Malaysia will benefit from rising oil prices, analysts say

Kuala Lumpur

AS an oil producing nation, Malaysia will largely benefit from a higher oil price environment even as the impact on the economy is uneven, analysts said.

Crude prices extended gains beyond US$90 per barrel earlier this week to trade at levels not seen since the 2014 shale-induced oil crash, mainly driven by geopolitical uncertainties that threaten supply.

The benchmark Brent oil prices have risen about 147 per cent over the past year or so, climbing from US$37.46 per barrel at the end of October 2020 to trade around US$92.71 per barrel on Monday (Feb 7).

"Rising oil prices should benefit Malaysia as the government and the oil and gas players would be the direct beneficiaries. As for consumers, retail fuel prices are being subsidised by the government. In that sense, they are quite insulated from the rise in the crude oil prices," Bank Islam chief economist Mohd Afzanizam Abdul Rashid told The Business Times.

"The sharp rise in crude oil prices would incentivise the oil and gas firms to accelerate their capital expenditure, which has been underinvested for quite some time," he added.

The high oil prices will bolster public finance for an oil and gas exporter like Malaysia, with every US$1 increase in Brent oil prices contributing an additional RM339 million (S$108.7 million) in annual fiscal revenues, according to estimates by the Singapore-based Asean+3 Macroeconomic Research Office.

The research house also found a positive correlation between every dollar's gain in Brent oil prices and the expansion in the Malaysian economy, as well as an increase in inflation as measured by the Consumer Price Index.

Petroleum-related revenue accounted for an estimated 19.2 per cent of Malaysia's federal government revenue with a contribution of RM42.5 billion last year, compared with a 24.9 per cent share in 2020, according to latest data from the Ministry of Finance.

This includes dividends from national oil company Petronas, petroleum income tax and export duty from crude oil.

While consumers in South-east Asia are feeling the pinch of rising oil prices, Malaysians have been relatively shielded from the most adverse impact as the government imposed a ceiling on retail prices for fuel, cooking gas and electricity through subsidies, thereby limiting the pass-through of higher energy prices.

Finance Minister Tengku Zafrul Aziz told reporters in June last year that the government expected to spend RM8 billion on fuel and cooking oil subsidies in 2021, more than double the initially budgeted amount following an increase in global oil prices.

Arif Asyraf Ali, the president of Grab Drivers Malaysia Association, said e-hailing operators in the country have not seen a significant squeeze in their incomes amid rising global oil prices, thanks to the government's subsidised pump prices.

"The price of RON95 grade petrol has been maintained at RM2.05 per litre for the past year or so. There was no significant increase in pump prices for the past two years, so it wasn't too bad," he told The Business Times.

Still, gains in consumer prices have accelerated. Inflation in Malaysia increased 3.2 per cent in December from the year before, surpassing the long-term average of 1.6 per cent.

Sunway University Business School professor of economics Yeah Kim Leng said inflation has been rising due to the cost-pushed factors such as higher oil prices.

Overall, he said rising global oil price will have a positive net economic impact on Malaysia from an earnings perspective.

"Malaysia has the ability to shield consumers from higher oil prices, but it is not efficient from a resource allocation perspective because the country is subsidising consumption on resources that are not renewable," he said.