Promoting Export-Led Economic Growth in Nigeria –The Export Processing Zone O...
COLLAPSE IN CRUDE OIL PRICES
1. 1
ECO 740
ECONOMICS ANALYSIS
GROUP ASSIGNMENT
TOPIC 3: THE RECENT COLLAPSE IN CRUDE OIL PRICES
HAS AFFECTED PRODUCERS AROUND THE GLOBE.
DISCUSS ITS IMPACTS ON THE FIRM’S RESOURCE
ALLOCATION AND PRODUCTION DECISIONS.
PREPARED BY:
MUHAMMAD FARIS BIN RUZAIN (2015477346)
TEH ADAWIYAH BINTI OTHMAN @ ZAID (2015216086)
NUR ANIS SHAHIRA BINTI ABDUL MAJID (2015212594)
GROUP: AA7001DF
PREPARED FOR:
PM DR GEETHA SUBRAMANIAM
DATE OF SUBMISSION: 27TH
OF JANUARY 2016
2. TABLE OF CONTENTS
1.0 Introduction 1
2.0 Issues Arise When the World’s Crude Oil Prices Collapse 2
2.1 Government Revenue Decline
2.2 Malaysian Ringgit (MYR) Decline
2.3 Stock Market Decline
3.0 Implications on Firms’ Resource Allocation and Production Decisions 5
3.1 Government Revenue Decline
3.2 Malaysian Ringgit (MYR) Decline
3.3 Stock Market Decline
4.0 Concepts Studied in ECO 740 8
4.1 Demand and Supply
4.2 Exchange Rates
4.3 Porter’s Five Model
4.4 Economies of Scale
5.0 Recommendations and Conclusion 13
5.1 Recommendations
5.2 Conclusion
References
Appendices
3. 1
1.0 Introduction
Oil price plays a very important role in determining the economy of all countries around the
world. Oil is the main commodity which generates the growth of an economy. The relevance
of crude oil in the global economy can never be ignored considering its significance as a
source of earnings to some countries and also as a source of energy that enhance various
economic activities in the world.
Malaysia stands as among the fundamental crude oil net exporter countries in the region of
Southeast Asia. Therefore crude oil and petroleum-related revenue is identified as a major
source of income for the Malaysian government. Any changes in the prices of commodity
will therefore bring significant implications on a nation’s total annual revenue (Kok, 2015).
However starting June 2014, the crude oil prices have plunged by more than 50% due to the
oversupply of the commodity in the international market amid weak demand. On 23rd
January
2015, the international Brent crude was traded at around US$49 per barrel, decline from
the2014’s peak price of US$115 per barrel in mid-June. The collapse of the crude oil prices
has forced the Malaysian government to revise its 2015 Budget. This is due to the fact that a
huge portion of the country’s annual income grows from the crude oil and petroleum-related
sources.
The Star (2015) has reported that the government also has lowered its oil price assumption to
US$55 per barrel from the earlier estimate of US$100 per barrel and projected a weaker
ringgit to be confronted by the country as an effect of the declination in oil prices. Taking
into accounts of all the impacts of falling oil prices on the country’s economy and the
government’s revenue, the gross domestic product (GDP) growth projection has also been
revised down to 4.5%-5.5% from the initial forecast of 5%-6%, while the fiscal-deficit-to-
GDP target has been raised slightly higher to 3.2%, compared with 3% previously under the
revised Budget 2015 (Kok, 2015).
4. 2
2.0 Issues Arise When the World’s Crude Oil Prices Collapse
2.1 Government Revenue Decline
Over the last six months, the global crude oil prices have plunged more than 50% due to
oversupply amid weak demand as this situation is due to higher output from non-OPEC
countries as well as OPEC is not willing to undertake production cuts as OPEC wants to
maintain its market share. Response to this issue, the Malaysia government has consistently
reiterated that the crude oil prices are beyond our control and analysts expect the price will
take quite a while to stabilize. The prime minister, YAB Dato’ Sri Mohd. Najib bin Tun Haji
Abdul Razak during a revision of 2015 budget in January 2015, has said falling crude oil
prices will reduce the government revenue due to government taxes oil producers concerning
when oil prices are low, the government revenue will undoubtedly take a hit (The Star
Online, 2015).
