Oil price: Chua Tee Yong and the government should stop burying their heads in the sand

Deputy Finance Minister Chua Tee Yong and the Barisan Nasional government are like ostriches burying their heads in the sand by not recognising the implications of lower global oil prices on the budget, the looming fiscal crunch and a potential economic crisis.

Chua Tee Yong told The Star (4th December 2014, pg 19) that the falling global oil prices might result in a positive impact on the country’s deficit.

He said that Malaysia relies on the Tapis Crude and not Brent Crude in determining oil prices, and “the average pricing per barrel had met expectations so far”.

“The average price per barrel from January to November has been at about US$100 (RM344), and this is what we had foreseen.”

Chua further said that the government “knew that there could be positive impact although many quarters were focused on the negative side of the drop.”

“Typically, when oil prices fall, many countries notice a growth in consumer sentiment. This may help our manufacturing industry and may even boost our exports.”

I am shocked at the lackadaisical attitude of Chua and the government in general towards the looming fiscal crunch and a potential economic crisis.

First, 30 percent of the government’s revenue comes from petroleum-related income and the lowering oil price will result in a larger fiscal deficits.

For every US$ 1 fall in oil price, it is estimated that the Malaysian government suffers at least RM650 million lose in revenue. The government budgeted oil prices at US$110 per barrel in 2014 and US$105 per barrel in 2015.

While the government no longer needs to fork out money for fuel subsidy, most analysts agree that it becomes a net decline of revenue when oil prices fall below US$ 80 per barrel.

Second, Chua’s argument about Tapis is stable and it is not Brent is just like a ostrich burying its heads in the sand. Tapis is usually about 5% higher than Brent price. Over the past four weeks until 3rd December 2014, the highest of Tapis was US$86 per barrel, and Brent and Tapis were both at the same price at US$ 71 per barrel.

The fact is, although Tapis is usually slightly higher than Brent, for most of the past two months it has hovered below US$100 per barrel. In fact, for most of the last two weeks, it was lower than US$ 80.

Thirdly, Chua’s argument that lower oil prices are good for consumer sentiment will only happen if pump prices come down substantially. The government’s decision to raise diesel pump price by 3 sen is just adding salt to the wound, which is likely going to send consumer prices up further.

I call on Chua and the government to be candid on the latest fiscal and economic scenarios arising from lower petrol prices and not to bury their heads in the sand.

Liew Chin Tong