Impact of High Oil Prices on the Malaysian Economy



The year 2008 has brought to Asia not only the Beijing Olympics games but also a hosts of economic calamities ranging from the spillover effects from the subprime crisis, the food crisis, and more importantly the unprecedented surge in international oil prices. History has shown us from the oil crisis in the 1970s that high oil prices severely affect economies in both the developed and developing countries. This research paper attempts to briefly study reasons for the spike in oil prices and the impact that high energy prices would bring to Malaysia and other Asian economies. Furthermore, knowing the challenges ahead is only part of the whole picture. More importantly, it is the response of the authorities in charge that will determine how well we weather this current crisis.



The end of the cold war, globalization, the rise of China and the rampant spread of information technology set the stage for a long spell of economic growth, high productivity, low inflation, and booming economy for not just the United States but for most of the rest of the world (Daniel Gross, 2007).[1] The acceleration of the flow of workers across borders to the most competitive markets during the past decade has been a potent disinflationary force that not only held down wage growth but inflation in virtually every country. Yet this period of unprecedented worldwide economic growth coupled with low inflation may be at its end as the subprime and financial crisis has all but crippled the economy of the United States while commodity prices of both food and fuel has reached previously unforeseeable heights.

Among all the commodity prices that are breaching record high prices, the price of oil emits the most concern from governments and citizens across the globe. Oil prices has been an unstoppable juggernaut since the early days of 2002 (back then, oil prices was merely at the US$20 level). Since the emerging economies of China and India took off, the price of oil has spiraled up to almost an alarming 600% and reaching a record high of US$147.27 on July 11 (Tee Lin Say, 2008).[2] According to Bob Lutz from General Motors, when the price of oil goes and stays up, it has a negative effect on the entire economy because oil is used in the production of virtually everything, including steel, aluminum, plastics, rubber, fabrics, transportation, and food (Daniel Gross, 2008).[3]

Yet why are oil prices so high? While many governments and analyst around the world blame speculators for artificially propping up oil prices (this is true to a certain extent), one must be reminded that speculators speculate according to market conditions that are set by fundamental factors of supply and demand. According to Tony Hayward from British Petroleum (BP), there is enough oil to maintain world consumption at current levels for another 42 years and to add to that, the world could probably unearth another one trillion barrels of oil should it really wanted to (The Economist, June 11th 2008). According to the data obtained from BP, the proven reserves of the world in 2007 remains at healthy levels.

Mr Hayward continues by saying that one of the reasons petrol prices are so high is because some 80% of the world’s oil reserves are in the hands of state-owned oil firms that tend to allow international oil companies limited access. This can evidently be seen in countries such as Russia and Venezuela that welcome the high-tech and well-capitalized oil firms when prices are high and chase them out when prices are low. BP’s data also shows that global output of oil fell last year and combining that with a decline in proven reserves (1.6 billion barrels) suggests that the world is consuming oil faster than it can be found. Countries like Mexico and Norway have an inevitable decline in output while Nigeria’s output is affected by political unrest.

In line with the data obtained from BP, Sadad I. Al Husseini a Saudi oil geologist, also calculated that output would be leveling off (stagnant output) as early as 2004 with this “production plateau” lasting 15 years (at best) and after which output of oil would begin to decline (Paul Roberts, 2008).[4] One of the reasons for the decline in oil output is because most of the big and easily located fields were discovered decades ago and the recent oil field findings tend to be smaller fields. Oil producers are now stuck in having to find greater number of oil fields to produce the same amount of oil. Smaller oil fields are more costly to operate as small oil fields in ten different locations would require 10 oil rigs compared to the lesser number of oil rigs at big oil fields.