This is extended to Petroliam Nasional Bhd’s (Petronas) as the state-owned oil company
dividend contribution to the government could drop in 2016 since the oil price fluctuation
continues, said Affin Hwang Capital Research as cited in (Kavithah, 2015). The collection
from the Petronas’s dividend is said to decline from RM26 billion in 2015 to between RM16
billion to RM 20 billion for 2016 which have an impact on the government revenue. In
addition, due to the global oil prices, the government’s overall revenues seem to be affected
as petroleum income tax, petroleum royalty and Petronas’ dividend will be lower.
On the other hand, according to MIDF Research Sdn Bhd as cited in Kavithah (2015),
petroleum-related revenue is expected to plunge to RM41.3 billion as compared to 2015
revised budget of RM48 billion. Furthermore, the domestic oil and gas (O&G) industry
which depend heavily on Petronas also being affected due the recent global oil price slump,
noted some firms suffered two-digit losses including UMW Oil and Gas (18%), Sapura
Kencana (10%) and Bumi Armada (12%) (The Malay Mail Online, 2014).
Petronas and other O&G industry which contribute a lot to government revenue through
corporate taxes have severely damaged Malaysia’s fiscal revenue base due to falling in global
crude oil prices as according to Department of Statistics, petroleum production is vital to
Malaysia’s economy as crude oil extraction contributes roughly one-sixth to total economic
output (The Economist, 2014).
5. 3
2.2 Malaysian Ringgit (MYR) Decline
As the world’s crude oil prices has collided since 2014, the Central Bank of Malaysia has
been struggling in containing the sharp depreciation of Malaysian Ringgit (MYR) (India
Forex Advisors, 2015). This shows that a continuous declination in the world’s crude oil
prices has actually sparked up the issue on the fall in MYR.
The year of 2014 has witnessed on the collapse of the crude oil prices where in the mid of
June, the price of the crude oil was at US$115per barrel and it started to decline until it
reached US$50 on 14th
August 2015. With the downfall in the price of the world’s crude oil
prices, this has led to a negative impact in the commodity currency such as MYR.
Commodity currency refers to the currency which holds a dependency on the production of
the raw materials as a major source of a nation’s treasury. As Malaysia depends on the
production of the raw materials especially on the petroleum-related resources thus the
direction of MYR also tends to move in tandem with the movement of the crude oil prices
(Farhan, 2015).
An article written by an economist at Focus Economic Robert Hill also supported the issue of
the weakening in MYR which is due to the collapse in crude oil prices. He connoted that on
29th
September 2015, the Malaysian ringgit peaked at 4.46 MYR per USD, making the ringgit
as one of the world’s worst-performing currencies. The ringgit continued to weaken 6.3%
from 28th
August 2015 and 36.0% from the corresponding day in 2014. The fall in ringgit has
been caused by a series of events. He highlighted that the weak demand for Malaysian
exports, particularly oil products and natural gas, which make up nearly a quarter of total
exports, has persisted since the oil prices collapsed in 2014(Hill, 2015).
Another data showed by Bloomberg also emphasized on the depreciation of MYR which is
caused by the declination in the crude oil prices. The article also connoted that the
government’s commitment to reduce a fiscal deficit that has plagued the country since 1998
has been more complicated by a drop in global crude oil prices which have more than halved
since their peak in mid-2014. Benchmark Brent crude fell 1.5 per cent on 19th
October 2015
to US$49.70 a barrel as compared with the high in the previous year in which the price was
US$114.81 (Today Online, 2015).
