THE IMPACT OF

INCREASING OF OIL PRICES

IN MALAYSIA
INTRODUCTION
Since mid-2004, the price of crude oil has increased substantially in the world
market. Factors like depletion in oil supply, increasing oil consumption and
political instability in oil producing countries are being blamed as the main causes
for these increases.

In the case of Malaysia, oil price is set by the government. It is under government
subsidy since 1970s.

Despite the fact that Malaysia is exporting oil, the country also imports oil from
other countries.

The Malaysian government subsidises and controls prices on a lot of essential

items to keep the prices low. Prices of items petrol have been kept under market
prices to keep cost of living low.

Since 1 November 2008, the Government of Malaysia is no longer subsidize petrol

as announced by the Ministry of Domestic Trade and Consumer Affairs Minister
Datuk Shahrir Abdul Samad, on 18 November 2008.
TABLE PRICE OF PETROL 2016
PETROL PRICE RON 97 ( PETROL PRICE DIESEL (
PETROL PRICE RON 95 ( RM/ LITRE) RM/ LITRE)
MONTH
RM/ LITRE)
INCLUDE 6 %GST

DECEMBER 2016 RM 1.95 RM 2.30 RM 1.90

NOVEMBER 2016 RM 1.95 RM 2.30 RM 1.90
OCTOBER 2016 RM 1.80 RM 2.15 RM 1.75
SEPTEMBER 2016 RM 1.70 RM 2.05 RM 1.70
AUGUST 2016 RM 1.75 RM 2.10 RM 1.70
JULY 2016 RM 1.75 RM 2.05 RM 1.60
JUNE 2016 RM 1.70 RM 2.05 RM 1.55
MAY 2016 RM 1.70 RM2.05 RM 1.55
APRIL 2016 RM 1.70 RM 2.05 RM 1.55
MARCH 2016 RM 1.60 RM 1.95 RM 1.35
FEBRUARY 2016 RM 1.75 RM 2.05 RM 1.35
JANUARY 2016 RM 1.85 RM 2.25 RM 1.60
SOURCE : KPDNKK
IMPACT

Impact on GDP growth

The impact of high oil prices on Malaysias GDP growth would depend on
the exposure of the Malaysian economy to oil, particularly in terms of
domestic consumption and the extent of the spill over effect of the
increase in costs on other products and services.
On the supply side, high oil prices would then spread throughout the
economy, driving up production and distribution costs on a wide variety of
goods that will induce firms to reduce output (McConnell & Brue, 2008).
The increase in production and distribution costs would be caused by
factors such as the rise in expected price level, workers demanding higher
wages and increases in non-labour inputs such as raw materials (Frederic
Mishkin, 2007).
Impact on Inflation
Inflation, a continuous rise in price level, affects individuals, businesses,
and the government (Frederic Mishkin, 2007). High inflation is
undesirable as it erodes the purchasing power of money that causes a
drop in real income, the weakening of a countrys currency, and a decline
in long-term economic growth.
The Malaysian consumer price index comprise mainly of three categories,
namely food & non-alcoholic beverages, housing, water electricity, gas &
other fuels, and transportation.
Relative to developed countries like the United States, Japan, and
developed countries in Europe, Malaysia has a higher level of exposure to
the adverse impacts of the increase in oil prices as a higher proportion of
Malaysian households income goes into food and fuel.
While a high inflation rate and a higher cost of living is normally measured
through the consumer price index, in reality a high inflation rate does not
affect all citizens equally. When income levels come into consideration,
high inflation normally hit the hardest on the poor rather than the rich.
Impact on fiscal budget
A countrys fiscal budget comprises of government expenditures and tax
revenues (Arnold, 2008). Malaysia has a long standing fiscal deficit
whereby government expenditures are greater than tax revenues of
approximately 3% to 4% of gross domestic product. However, the budget
deficit is said to be within a manageable range and is forecasted to remain
at current levels.
As stated above, the fiscal deficit of a country depends on government
expenditure and tax revenues. Holding everything else constant, a decline
in Real GDP due to rising oil prices would result in a decline of Malaysias
tax base and if tax rates are held constant, tax revenues will fall.
Furthermore, should oil prices continue to increase, the amount of
government subsidies on fuel and other essential items would also increase.
Thus, the Governments expenditure will rise and tax revenues would fall
resulting in an increase in the countrys fiscal deficit. Due to the presence
of both inflation and an economic slowdown, the usage of fiscal policy to
solve domestic economic problems is severely limited. Should the
government attempt the make use of expansionary fiscal policy measures
either by increasing government expenditure or reducing taxes.
DOMESTIC RISK
The rising trend in international oil prices is likely to increase the domestic
risk in Malaysia. It is important for both the government and citizens alike
to understand that the economy works in a circular flow by which a change
in a single part or industry in an economy is likely to cause changes in
other parts of the economy as well.