Malaysia remains an oil exporter until the year 2011 after which Malaysia would be a net oil importer. Recently to the horror of business firms and households alike, the petrol and diesel prices in Malaysia rose 41% and 63% respectively. While the raising of energy prices in Malaysia is not totally unexpected, the Government’s latest move have prompt many of us to look back at the cause and effects of subsidies itself. While economists agree subsidies are unsustainable and implemented to the benefit of the rich, the adverse effect on the Malaysian economy in the short-term must also be carefully studied.


Impact on GDP growth

According to Roger A. Arnold (2008), the gross domestic product (GDP) refers to the total market value of all final goods and services produced annually within a country’s borders.[5] Based on the expenditure approach in computing GDP, a country’s GDP is the sum of its consumption, investment, government purchases, and net exports. While the GDP is a good measure of the total output capacity of a country, a country’s GDP omits certain underground activities (for example, the selling of illegal DVDs and VCDs), the sale of used goods, and financial transactions. Furthermore, a country’s GDP is only the aggregate total of an economy’s output and it does not represent the equality in income of its citizens.

The impact of high oil prices on Malaysia’s GDP growth would depend on the exposure of the Malaysian economy to oil, particularly in terms of domestic consumption and the extent of the spillover effect of the increase in costs on other products and services. At the first glance as an oil exporting country, high oil prices would benefit the Malaysian economy as the positive gains from higher oil prices would offset any negative impact on the economy. This is done through pump priming whereby revenue from higher oil prices can be channeled back in to the domestic economy through Government expenditure. This research paper would attempt to look at both the benefits and the adverse affects on the economy of higher oil prices.

There are two sides to an economy. There is the demand side in an economy is referred to as aggregate demand (AD) and the supply side that is referred to as aggregate supply (AS). Higher energy prices caused by the rapid increase in oil prices would transmit into the economy by reducing the real income of households and prompting them to reduce consumption. This happens due to the real balance effect that states the inverse relationship between price level and quantity demanded of Real GDP established through the changes in the value of monetary wealth (McConnell & Brue, 2008). As the price level in the economy increases, the purchasing power, and monetary wealth of households and businesses declines, thus resulting in a decline in quantity demanded of goods and services in the economy.

On the supply side, high oil prices would then spread throughout the economy, driving up production and distribution costs on a wide variety of goods that will induce firms to reduce output (McConnell & Brue, 2008).[6] The increase in production and distribution costs would be caused by factors such as the rise in expected price level, workers demanding higher wages (wage push), and increases in non-labor inputs such as raw materials (Frederic Mishkin, 2007). These factors would cause the short-run aggregate supply curve to shift to the left. Figure 1 shows what happens when the short-run aggregate supply shifts. Suppose the economy is initially at the natural rate level of output at point 1 when the drop in quantity demanded and leftward shift in short-run aggregate supply shifts from AS1 to AS2 because of a sharp rise in energy prices.

The economy will move from point 1 to point 2, where price level rises but aggregate output falls. This situation of a rising price level and falling level of aggregate output pictured in Figure 1 is known as stagflation which is a combination of economic stagnation and inflation (Frederic Mishkin, 2007). In line with this, the Malaysian Institute of Economic Research (Mier) has recently revised downwards its real gross domestic product (GDP) growth forecast for this year from 5.4% to 4.6% (this is below the Government’s target of 5% to 6%).[7] The executive director of Mier Professor Datuk Dr Mohamed Ariff Abdul Kareem said that the weaker outlook was due to the impact of the slowing US economy, soaring food prices, rising global oil prices, and local political instability.

The Malaysian net exports are also likely to be affected from the surging oil prices and the slowdown in the US economy. Earlier this year (2008), the argument was that the emerging Asian economic powerhouses like China and India would cushion the impact of from a slowdown in developed economies. According to the World Economic Outlook report by the International Monetary Fund (IMF) in April 2008, there would be a 25% chance that the global economy would face a recession should growth be 3% or lower this year and next. A slowdown in developed countries (particularly the United States) would have an adverse effect on Malaysia’s GDP growth as the demand for Malaysian exports decline.