6. 4
2.3 Stock Market Decline
When low prices in crude oil occur, it could cause concerns about the Government budget
balance and trade balance, which will add downward pressure to ringgit and economic
growth. As oil company’s profits are plummeting, so will the oil company shares that will
drag down the whole market. This is worrying as oil and gas revenues accounted about 30%
of the Government’s annual budget. The sector’s contribution to the Malaysian economy was
projected to reach 11.1% on the gross domestic product (GDP).
Crude futures slumped in Asian trade, with US oil dropping more than 3% towards US$27
(RM118) per barrel and it is the lowest since the year 2003. The FBM KLCI fell 10.39 points
or 0.6%, tracking weaker Asian share markets as crude oil prices fell. At 5pm on 20 January
2016, the KLCI closed at 1,618.83 points on losses in stocks like Sapura Kencana Petroleum
Bhd and UMW Holdings Bhd. Across Asia, Hong Kong's Hang Seng fell 3.82%, Japan's
Nikkei 225 was down 3.71% while South Korea's Kospi dropped 2.34%.
The declined in Asian stock markets due to constant slide in oil price dealt a further blow to
global investor’s appetite for riskier assets. All of these came after the International Energy
Agency, which advises industrialised countries on energy policy that the oil markets could be
drown in oversupply in the year 2016. Investors are also selling shares of companies that may
have exposure to the oil industry. The price of oil has now fallen so low that investors are
also worried that it could mean global economic growth is much weaker than expected,
which could hurt all companies.
In Malaysia, investing companies shared same sentiments that the current situation in the
local stock market will remain for some time mainly due to the volatility seen in oil price.
Buying opportunities arose for some oil and gas shares as crude oil prices had never been so
low for a long time. This was proven when counters in Bursa Malaysia saw 830 decliners
versus 168 gainers, while 259 counters were unchanged. A total of 2.35 billion shares valued
at RM2.1 billion changed hands.
7. 5
3.0 Implications on Firms’ Resource Allocation and Production Decisions
3.1 Government Revenue Decline
Concerning to losses of revenue from the declining of price crude oil, it will impact
government’s resource allocation by government revise the yearly budget as what
government did in January 2015. The government responds to the shortfall in revenue by
reducing the development expenditure such for the purpose of building of schools, roads and
houses of worship. It also concerns on the other expenditures such as salaries of civil
servants, cost of medicine in government hospitals, agriculture subsidies and expenditure for
security including armed forces (The Star Online, 2015). Reducing in this expenditure could
hurt consumer spending and delay infrastructure projects as well slowing down overall
economic growth of the country (The Economist, 2014).
It is supported recently by the Economic Planning Minister, Abdul Wahid Omar as
Malaysia’s government may revise its budget for 2016 if crude oil prices remain low and this
is proven when Prime Minister will table the revised budget on 29th
January 2016. This is
because the budget was structured at the assumption that Brent Crude would average $48 a
barrel in 2016 but then, recently it was trading at $37 a barrel which demanded government
to revise the budget (Reuters, 2015). Revised budget definitely show government will cut
expenditure that affect the resource allocation for the country.
In addition, Petronas also announced a cut of between 15 to 20 per cent to its annual capital
expenditure of RM50 billion (Sue, 2015). Sue (2015) in her article also added the oil giant’s
CEO also announced that the fortune 500 companies will review its projects, with no more
marginal oil-field developments unless Brent prices go over US$80 per barrel. This
worsening issue is further explained by Royal Dutch Shell’s oil unit in Malaysia as they will
cut 1,300 jobs or about 20% of its Malaysian workforce over the next two years as they are
preparing to be more competitive in a low oil price environment (Eaton, 2015). This decision
has shown how the falling of crude price affect the production decision by Petronas and other
O&G companies as they cut their expenditure.
Despite of these negative impacts, The World Bank estimates that 30% decline in crude oil
prices could boost global GDP up to 0.5% and this could provide opportunity for Malaysia to
have a strengthen venture in manufactured products.
