Petrol Prices Down By 10 sen But Inflation Remains

Dear Reader,

Petrol and diesel prices have come down by 10 sen since last Thursday (24th September 2008). The new prices are now: RM2.45 per litre for petrol, and RM2.40 per litre for diesel. (Ref: Forbes, Malaysia Cuts Petrol, Diesel Prices - Minister, 24.9.2008) Yet, inflation remains its highest in 27 years for this nation at 8.5% since July.

Bloomberg further reports on the inflation. (Ref: Bloomberg.com, Malaysian Inflation Holds At Fastest Pace In 27 Years, by S. Phang and R. Pakiam, 24.9.2008) According to the report: "Consumer prices rose 8.5% from a year earlier, matching July's gain". A Singaporean research center, Action Economics, expected inflation to ease from the reduction of oil prices.

Recent events have gone to show that times are toughening up. The US credit crunch has led to the closure of large corporations, like Bear Stearns, Lehman Brothers, and Merrill Lynch.

According to a press release by Bank Negara Malaysia (Malaysia's central bank), Monetary And Financial Developments (August 2008), the 8.5% inflation reflects increases in food and transport prices. A friend of this writer has pointed out that food and transport prices are not likely to lower, even if petrol prices are lowered. The BNM report further states that the Ringgit has slid downward 4.8% against the Dollar between 1.8.2008 and 25.9.2008.

Where to from here? Leaders in the Malaysian Government at this point of time will be more concerned with their internal political party elections. It appears as though it may be a no-win situation for the embattled Prime Minister who has already lost public confidence terribly in the last elections. At this point of time, the government may not be ready to consider implementing carbon taxes, what more when suggestions like Race Relations Act initiative being viewed as redundant. (Ref: New Straits Times, Tan: Law On Race Relations Not Necessary, 28.9.2008) Canada is at the moment grappling with the introduction of a carbon tax. (Ref: GlobeAndMail.com, Distortion, Incoherence In The Carbon Tax's Wake, by J. Simpson, 26.9.2008)

The question that must be considered is how much more will petrol prices go down, internationally, and nationally. For as much as we rationalize it, the price of petrol ultimately affects the prices of goods and services, as service providers and traders continually seek to pass on the pinch in their pockets to their clients. Granted, there are industries that depend less on petrol, but ultimately petrol is a topic close to everybody's hearts, including employees of software companies, janitors, hawkers, etc. Perhaps the time is right for a carbon tax?

USD$39 Billion, The Pullout That Caused The Fall?

CNNMoney.com (also, incidentally, Associated Press and USA Today) reported that a report by Masters Capital Management concluded that speculation could have been the driving factor behind the price increase of petrol. In their report, Masters Capital Management reported:

• Investors poured USD$60 billion into oil futures from January to May 2008;
• The price of crude oil increased from USD$95 per barrel in January, to USD$145 per barrel in July;
• Investors have withdrawn USD$39 billion from oil markets between July 2008 to the present day;
• These investors became alarmed when US Senate began holding hearings on speculation, starting May 2008;
• The recent rise of petrol price may have been caused by speculators, not market forces.

 

The head of Masters Capital Management, Michael Masters, had previously on 20th May 2008, discussed the increasing investment by several new groups. S Dali, in the Star Online, wrote:

Masters talked about the resurgence of several groups over the past five years who he deemed as newcomers to the “commodity speculation scene”. They are corporate and government pension funds, sovereign wealth funds, university endowment funds and other institutional investors. Collectively, they constitute the largest share of outstanding commodities futures contracts than any other group.

Masters refers to them as “index speculators” because they distribute their allocation of dollars across 25 key commodities futures according to popular indices, namely the S&P Goldman Sachs Commodity Index and Dow Jones AIG Commodity Index.

The rising interest in commodities was largely based on the assumption that historically, commodities have no correlation to fixed income and equities. It has to be noted however that while previously the futures market may have been relatively “not big enough” to provide this kind of diversification, this has not been the case over the last 10 years.

As at end 2003, assets allocated to commodity index trading stood at a whopping US$13bil. As of March 2008, that figure has ballooned to US$260bil!

Obviously, something highly significant has happened here with equally significant consequences.

