Sunday, June 8, 2008

Recent oil shock: Benefits, costs & why?

Benefits of oil increase?

  1. The slowing down of global warming due to lesser carbon emission from cars
  2. Lesser congestion on the road which may lead to lesser accident statistics. People living in large city have lesser health problems associated with air condition. Fall in the extent of air pollution
  3. The poorest people in the economy will benefit as in the form of greater provision of public transports
  4. May cause or ‘force’ some people to choose healthier lifestyle by walking more
  5. Expedite the discovery of new form of energy source e.g. biofuel
  6. Firms will be automatically forced to be more cost efficient either with or without competition

Problems of oil price increase?

  1. Causing stagflation to an economy (increasing price with falling output)
  2. Worsening inflation. Average consumers which form the majority of people will become poorer with declining purchasing power
  3. Will erode profitability of many firms. As such they may start to think of ways to cut costs. Among measures can be taken e.g. cut employment especially in the manufacturing sector & other labour intensive industry like hotelling
  4. Prices of other goods will increase
  5. May prompt the government to introduce measure such as minimum wage to protect those low paid. This will worsen unemployment
  6. Some countries may lose its international competitiveness when it comes to trade as goods produced are more expensive. This lead to fall in the demand for exported goods

Why oil price increase?

  1. Reluctance of OPEC to increase oil supply to meet rising demand
  2. Rise of China & India economically means greater demand for oil
  3. Strong consumption by US & given the fact that they are the major cause of price hike as US has the world’s largest oil reserve
  4. Speculative activities in the economy. Given the rumours that oil price will likely reach $200 by the end of year 2008, has led to an ‘abnormal’ demand in the market

As such oil price will definitely increase given that the growth in demand outstrip the growth in supply e.g. demand increase 20% per annum, while supply increase by 8% or worst still remain stagnant


Monash Hostellite Committee said...

how bout political turmoil in middle east n nigeria???

Tats! said...

Appearently, Malaysia has the lowest price of petrol compared to the neighbouring countries.

is this because Malaysia is also producing oil, and oil-processing and manufacturing companies' contribution to society?

Lawrence Low said...


Thanks for bringing it up! That is an argument for the supply side! Will publish it later.

Lawrence Low said...

Dear Tats,

The main 2 reasons as to why we have the lowest price in Southeast Asian region is because

(1) We are oil producing country. According to The Stars on 10th June, we produce 625,000 barrel a day of which 400,000 is being used for local consumption while the remaining 225, 000 will be exported (need to clarify this, as some argue we use imported oil)

(2) Countries like Thai & small republic like Singapore have more expensive oil price is mainly because they are oil importer. Just like India, they produce onions therefore onions in India will definitely be cheaper compared to us as we need to buy from them!!

However I do feel that there is FLAW in the comparison. It seems that Msia is compared to Singapore, Thai, Vietnam & others non-oil producing countries. Why not compare our oil price with Brunei, Saudi Arabia, Venuzuela, Morocco, Nigeria etc?

Tats! said...

Mr. Lawrence.

thanks for the reply. I see the picture now.
the government seem to postulate (give the public an idea) a lower oil price compared to other countries, to make them accept the higher oil price.

I do agree that we should compare our oil price with oil-producing companies.

the statistics used by the government is... somewhat incomplete, so I guess it is up for us, to look beyond figures which they feed us with, and look at the true situation.