8. 6
3.2 Malaysian Ringgit (MYR) Decline
The issue of weakening in the value of MYR has raised the concerns among all the citizens
especially the economists in discussing on its impacts to business and the economy as a
whole. The Head of Research of Inter-Pacific Research, Pong Teng Siew highlighted that
companies such as electronic companies which derive their sales domestically with imported
intermediate or raw materials would be the worst hit from the weakened ringgit. This is
because those companies would have to pay for their costs in USD and would have to sell
them back to the local citizens in the national currency which is MYR. This would then
impact on the companies’ profitability if the situation continues(Khoo, 2015).
In looking to the circumstance above, firms that are related to importing raw and intermediate
materials may find their way to reduce or to minimize the number of imported goods and by
importing more goods would only incur them a higher cost and it may also affects their
profits. Another alternative that they may look upon is by increasing their selling price in
order to sustain the increased cost of operation that they have incurred.
However, the weakening of MYR will also implies some positive consequences to the
domestic economy especially in the near term. According to the Executive Director of
Malaysian Institute of Economic Research (MIER), Dr Zakariah Abdul Rashid suggested that
the depreciation in the value of MYR will eventually help to boost the tourist arrivals in
Malaysia for a short period of time. This is because, when the ringgit’s value weakens,
foreign tourists with stronger currencies are able to spend more in our country. Therefore in
short, Malaysia becomes much more affordable to those foreign tourists.
Apart from that, it will also help the nation to boost its export-oriented industry (Soon,
2015).When exports are becoming cheaper and more attractive to the international market
specifically the US market, the favourable USD/MYR exchange rate can possibly lead to a
steady improvement in the demand for the country’s export. A weakened ringgit can act as a
stimulus to the Malaysian businesses as it has now become more affordable for foreign
markets to purchase Malaysian-made goods. The increment of demand for the domestic
products will likely to generate more profits for the certain businesses such as the
manufacturing sector and also provide more job opportunities for the citizens.
9. 7
3.3 Stock Market Decline
When the crude oil price affects the oil company shares which consequently declined its
value in the stock market, it will give impacts on the firm’s resource allocation and
production decisions. Firm specifically in the petroleum-based industry, will have to cut their
cost in order to cover back the revenue they have lost due to the fall of crude oil prices and its
market shares. This usually being done by pink-slip or dismiss the employment of some
workers in the company. Example of a retrenchment plan taken is the action recently being
done by Petronas which dismiss the service of contract workers and/or workers on project
basis in order to reduce their costs in order to optimize production.
Firms in petroleum-based industry also can reduce their cost by cutting a percentage of the
wages or salaries of their workers. The revise in salary will help in maintaining the labour
needed for efficient production and maximizing the profit. It will also help the firm from not
losing too much of the profit they obtained from the drop of oil prices. Petronas for an
example, reduces 20% from the current salaries of its workers since 1st
May 2015 because of
the challenging market condition caused by the low global oil price.
When the price of oil decreases, it will cause hardship to sustain capital resources such as
labour and machinery. For example, an oil rig operation need 30 men to operate a drilling
machine efficiently, thus if there are 3 machines it needs 90 men. However, due to reduce in
revenue, the firm has to cut cost by reducing its manpower requirement. If the firm reduces
1/3 of its labour force, one of the machines would be left idle. Therefore, the firm can cut
their production by just using two oil drilling machine focusing two oil wells to optimize
their productivity through minimizing costs that could provide some buffer to the reduce
revenue.
10. 8
4.0 Concepts Studied in ECO 740
4.1 Demand and Supply
Since June 2014, global crude oil prices plunged by more than 50% is said due to oversupply
and weak demand. This clearly shows how demand and supply of the crude oil has affected
its price that hurt producers around the globe. According to International Energy Agency
(IEA), there could be 2 million barrels per day of oil surplus by the second quarter of 2015
yet the demand is expected to remain weak amidst slower global economy (Lim & Tim,
2015). Demand and supply has a positive relationship as increased in demand would increase
in supply. In this issue, due to oversupply of crude oil by many producers over the subdued
demand has declined the price of crude oil which some countries gain benefits and some gain
losses.
