08 December 2008

Excess Production, Hedge Funds and Public Transport

The facts show that the price of petrol is dropping, and so is the price of crude oil. Some quarters say that petrol prices in the USA could reach USD$1 per gallon. [Source: AP, 5th Dec 2008. Return to $1 gas? Energy prices evaporate] Tom Kloza, publisher of Oil Price Information Services, speculates that the price of crude oil could dip below USD$40 per barrel. [Source: Speaking of Oil blog, 4th Dec. 2008. Never say never in the oil price business] More interestingly, Nariman Behravesh, chief economist at IHS Global Insight, was quoted saying, "Every 10 cent drop in the gasoline price is the equivalent of a USD$12 billion tax cut." [Source: CNBC, 3rd Dec. 2008. Oil Likely To Stay At $50, But Don't Celebrate Yet. via Tom Kloza's blog]

The main reason that petrol prices are falling is the excess production capacity. According to Ruchir Kadakia, head analyst at Cambridge Energy Research Associates, crude oil spare capacity is currently about 5 billion barrels. He also theorises that financial deleveraging, by redemption calls of hedge funds, also contribute to the slipping price of crude oil. [Source: CNBC, ibid.] More than 80 hedge funds have suspended redemption calls and imposed restriction on withdrawals in the past two months to protect "longer term investors from those who panic and redeem". [Source: Bloomberg, 4th Dec. 2008. D.E. Shaw, Farallon Restrict Withdrawals as Fund Freeze Deepens] In November, George Soros predicted that the hedge fund industry could shrink by 75% next year. Financial Times reports that investors and banks have become more risk-adverse and are cashing out before markets freeze up. [Source: Financial Times, 14th Nov. 2008. Hedge Managers Brace For Shrinking Feeling -- found via Gwen Robinson's blog at FT Alphaville]

In Malaysia, the Government is making money from the slipping price of petrol. The Star reports FOMCA (Federation of Malaysian Consumer Association) secretary-general, Muhd Sha'ani Abdullah, stating that at current prices, the Government is making about RM16.5 million a day. Apparently at current prices the price of RON 97 should be RM1.30 per litre. Sha'ani suggested that the Government should invest the daily RM16.5 million from the "windfall" into public transportation systems. Sha'ani was not in favour of lowering prices to match actual crude oil prices because it would cause traffic congestion to surge. [Source: The Star, 6th Dec. 2008. Government makes RM16 mil a day from fuel windfall]

To this, Domestic Trade and Consumer Affairs Minister, Datuk Shahrir Abdul Samad has responded that a portion of the revenue will go to the consolidated fund as well the fund to improve public transport. He has also clarified that it is not unusual for the Government to "gain revenue" from the sale of petrol when its price is low, as the Government has also subsidised the price of petrol when the price of petrol was high. He also stated that the average price of petrol for the month of November would fix it at about RM1.50 per litre, and not RM1.30 per litre.  [Source: Bernama, 6th Dec. 2008. Not Unusual For Gov't To Gain Revenue From Petrol Sale, Says Shahrir]

Hopefully, the Domestic Trade and Consumer Affairs Minister can go all out to ensure that public transportation is indeed upgraded for the benefit of all Malaysians. The important question is whether public transport was under his ministry to begin with.