The world’s largest oil facilities in Saudi Arabia were attacked by drones and cruise missiles on September 14. As a result, the country’s daily crude oil production has been slashed by more than 50% or 5.7 million barrels, sending international oil prices sharply higher at a margin unseen before.
It is yet to know when Saudi’s oil output will be fully restored.
Washington is of the view that Iran was behind the assault on Saudi’s oil facilities. The attack was also related to the geopolitical events arising from the civil war in Yemen, which sees also the involvement of Saudi, the United States and Iran.
The impact of the incident on international oil prices will very much depend on how fast Saudi fully restores its oil output. The mastermind behind the attack is also very critical. If Saudi retaliates, crude prices will likely jump by US$10 to US$20 per barrel, or even more. This is, of course, just an estimate.
Anyway, the incident has already dealt an additional blow on business and consumer confidence worldwide, in view of the Sino-American trade war and slowing global demands.
The effects of this incident on Malaysia can be inspected from two different aspects.
The rise of Brent crude prices could be a boon to the local equity market, while the government can look forward to better tax revenue. As a net oil exporter, Malaysia is set to benefit from high oil prices, even though this effect may not last too long.
Economists have pointed out that the incident’s effects on Malaysia could be neutralized if the short-term effects do not last beyond a month. The government should enjoy more lucrative oil revenue, and this will remarkably expand the government’s fiscal space, reducing the need for more drastic spending cuts.
Nevertheless, skyrocketing international crude prices will definitely impact the government’s fuel subsidy policy meant to keep retail fuel prices stable.
Finance minister Lim Guan Eng has said the ceiling price of RON95 will still be capped at RM2.08, although the government will evaluate and monitor further developments from this incident.
In the event the government later decides to up the price cap, inflation rate will invariably pick up and consumers will take the brunt.
The stability of fuel prices is very crucial. Higher fuel prices will negatively affect the costing of local manufacturers, and this entails not just transportation cost but the entire production cost at all levels.
With the trade war and global market uncertainties coming into picture, Malaysia will no longer be immune to the effects of the trade war, as both the US and China are very much an integral part of the Malaysian economy. The government must come up with effective counter-measures.
The government must realize that even though we are an oil-producing country, we are not a low-cost producer like Saudi Arabia. Even Saudi is itself constantly fine-tuning its economic strategies on the back of bleak global outlook and climate change concerns.
The Saudi attack should serve as an important test for Malaysia in its readiness for the impact from constantly changing global trade environment and hostile geopolitical developments.
How should we ready ourselves for the looming war while nations around the world have done so?