The surplus of oil market is due to subdued demand from non-OPEC producing countries, by
which in a November 2014 analysis, Citibank estimated that supply was exceeding demand
by 700,000 barrels per day (Deloitte, 2015). This resulted in a build-up of oil inventories as
supply over demand. The excessive supply of the oil is due to OPEC decided not cut the
output prices by responding to maintain the production levels which are led by Saudi Arabia
as the subsequent November decision by OPEC to maintain their collective production
ceiling of 30 million barrels a day (Ellyatt, 2015).
The subdued in demand is related to economic activity by many countries are switching into
green technology by replacing usage of oil to other fuel as well reducing dependency towards
oil (Evans, 2014). In addition, the economies of Europe and developing countries are
weakening, and at the same time, vehicles are becoming more efficient, which has caused the
demand for fuel to lag (Tarver, 2015). The demand of crude oil is also related to the
economic activity concerning on season where in the winter in the northern hemisphere and
during summer in countries which use air conditioning will slower the demands for oil. It
means the slower in certain economic activity affect the demand of crude oil.
America has becoming the world’s largest oil producer has an impact in demand of crude oil.
Even though it does not export crude oil, it now import much less which creating a lot of
spare supply. In conclusion, due to the theories of demand and supply, the price of crude oil
has to be lowered in order to increase the demand towards the crude oil and reduce the
oversupply of crude oil as the plunge in the crude oil hurt many exporting countries.
11. 9
4.2 Exchange Rates
In discussing the issue of the global crude oil prices and how the changes in the prices of the
crude oil will bring implications to the nation is much related to the concept of exchange
rates. Import and export sales and profit margins are recognized as among the important
determinants which are relatively sensitive to the changes in the exchange rates.
Exchange rates are quoted as foreign currency per unit of domestic currency or domestic
currency per unit of foreign currency. Exchange rates basically allow us to denominate the
cost or the price of a good or service in a common currency (Krugman & Obstfeld, 2014).
Exchange rates highlight on the appreciation and also the depreciation of a currency. When a
currency appreciates it means that it increased in value relative to another currency whereas
depreciates means that it weakened or fell in value relative to another currency.
A study conducted by Chen and Chen (2007) showed that real oil prices may have been the
dominant source of real exchange rate movements and there is a positive link between oil
prices and real exchange rate. Another literature also suggested that there is a positive
relationship between the oil price and the exchange rate in net oil exporting countries. In
other words an increase in oil prices leads to an appreciation of the domestic currency while a
decrease in oil prices causes depreciation in the domestic currency. Golub (1983) also
suggested that a depreciation in the local currency relates to decrease in the exchange rates
and this occurs when the price of oil decline (Aziz, 2009).
With oil priced in USD, the MYR falls in line with the oil price reductions against the USD.
The declination in MYR also implies that the exchange rates also decline. The plunging oil
prices inevitably affected the MYR and the value continues to weaken (Kok, 2015).
With this, it has made the domestic currency to worth less as compared to other countries for
instance the United States. As an effect of the exchange rates, specifically in a circumstance
of a depreciating domestic currency, it is highlighted that the exports will be more attractive
since it is cheaper as compared to the imports. The price of the imported goods will be
automatically increased and therefore the local consumers will have to bear the burden in
paying higher or more for the imported products.
12. 10
1.1 Porter’s Five Model
1.1.1 Potential Entrants
A new Oil and Gas Company would require a high capital to enter the market or the industry.
With the other establish petroleum companies around the world and also in the domestic
arena, it will be costly to establish a new company. One of the costs centre would be the
research and development role to produce a better quality oil products. The other cost would
be the production of the oil itself such as the drilling process of oil wells. Public policy
constraints also can be a barrier for potential new entrants to enter the petroleum industry. For
example in Malaysia, Petronas is one of the government-linked companies for oil and gas in
Malaysia and the government may not keen to license other petroleum company as it would
increase competition in domestic market.
