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The Oil Game

Starting in 2010, Malaysian Prime Minister Najib Razak announced reductions in government fuel subsidies that would be slowly implemented over a 3–5 year time period. The move was said to be done to strengthen government balance sheets and to improve government efficiency.

In November 2014, Indonesian President Joko Widodo’s government followed suit and began to wind down its government fuel subsidies, thereby allowing pump prices to float so they would fall in line with the cost of crude oil.

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Both moves are considered bold, especially for President Widodo, the newly elected president who came into office on the promise of bringing change and reforms to the Southeast Asian island nation. Although many pundits believe it was the right thing to do, timing is everything, and now some are saying it may have been a little too early.

As global oil prices continue to collapse (most recently below US$50 per barrel), many oil-producing countries are now forced to quickly re-examine their yearly budgets, as many were based on an oil price north of US$100 per barrel.

Many analysts, including a few at Goldman Sachs, believe the price of oil may not find a bottom until around US$30 per barrel. And even then, there is no telling how long it will sit there either. This could bring with it many fiscal shortfalls for oil-producing governments, and might prove to be truly bad timing for Indonesia’s Widodo.

Although Malaysia and Indonesia have diverse economies, unlike such one-trick ponies as Nigeria, Ecuador, Libya, Algeria, and Venezuela, they still rely heavily on oil as a main driver. This, of course, will no doubt be a test for their other industries, such as manufacturing, textiles, agriculture, and tourism—although the latter should benefit somewhat from cheaper fuel.

Southeast Asian economies have suffered with the rest of the world since the financial crisis of 2007–08. Indonesia in particular has remained somewhat stagnate, and Widodo’s challenge as newly elected president is to live up to his campaign promises—such as kick-starting the economy through various infrastructure projects.

Widodo’s ambitious projects are mainly based on fossil fuels, so paying for them now when oil is at such a drastic low from only a few months previous seems almost inconceivable, especially if oil actually does crash to under $30 per barrel.

Malaysia as well has done away with a very costly issue by abandoning fuel subsidies, but now they too are in a difficult spot when so much of their economy is based on US$85 per barrel.

Though to be fair… what country in Asia isn’t basing their economic future on the continued growth in use of fossil fuels? It’s not like any country in the region has made any genuine strides in the use of alternatives, so it almost seems ridiculous for the price of oil to be dropping like it has, and it’s certainly not feasible to hang around US$30 per barrel for very long.

Nevertheless, Southeast Asia has a lot to think about in the very near future. Only time will tell if their other industries and sectors truly have the legs to stand on all by themselves.