RM31 billion lost this year from dip in crude oil prices

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PETALING JAYA: An analyst in the oil and gas sector warns that Malaysia may lose some RM31 billion in revenue this year due to the low price of crude oil, which continues to be buffeted by the Covid-19 pandemic.

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Renato Lima de Olivera, an assistant professor at the Asia School of Business, said the complicating factor for Malaysia is its mature basin and higher production costs compared with producers in the Middle East.

“While most Organisation of Petroleum Exporting Countries (Opec) can still profitably extract oil at US$20 per barrel, many other countries will see their exploration activity come to a halt,” he told FMT.

He was commenting on US oil prices which rebounded above zero yesterday, a day after West Texas Intermediate futures closed at -US$37.63.

Olivera attributed the low oil prices to the drop in demand for the commodity in the transport sector due to Covid-19 travel restrictions.

“About 60% of global oil consumption is in the transportation sector but now, mobility has been restricted as countries adopt lockdown measures.”

And because production has continued at a time when there is little demand, Olivera said the cost of storing oil had increased.

“To clear storage space, prices went negative. Even with Opec members agreeing to cut production by 10 million barrels per day, which is a 10% reduction from the 100 million barrels consumed globally per day, there is still an excess of oil produced as demand has dropped by almost 30%.”

The oil is stored in tankers which are now reaching full capacity. Olivera said even if demand recovers, prices will remain depressed due to the excess oil in storage.

He said this would have a “sizeable impact” on Malaysia as a net oil exporter which benefits from high oil prices.

He noted previous estimates by the finance ministry that a US$1 drop in oil prices would cost the country RM300 million in revenue.

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“Petronas, as a 100%-owned national oil company with sizeable international presence, is hurt by low oil prices. With less revenue, it becomes more challenging to make the same amount of capital expenditures and pay dividends to the government.”

Naturally, he said, the oil and gas supply chain would also be affected, which could see job losses and a reduction in economic activity created by capital investments.

He said his analysis showed that if prices remained under US$30 per barrel, fiscal revenue from oil and gas could drop by US$7.1 billion (RM31.2 billion).

On how long these low prices would last, Olivera said in the short term it would depend on the lifting of travel restrictions implemented by countries around the world due to Covid-19.

“The faster the economy returns to normal with people travelling, the better for the oil industry.

“In the medium to long term, the price of oil will be pressured by the energy transition and the efforts by Opec countries to regain the market share lost to unconventional oil producers.”

He said Putrajaya might need to consider the possibility that low prices would be the “new normal” and step up efforts to diversify revenue sources and invest in innovations to reduce domestic production costs.

Universiti Tun Abdul Razak economist Barjoyai Bardai said the price of oil would likely only recover above the US$50 mark next year.

Like Olivera, he expects companies linked to the industry to see high rates of unemployment.

Even after the movement control order is lifted, Barjoyai said the consumption of petrol would probably not increase by a drastic amount as people would still be subject to social distancing rules, and would reduce the need for non-essential travel.

“Putrajaya will need to reinvent the economy, shifting from traditional revenue sources and ditching old spending habits.

“The country cannot go back to the way it used to be. The world will have changed after Covid-19, and we must be ready for that world,” he said. – FMT

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