The combination of a slowdown in the domestic economy, high inflation,

and a decline in the ringgits value relative to other currencies increases
the risk of doing business in Malaysia .(Mukhriz & NorAznin, 2011).
 According to star newspaper, some of the potential risks and
challenges facing the domestic market include :-

- Rising operational costs resulting from surging price of

commendation
- Possible electricity tariff hikes
- Government on going reduction subsidies causing higher fuel
prices
- Malaysia growth slows down more than anticipated

Domestic fundamentals and imbalance pose significant risks to

economic growth. Malaysia public debt has been on the rise and debt
affordability has seen limited improvement despite the government
recent initiatives for fiscal consolidation.

Although, the goods and services tax (GST), Implemented as a part of

fiscal reforms is expected to improve the government revenue, its
impact on consumption demand has been adverse so far.
Impact on Malaysias competitiveness
It is a common misperception that countries blessed with natural resources
like oil would result in higher economic growth prospects and higher
competitiveness against countries that are forced to spend large amounts of
money to import these resources. Yet as history has often proven to us, this is
seldom true and countries with natural resources are often plagued with a
resource curse which leads to corruption, wastage, and mismanagement of
the economy.
The presence of oil and gas in Malaysia has created and artificial sense of
wealth to which the petrol-dollars are used to pump and prim the economy
and subsidize a number of essential consumer items. On top of that, the
Malaysian ringgit used to be attached to the greenback thus making it
undervalued in terms of purchasing power equivalence to other regional
currencies (Tricia Yeoh, 2008).
This has made Malaysian exports cheaper relative to other countries and
resulted in a booming export industry and a current account surplus. While
the oil price hike in June is detrimental to the Malaysian export industry, it is
likely that domestic firms in Malaysia would become more competitive. The
reason for this is that as the costs of doing business increase, Malaysian
companies would be forced to innovate and generate more income in order to
protect their profit margins and ensure their survival.
CONCLUSION
The rapid increase in oil prices would spill over into other major sectors of
the economy and fuelling headline and core inflation while at the same
causing a slowdown in Malaysias economy. This period of stagflation
would limit the use of fiscal and monetary policy to solve short-term
economic problems in the country.
On top of that, many economists have argued that increasing interest rates
to put a lid on inflation may not be an option as inflation is not driven by
demand but by increases in costs.
The best solution would be to open up the Malaysian economy by
fostering more open competition, freer trade, and the removal of price
controls. This would enable the retaining of human capital, the increase in
domestic firms competitiveness, and a better allocation of scarce
resources.
Yet for authorities to do so, a lot of political discipline is needed as
beneficiaries from the current system groups would firmly campaign
against such a move. As usual, there is no such thing as a free lunch and
short-term sacrifices need to be made to guarantee long-term prosperity.
The government must constantly monitor and take strict action against
any parties raise prices indiscriminately without getting approval from the
government. Responsible officer should visit all of a sudden from time to
time to ensure the seller to comply with the rules or do not act like loan
sharks. For example, any of the parties raise prices indiscriminately or try
to install a fish trap in the constriction, they should be prosecuted. This
will be a good reminder for them not to take an advantage with rising
prices.

In conclusion, the rise in oil prices effect the country directly or indirectly.
Rising prices will lead to uncontrollable economic chaos and uncertainty,
which threatens social and political harmony in the country. Therefore, all
parties should play their role to curb the rise in prices of essential goods
and take action to resolve this problem so that the problem of rising prices
could be controlled. As a smart consumer, we need to control our
spending so we will not be burdened by the impact of rising oil prices.
THE END