Thursday, October 16, 2008

Should Malaysians Cheer For The Recent Lower Oil Price?

Is there anything to cheer for cheaper oil price?


(1) Less burdening. In Malaysia, demand for car is inelastic (PED< 1) given the poor condition of public transport e.g. irregular bus, sardine-packed LRTs & KTMs etc. As such Malaysians rely heavily on it as a main form of transport to travel from one place to another. This translates to high expenditure on fuel consumption. Now with lower price, public especially those on lower income bracket can set aside more money for various purpose e.g. saving, children school fees, household goods etc

(2) Lower price of other goods. High oil price is the main cause for sudden hike in the prices of most other retail goods. This is because, goods need to be transported from factory to the shop, restaurant or distribution outlet. Manufacturers will not hesitate to factor in the cost of logistics. As a result, retailers will too pass on the increase in costs to end consumers to protect their profit margin. Since oil price has went down again recently, it is hope that consumer goods will be much cheaper


(1) Cut in allowance. Some companies do pay their employees COLA (cost of living allowance) to ease the burden of unsustainable living cost. With oil price downward spiraling, companies are likely to review whether COLA should be continuously given or stripped. Given the outlook of worldwide economy continues to be gloom, the profitability of companies are likely to be affected too. This further strengthen their justification to reduce or strip COLA

(2) Congestion. As driving is now less burdening, those who once car pool & use public transport to work will resume to travel at their comfort once again. This cause negative externalities. Existing congestion will be worse. People will be late for work & productive time is wasted just like that. Also, increasing number of cars lead to more road accidents.

(3) Pollution. More cars mean pollutants released. Air quality will worsen & in the long term it is not surprising that more people will suffer from respiratory ailments

(4) Lower revenue for government
. Price elasticity of demand for oil is very low (PED < 1). Therefore, as world oil price decrease, total revenue for oil producing country such as Malaysia will decrease too. In the near future, government may find it tough to conduct expansionary fiscal policy e.g. spending on development projects to awaken the economy from its slumber to recession. Our government does rely heavily on revenue from Petronas as source of funding. In fact, from today’s newspaper The Star, 16th October, government had already planned to shelve some of the development projects

(5) Lower profit for transportation firms. Bus & LRT operator will definitely see a fall in the demand for their service after the height of RM2.70 per liter. More & more people will switch back to cars. Cost of operating will now be higher given that the fixed costs are thinly spread over the smaller number of passengers. Small reduction in price of diesel will not be sufficient to offset this

(6) Prices of other goods stay the same. History has proven that business people are very fast to response to high oil price by raising the price of their goods. But when there is a fall in oil price, they are sort of ‘reluctant’ to lower the price of their goods, as it mean lower profits for them