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Wednesday, 11 June 2008

Oil Price Stagflation - Where should we be heading (Part 2)


By: Ahmad Syah Ejaz Hj. Ismail

Where are we heading?

I believe that some of us are still in the precept that there will be time for the oil price to recoil and sell at the previous rate of RM 1.92 per litre or even lower. But the real trend is unlikely where global demands for crude oil are increasing. The oil price hike that was felt around the world still has a long way to go. The rise of emerging economies of China, India, Vietnam and Russia as major global economic players which requires these countries to consume more oil is inevitable. To say no for these nations to use after we ourselves have build up our robust economy from oil would be preposterous.

What was needed to mitigate the global effect of spiking crude oil prices is the flexibility of the market economies. The beauty of the market forces which requires consumers to change, adapt and reform surely would be a major factor in mitigating future disaster. The problems with Malaysian economy is that, such drives that was needed for it to be flexible are absent even amid the global fears of rocketing oil prices. Malaysian economy is not flexible enough to absorb any shock for any unseen debilitating factors [we do see it happens many times such as 1970s OPEC cartel of oil shock, 1997 financial crisis], but we ourselves never learn from past occurrences.

The irrational exuberance of spending unnecessarily in the year 2004 – 2008 are a stark evidence of sheer ignorance of what might happen especially when the global crude price begin to increase even in the year 2000. Globalization and market interdependent had caught Malaysian unprepared for the worst time such as this. One of my good friends Lino pointed out a very good suggestion of the importance to build our own oil inventories to absorb any anomalies such as the oil shock or terrorist attack that will contribute to the energy uncertainty and to give an ample time for Malaysian consumers to reform, change and adapt.

As far as I’m concern, Malaysia still hasn’t had any oil inventories for emergency time even though we are also one of the producers [correct me if I’m wrong on this]. Such management technique of dealing with uncertainties can be seen during the war. There would be fuel dumps at various place for the war effort and such military tactics can be adopted in Malaysia and as matter of facts, United States itself were building its own oil inventories despite its abundant reserves of crude oil well.

According to Greenspan - consider had prices not risen owing to the anticipatory buying by investors, oil consumption would have increased at a faster pace, bringing forward the time when demand would smack into the supply ceiling. At that point, world consumers would rapidly run through their inventories, and prices would rocket sharply higher, with severe consequences for world economic stability. Instead, in response to higher prices induced by investors demand, producers have increased production measurably, and some consumption has been discouraged. Even though crude-oil production capacity remains inadequate, it too rose in response to higher prices. The bottom line is that without the build-up of inventories owing to speculation, the world would surely have eventually experienced a far more precipitate and severe oil shock than actually occurred.


There are some arguments by an economist and government leaders that the current oil price increase phenomenon is due to speculative and hedging by speculators. Even the infamous speculator Mr. George Soros who makes money from market speculations and donate some profits of it to charity claims the same way. But to say that oil price hike phenomenon is merely due to speculation would be foolhardy. There are some factors contributing to it, but much of the cause was fears and classic market economies price drive which is demand and supply.

The oil price was forecasted by some economist to reach at the peak of $250.00 per barrel in 2030 but one need not to worry if “creative destruction” took place before it thus ensuring market flexibilities and forcing the world consumer not only to adapt, but also to innovate for the future well-being. I still remember watching Mr. Greenspan giving testimonials before the U.S. senates in Capitol Hill coolly saying that the world need not to worry due to the price hike phenomenon when the market economies itself will self-adapt and self-corrected through innovation and changes. But I guess, he is not there anymore to help in decision making and fiscal policy in dealing with the energy crisis.

For us, Malaysian economy depended mostly on oil for its growth. This is a stark reality where there is not much alternative in replacing such a latent threat to growth and if there are any anomalies in domestic economies, Malaysian would be at the losing end. Amid the global energy crisis, there are some calls by the public for the government to halt and stop some “mega projects”. It would surely be a popular decision for the time, but one also needs to take into account of the consequences that will follow suit if Malaysian is not provided with the much needed infrastructure for future growth. The way that I know it, there is no real terms of the so called “mega projects”.

Such terms was only coined by the person who didn’t get the contracts thus frustrated with it. To ensure that nobody gets the coveted trophy the “mega projects” were created to bedevil it. A project that was proposed before by the government must be ensured to promise a positive long term effect. Either it on a big scale or small, amid the global tension of oil shock, there must be some projects implemented by the government to ensure our economy not at the stagnating mode.

My suggestion is that we must prepared Malaysian with some alternatives to driving internal combustion engines vehicle by “go ahead” with some big infrastructure projects such as Putrajaya Monorail, Double railway track and Bakun Hydroelectric. Such projects will not only give an alternative for Malaysian not to rely heavily on oil but also at the same time cutting budgets on increasing government expenditure on energy that are based on oil. Some economist would suggest for world nations to turn Nuclear through nuclear power plants for generating electrics. Nuclear technology is clean, but some studies also must be done to ensure no negative effects towards the populations due to the depleted uranium. Even though some argues that such incidents never occurred before but studies need to be taken without bias or prejudice.

