unequalled losses
could have serious effects for global finance and the state of the global economy in the future.

Furthermore, decline in oil prices also give pressure to the Oil & Gas firms. Lockdown
and MCO make the firms and vendor facing disruption of manpower, services and supply
chain in managing their projects and production activities. The risk for all the projects to be
delayed also will be rising and making all the workers of Oil & Gas firms to face earning risk
due to lockdowns that is implemented globally and also in Malaysia. Mobility restrictions and
lockdown making it harder for executives to manage their ongoing projects. I think, the
companies will have no option but to cut their spending money when the cash drying up
because low prices of oil have restraint cash flow at upstream companies and weaken their
ability to find capex ability. While for the downstream company, I think they might not cut
their spending and may use the current environment to extract better rates from vendors and
lower project costs. Therefore, decline in oil prices could give serious effects to global
finance and global economy, but there are ways for the government to decide to overcome
these problems. That is all what I learn from the article.


Intan Farhana Zainul. (2020, April 15). Earnings risks for local O&G firms. The Star.

Retrieved from https://www.thestar.com.my/business/business-


Adam Muspratt. (2019, January 5). Introduction to oil and gas industry. Oil & Gas iQ.

Retrieved from https://www.oilandgasiq.com/strategy-management-and-


Tejvan Pettinger. (2017, January 18). Are falling oil prices good for the economy? Economics

Help. Retrieved from https://www.economicshelp.org/blog/15601/oil/are-falling-oil-


Adam Aziz. (2020, March 26). Cover story: How oil prices will impact Petronas’ earning.

The Edge Markets. Retrieved from https://www.theedgemarkets.com/article/cover-


Praveen Duddu. (2020, April 1). Coronavirus in Malaysia: COVID-19 outbreak, measures

and impact. Pharmaceutical Technology. Retrieved from



Matt Reynolds. (2020, May 15). How coronavirus started and what happen next, explained.

Wired. Retrieved from https://www.wired.co.uk/article/china-coronavirus.