1.1.2 Substitutes and Complements
In the petroleum industry, the Organization of the Petroleum Exporting Countries (OPEC) is
the major crude oil producers which produce 40% of the world’s crude oil supply. They also
control and influence the price of crude oil for the world. However, the shale oil revolution
has stimulated tremendous production of oil and natural gas especially in the United States.
Shale oil is a substitute for conventional crude oil produce by oil producer countries. It also
complements the production of oil as another alternative for energy fuel. Other substitute for
oil and gas would be the new and under gradual development of green energy.
1.1.3 Buyer Power
As stated in the law of demand, when price is increase, quantity will decrease because there is
no demand for the products. For example on the current situation of oil industry, when the
crude oil is oversupply, the buyer power will increase. It is a disadvantage to oil company
such as Petronas as the net exporter to gain profit from the oil production. Therefore, the
buyer power needs to curtail by reducing the overcapacity of oil production in order to
decrease back the buyer power.
13. 11
1.1.4 Supplier Power
The production of oil and gas industry plays a major role in determining the supplier power.
Therefore in the current situation for example, surplus quantity of crude oil will reduce the
supplier power and it will be a disadvantage for net exporter to gain revenue and an
advantage for importer as the price of oil is reduced. The depreciation of oil price is cause by
over surplus quantity of crude oil in the market. As a result, suppliers have no power in
determine the price and consequently have to decrease the price which results in the drastic
drop of crude oil currently happening in the world down from US$108 in June 2014 to
US$28 in January 2016 per barrel.
1.1.5 Intensity of Rivalry
The current growth of oil and gas industry is considered a negative growth given by the
reduction of price in crude oil due to surplus production by the industry. The existing
competition between the OPEC members make it impossible to reach an agreement on
reducing the production of the crude oil in order to increase the price of oil that could
improve economic growth of many countries. If this situation continues, many oil companies
will be heading towards bankruptcy and pink slip of many workers in oil industry in order to
reduce cost.
14. 12
4.4 Economies of Scale
Economies of scale can be defined as the advantages of which firms can attain due to their
large scale of production. In analysing the economies of scale, it is important to highlight on
its two types which are the internal economies of scale and also the external economies of
scale. As a full-service oil company, Petronas enhance its internal economies of scale by
emphasizing on its efforts in the area research and development (R&D). Among its efforts in
R&D include by introducing the enhanced oil recovery (EOR) programme which aimed to
revive the production of the mature and depleting oil wells. Petronas realized on the
importance in maintaining the sustainability of the natural resources particularly its oil and
petroleum assets and at the same time they also realized that R&D plays a crucial role in
improving its capability as an oil producer company in providing better services to the public.
With that, R&D is seen as one of the platforms which can assist the organization to achieve
its desired goals. Petronas is expected to spend RM1.1 billion in conducting the R&D.
Therefore in realizing the large scale of the EOR project, Petronas, through its E&P
Technology Centre has allocated substantial resources, manpower and also finance to conduct
research and to eventually develop innovative and applicable technologies in rejuvenating
and enhancing production of oil (The Star, 2014). By having their own R&D department, it
may help Petronas to reduce its average costs and raise its total revenue by developing more
efficient methods of production.
Apart from that, Petronas also attain a benefit from the external economies of scale especially
in the context of training and development opportunities among the members in the
organization. With the availability of various training facilities provided by the government
under its financial allocation towards Petronas, this has helped the oil industry steered by
Petronas to go further. For instance by launching the new training facility which is known as
the Integrated Oil and Gas Training Centre in Bukit Rakit, Terengganu on 27th
March 2014
(Offshore Energy Today, 2014). With such training programme, Petronas aimed to equip its
workforce with necessary skills and knowledge in the oil and gas industry with an objective
to enhance its capability as a full-service oil company. Through the efforts in training and
development, this shows that Petronas is committed enhancing its human capital by
equipping them with all the necessary skills and knowledge which would enhance their
capability in carrying out their duties and works which in turn would also help Petronas in
achieving the organizational goals and profits.