For some dynamics entrepreneurs, current oil tension is an opportunity for them to innovate and drives for new market niche. As such there will be an impetus for consumers for a plug in electric hybrid cars. The Toyota motor company had announced that 2010 would be the year for them to unveil new plug-in hybrid which don’t relies on oil for internal combustion engines. For Malaysian to accept such drastic changes would be difficult, but one first steps need to be taken in achieving the same goals as the Japanese are trying to do.

To anticipate a decrease of an oil price would be wishful thinking and put Malaysian at the losing end. Consider had prices not risen owing to the anticipatory buying by investors, oil consumption would have increased at a faster pace, bringing forward the time when demand would smack into the supply ceiling. At that point, world consumers would rapidly run through their inventories, and prices would rocket sharply higher, with severe consequences for world economic stability. Instead, in response to higher prices induced by investors demand, producers have increased production measurably, and some consumption has been discouraged. Even though crude-oil production capacity remains inadequate, it too rose in response to higher prices. The bottom line is that without the build-up of inventories owing to speculation, the world would surely have eventually experienced a far more precipitate and severe oil shock than actually occurred.

The prices oil also is much determined by the refineries built operated. The facts show that there are more crude oil that were produce daily rather than the refineries that were turning the crude oil at the ready mode of consumption. The obligations from these big oil companies that are currently reaping the profits of high oil must be supplanted to its R&D in building refineries to meet the global demand and also R&D in venturing into new source of energy. Refining-capacity pressures have opened up refining-market profit margins, which have added to the prices of gasoline and other refined products.

Some Malaysian argued that PETRONAS is making a big bulk of money due to the global price hike. Some say that PETRONAS must use its profits in subsidizing the Malaysian citizens for a cheap price of petrol. Yes indeed PETRONAS is making huge profits from the global price hike and I do agree with above point to an extent of using PETRONAS money (only how it differs). PETRONAS money must be used to help Malaysian dealing with the global energy crisis. But I disagree with the motion to use the profits for Malaysian in keeping them to buy cheap petrol. The PETRONAS money must be used to prepare Malaysian with alternatives for oil. Public transport must be enhanced not just only through soothing promises. There must be a clear schedule of public transport infrastructure with clear amount of expenditure using PETRONAS money.

As far as I’m concern, Tun Dr. Mahathir had been building Putrajaya from PETRONAS profits itself thus turning it’s profits into a real estate investment powerhouse through Putrajaya Holdings. Not to spent the money would surely be a stupid move. An amount of PETRONAS money must be well planned to help Malaysian with alternatives for mobility and energy. PETRONAS is owned entirely by the government and its action should be dictated by the government itself without jeopardizing its future of innovation and progress.

In 1908 Henry Ford introduces the Model T, and thus creating a massive market for crude oil. If Henry Ford is still alive, he would be disappointed to see the future vehicle is still run by the oil and not new type of energy such as lithium batteries or hydrogen fuel. The drives for creative destructions and alternatives for vehicles must keep pace with the latent threat of oil depletion. We need to change our transport vehicle from internal combustion engines which required carbon oil to a more friendly energy sources such as plug in hybrid and hydrogen fuel cells. But of course, hydrogen fuel is impossible without nuclear reactor for it to be produce. In the history of energy that was based on oil mankind needs for constant change. For the past 200 years, oil displaced coal despite still-vast untapped reserves of coal, and coal displaced wood before our forestlands were denuded.

To be continued…

1 comment:

afif said...

Nuclear plant for hydrogen production is not that hard to be built. The first nations has the ability to build several plants of that type. But the stumbling block is lack of political will. Most political election were fueled by oil money from oil companies... and oil companies ain't like too much any new resources that will replace their carbon product

That's why till to this day no US presidents ever attempt to build hydrogen producing nuclear plants because they need to finance their election campaigns, and oil companies has always been the most generous in political charity donation.

But I read that Barack Obama stand out from other candidate because he refuse to be finance by lobbyist because he know how much damage this lobbying practice has done to Washington. Maybe he'll be the one who will stand bravely in front of oil companies and adventuring into the world of hydrogen economy.

Oh before I forgot I want to point my finger to the oil cartel OPEC. The OPEC is behind all this. They colluding for the sole interest of major oil producers - keep production low and price high - and at the expense of us all as oil users. Malaysia will become net oil importer in less than 2-3 decades in future, we should relinquish our OPEC membership sooner or later. Indonesia already did that although temporarily. After that, we should cooperate with all oil user nations in effort to destroy the OPEC.

Hillary Clinton did vowed in her campaign to become Dems candidate for US presidential to smash OPEC. Sigh, she lose, and we lose our hope to see the extinction of international oil cartel

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