How the oil crisis puts Malaysians at crossroads

 As a nation, we are at a crossroads, with petroleum revenue no more the cash cow, while the country’s operating budget is on an ascending trajectory.

The government has initiated a strategic and timely response to the recent escalation in global oil prices, given its impact on the domestic economy. We are an open economy and an export-oriented nation, which brings with it separate and unique challenges.

So much for certain opinionated leaders pushing their agenda to rid the world of a “rogue” country developing nuclear capabilities, with a view to making the world “safer”.

The net effect is that it has stirred a hornet’s nest, with the “rogue” rediscovering its potential to leverage passage through the narrow Straits of Hormuz as part of strategic warfare.

To the rest of the world, relationships with hitherto friendly political allies have taken a step back and consequentially the world economic order is approaching turbulent waters, not unlike the tempestuous global shipping waterways.

On the domestic front, the quota for subsidised RON95 has been reduced to 200 litres and the work-from-home (WFH) option is on the table.

On diesel prices, there is some pushback from manufacturers in the peninsula, while the price of subsidised diesel in East Malaysia has become a political football to be exploited.

Recent estimates suggest that the fuel subsidy burden borne by the government has risen from RM700 million to RM4 billion.

This revelation, however, is only part of the story pursuant to the mess that the world finds itself in given the global energy flow constriction.

Revenues from liquefied natural gas (LNG) exports are rising due to developments in Qatar and Australia which have impacted refining capabilities. Malaysia has long been lulled into complacency by its large oil reserves and being a major exporter of energy, including LNG.

The oil exported is of higher quality – light sweet crude, which attracts higher premiums. What is imported is cheaper refined petroleum products.

Net revenue, which used to accrue from a production of 750,000 barrels per day, is now at just about half due to less productive oilfields, higher extraction costs and rising overheads.

Petronas has resorted recently to proactive cost management, including staff culling.

The reality is that since 2022 we have slipped ominously to become a net importer. Structurally, there is a mismatch between the production of oil and the consumption demands of a growing economy, hence the net importer configuration.

As a nation, we are at a crossroads. Petroleum revenue is no more the cash cow which funded grandiose superstructures. Dividends from Petronas have been declining while the country’s operating budget is on an ascending trajectory.

In this context, institutional reform does not put food on the table. Economic transformation coupled with institutional reform to plug leakages does.

Malaysia has been woefully slow on the uptake. Vietnam, the Philippines and Indonesia have targets on opting to nuclear energy. We are considering this option amid spending time and effort constantly arguing on oil rights, a depleting resource.

On B20 biodiesel blending depots to reduce dependency on expensive imported fossil fuels, a MP from the ruling unity coalition has queried on the status of construction plans, mooted years ago. It appears to have stalled.

As a nation we have vast tracts of fertile land, yet still speak of food sufficiency. The rise in price of diesel has a consequential snowball effect on domestic food costs and inflation.

It appears political will is lacking, or is it due to sheer lack of foresight to manage risk? Our supply chain is not diversified and continues to be still “channel narrow”. This compromises the nation’s finances.

As an interim stop gap measure, Petronas should—from its increasing revenues, both from oil and LNG—rightly step up and offer a one-off payment, to offset the rising cost of subsidies, consequent to the current global turmoil.

In the short term we may be able to ride out the storm but focus should be on the future.

We are now paying the price for incompetence and lethargy as the subsidies bill climbs. The government is selling itself as a “caring’ government”. How long can this benevolence last?

Global supply chain disruptions only serve to amplify the fiscal burden.

This is a wake-up call, let us not press the snooze button and ultimately suffer its consequences. - FMT

The views expressed are those of the writer and do not necessarily reflect those of  MMKtT.