15. 13
5.0 Recommendations and Conclusion
5.1 Recommendations
5.1.1 Shifting to other sectors
In responding to Petronas losses some revenue due to falling in crude oil prices which
directly affect the government revenue, the government needs to accelerate the diversification
of its economy by fostering a swifter expansion of the manufacturing and services sector
(Nurhisham, 2014). It means that government must reduce the dependency on oil and gas
revenue in the budget by strengthening other sectors as align with the National Key
Economic Areas (NKEA). Government could sustain demand for our electrical and electronic
(E&E) products due to strength of US economy (The Star Online, 2015). By shifting to other
sectors that potentially can boost the government revenue, it will help to sustain the revenue
through paying corporate taxes and can cover losses from the lower crude oil prices that hurt
the oil and gas industry. Besides that, the government must also tighten up project and
spending monitoring and take the necessary remedial and disciplinary actions to prevent
costly incidents of wastages, leakages, poor financial management, and non-completion or
late deliveries of projects (The Star Online, 2014). It is align with 11th Malaysian Plan as the
government is aiming to reduce the dependency on petroleum-related revenue to 15.5% by
2020.
5.1.2 Enhance the Government’s Credibility in Disseminating Information
The ringgit’s depreciation is mostly caused by external factors. The issue of falling of MYR
is beyond the government’s control as it relates with the fall of the world’s crude oil prices.
However, it is necessary for the government to enhance its credibility in managing the
economy, which at the same time, will affect how the players in the market feel. Therefore, it
is important for the government to procure the ability in disseminating the right information
on the economic situation in Malaysia as there has been some misleading information and
heated discussions pertaining the country’s economic condition due to the declination in
ringgit. By disclosing the actual facts and information to the public in regards to the
economic condition, the public will be able to obtain the facts and information on the benefits
and drawbacks of having a declination in ringgit, the status of the economy and the
government also must be able to enlighten them on what are the measures to be taken by the
government to comprehend the issue. With this, the government will be able to gain the trust
and to boost the confidence among the public and also the foreign investors.
16. 14
5.1.3 Production measurement
An action need to be taken in order to increase the crude oil price back to a more reasonable
price. Such improvement could help to attract investment from the global investors which
have impacted the stock market due to the volatility in oil price for the past 18 months. First
of all, the major producers of crude oil specifically the members in The Organization of the
Petroleum Exporting Countries (OPEC) should collectively reduce their production to avoid
oversupply that has caused the reduction of oil price. By reduce production there is tendency
for the oil price to pick up and stabilize although it may not back to the original. Nonetheless,
such stable pricing could help the economic growth of many countries.
Other than that, the production of U.S Shale Oil should be halt to avoid over supply of oil in
world market. The U.S should only produce when there is a low production of oil or a scarce
of oil resources is detected so that they will not waste the resources in making the shale oil
and able to gain more profit by producing more in the future when the world needed them the
most. However, the U.S can produce or introduce their shale oil globally but at a low
production in order to suit with the demand and not damaging too much on the price level of
crude oil around the world.
5.2 Conclusion
In conclusion, Malaysia gains losses due to collapse of crude oil in terms of decreased in the
government’s revenue, shortfall in Malaysian Ringgit as well decline in market share. These
occurred as Malaysia is the next exporter of oil, which falling in crude oil prices affect the
firms’ resource allocation and production decisions by the government and the firms have
taken corrective action to respond with the fluctuation of the crude oil prices. It is to ensure
Malaysia is sustainable and competitive to the global changes as to reduce the deficit and
achieve the expected growth. The issues of the crude oil prices also encourage the
government and firms to competitively and aggressively respond to the global challenges as
reality outcome should be the consideration in any actions taken by the government and the
firms.
17. References
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Retrieved January 23, 2016 from http://www.bloomberg.com/news/articles/2015-05-
22/petronas-first-quarter-profit-plunges-on-oil-price-slump.
Deloitte. (2015). The impact of plummeting crude oil prices on company finances. Retrieved
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company-finances.html
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over-two-years/#34195101=0
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