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Oily Scenario Continues to Challenge Policymakers
calendar07-03-2011 | linkBusiness Times | Share This Post:

07/03/2011 (Business Times) - With the risk of rising consumer prices, it will be interesting to see how Bank Negara Malaysia is able to ensure that Malaysia enjoys economic growth of between 5 and 6 per cent this year.

Here we go again. The familiar scene of rising oil prices from the not-too-distant past is back and with it comes the poser which will constantly dog policymakers and analysts.

What do they do when oil prices rise too high? Already the number bandied around is an alarming US$220 to US$250 (RM665 to RM758) per barrel.

Brent crude oil price - a benchmark for petroleum prices - is trading about US$116 (RM356) a barrel now.

Rising oil prices will stoke inflation fears, especially for food, and more importantly, on how they will hurt economic growth.
 
Unrest in Egypt, Bahrain and Libya, as well as most of the Middle East, will have a crushing effect on the already fragile recovery in the global economy.

If 2010 showed economies were on the mend, 2011 promises normal growth levels as economic activities return, at least in the Asian region, on better domestic spending.

Elsewhere, economic recovery has been spreading in Europe, led by Germany.

Confidence has also picked up in all 27 member countries of the European Union, including those hit by the sovereign debt crisis.

Across the Atlantic, the US economy has clearly been on the mend with job payroll figures looking brighter. Holiday spending levels in November and December appear to be returning.

A confident American consumer is important for the Malaysian export market, which hinges largely on the performance of its electrical and electronics sector.

But it looks like any full recovery will have to wait as the ripple effects of discontent continue to meander through oil producing countries.

What does it take to reach the proportions of three years ago? According to some research estimates, the price would likely be in the region of US$120 to US$125 (RM364 to RM379) per barrel.

A rise to US$100 (RM303) per barrel of oil price could necessitate a 40 sen per litre hike, which could easily bring the average inflation in 2011 to 2.9-3.6 per cent for Malaysia, as food prices and transport costs also rise in tandem.

For Malaysia, it's a double-edged sword. For one, good times are here for the commodity players with expectations of palm oil prices to average RM3,652 this year, while rubber prices are also hitting records.

In the meantime, the average wage earner has to brace for tough times if petrol prices rise again. The price for unsubsidised RON97 petrol is now RM2.50 per litre, up by almost a fifth while the subsidised RON95 is up 6 per cent to RM1.90 per litre.

So far, the government has pledged to absorb the extra subsidy from higher oil prices.

But the subsidy bill, budgeted at RM10.3 billion this year, could jump to more than RM14 billion if prices continue to jump, said a cabinet minister recently.

With the risk of rising consumer prices, it will be interesting to see how Bank Negara Malaysia views the situation and how it is able to ensure that Malaysia is able to enjoy economic growth of between 5 and 6 per cent this year.