Reading List:

• CNNMoney.com, 10 Sept. 2008, Study Blamed Speculation For Oil's Rise
• Associated Press, 10 Sept 2008, Study Links Oil Prices To Fuel Speculation
• USA Today, 10 Sept 2008, Report Says Speculators Had Big Role In Oil Price Run-Up
• The Star Online, 14 June 2008, Potential Puncture In The Oil Bubble

International Petrol Price Dips Below USD100 per Barrel

It has been some time since I last wrote a post on the Petrol Malaysia dotcom blog. The international price of petrol has been slipping. The OPEC website listed the basket price of petrol as USD$95.29 as of 11th of September 2008. This drop in oil price has been applauded by many hard hit consumers, who expect national governments to implore oil retailers to lower their prices. It is the first time the international price of petrol has dipped below USD100 per barrel since April. Still, many oil retailers continue to sell petrol at elevated prices, following the jump in the international price of petrol to USD$147 per barrel. 

However, OPEC has become cautious at the slowing demand for petrol. OPEC recently ordered its cartel members to cut production by 530,000 barrels of oil per day. President of OPEC, Chakib Khelil, was quoted:

"My hunch is probably the price still will be going down despite the decision that we made." 

"I don't think this will affect the consumers in any way because first of all, there's an oversupply. Everybody agrees on that."

Source: Sky News (UK), 10th Sept 2008, Opec Oil Cut Plan Comes Under Fire

Meanwhile, Malaysian analysts do not foresee the sliding price of petrol to help much as the ringgit has depreciated against the dollar (6.5% over the last two months). The Edge Financial Daily reports, 

Malaysia is expected to continue seeing high inflation despite the recent decline in crude oil prices, as a weaker ringgit has partially offset the positive impacts from lower oil prices, according to economists.

Source: The Edge Financial Daily, 15th Sept 2008, 15-09-2008: Falling oil price yet to ease high inflation, by Gan Yen Kuan

It looks like there may be uncertain times ahead. Add that to the current economic climate, I think it will be good to learn some frugality. The advice that old folks used to give, saving for a rainy day, is good advice.

Petronas One Of The New "Seven Sisters"

On Merdeka Day this year, the New Straits Times published an article penned by Datuk Saw Choo Boon, chairman of Shell Malaysia, entitled "Petronas one of the new 'Seven Sisters'". In it, he lauds the success of our own oil and gas company, Petronas. Here are some notable extracts from the article:

What Petronas has achieved in a mere 34 years is astounding. It must have been daunting for the small group of government secondees, with no experience in the energy industry, to have been given the onerous task of managing the country's energy resources, developing a national oil and gas business and facing the multinationals that have operated in the country for decades.

They had to be courageous and visionary, qualities that have been perpetuated in the Petronas leadership since then.

Equally daunting was the decision to venture overseas, to countries with environments that even multinationals find very difficult. This happened when Petronas set itself the target of achieving 30 per cent of its earnings from international operations in the early 1990s.

Recognising that Malaysia's oil and gas reserves are relatively small and would run out one day, Petronas knew that to continue to exist and grow, it had to take its operations overseas.

Petronas' growth was accelerated as its leaders set out to achieve this target, and achieve it they did. About 40 per cent of its revenue is now generated overseas.

The national oil company now explores in more countries than Shell does. More than one-third of its production now comes from international operations, from over 60 ventures in more than 20 countries, and this will continue to increase into the future.

Datuk Saw alluded to the report by the Financial Times about Malaysia being termed one of the new "Seven Sisters". That article can be found here, along with a host of other resources. No doubt, some of these articles will be fodder for future posts. But for now, let us look at the profile of Petronas at the Financial Times website.

The Financial Times notes that "Petronas, Malaysia’s national oil company, has been described as the role model that other national oil companies would like to follow." Petronas is noted for being "one of the top three exporters of liquefied natural gas," but "has yet to realise its full potential". Among its strengths, is its highly competent staff and the fact that it is "the leading refiner in Asia".

Below are some links that will be of interest:

• The Petronas corporate website
•  Petronas @ Wikipedia
•  "Discover Petronas" career website

On 30th August 2008, the Star online reported in an article "Petronas Single Largest Contributor To Govt Coffers":

It (Petronas) gave the Federal Government RM62.4bil and disbursed RM4.8bil in royalties to Terengganu, Sabah and Sarawak, bringing the total to RM403.3bil paid to the Government and the relevant state governments.

Congratulations, Petronas!