Emerging economies like Malaysia which are export-intensive (having a current account surplus of Rm100.5 billion in 2007) would face an economic slowdown as the demand for exports from developed countries decline. Based on data obtained from Bank Negara Malaysia, the United States is still Malaysia’s biggest export destination. According to CIMB Investment Bank Bhd head of economic research Lee Heng Guie said that a 1% decline in US GDP growth could potentially trim Malaysia’s export growth by 0.8% percentage points, leading to a 1 percentage point decline in GDP growth.[8] Should this be true, an economic slowdown faced in the United States could adversely affect the Malaysian economy as through the trade links of the two countries.


Impact on Inflation

Inflation, a continuous rise in price level, affects individuals, businesses, and the Government (Frederic Mishkin, 2007). High inflation is undesirable as it erodes the purchasing power of money that causes a drop in real income (and thus a drop in an individual’s standard of living), the weakening of a country’s currency, and a decline in long-term economic growth. According to Frederic Mishkin (1997), price stability in the long-run is achieved through a low and stable inflation rate that promotes a higher level of economic output and a more rapid economic growth.[9] Economists generally measure the price level by the consumer price index (CPI) which is a weighted average of the prices of all goods and services purchased by a typical household (referred to as the market basket).

The Malaysian consumer price index comprise mainly of three categories, namely food & non alcoholic beverages, housing, water electricity, gas & other fuels, and transportation. The combined weight of these three categories amounts to 68.7% of the total consumer price index. Relative to developed countries like the United States, Japan, and developed countries in Europe, Malaysia has a higher level of exposure to the adverse impacts of the increase in oil prices as a higher proportion of Malaysian households’ income goes into food and fuel (both of which increased rapidly after the fuel hike in June). In contrast to developing countries, households in developed countries like the United States which spends a lesser proportion on food and fuel and are able to cut back on the purchases of optional goods to cater for higher energy prices.

The severe adverse impacts of the fuel hike in June can be seen when the consumer price index rose to a 27-year high of 7.7% for the month of June from 3.8% in the month of May.[10] The consumer price index is likely to remain high in as the fuel hike in June would be followed by an increase in the electricity tariff in the month of August. The jump in the consumer price index is caused by the adjustments made by households and businesses (reduction in quantity demanded of goods and services and the drop in economic output) that were previously insulated from the surging international market oil prices through government fuel subsidies and various other price controls like those previously seen in the local cement and steel industries.

While a high inflation rate and a higher cost of living is normally measured through the consumer price index, in reality a high inflation rate does not affect all citizens equally. When income levels come into consideration, high inflation normally hit the hardest on the poor rather than the rich. Furthermore, a retired person or any unemployed individual is very likely to be hit by inflation on a larger scale than a higher income earning individual (assuming the higher paid individual’s income rises in tandem or faster than price levels). This is because the unemployed individual is relying on his/her money kept in the bank which purchasing power, due to high inflation is eroding. Without the chance of benefiting from any economic growth in the society, the unemployed individual is stuck with a higher cost of living without any compensation in any form

The Consumer Price Index (CPI) which is commonly used as a measure of inflation might not be a correct representation of the way inflation affects us. The calculations of the CPI may be distorted because it is the average price of goods and services purchased by households when the highest rise in prices may be in products that people cannot live without (fuel and food).

According to the Household Expenditure Survey, the main expenditure of households would be centered on four categories firstly, food and non-alcoholic beverages, secondly, housing, water, electricity, gas and other fuels, Third, transportation and fourth, restaurants and hotels. A further breakdown on this four categories in terms of income levels from below Rm 500, Rm 500 to Rm 4,999, and Rm 5,000 and above shows us that poorer individuals (below Rm 500) spends 38.8% of their household expenditure on food and non-alcoholic beverages compared to the richer individuals (above Rm 5,000) that spends 9.4% on the same items.

Further results from the Department of Statistics shows us that poorer individuals (below Rm 500) spends only 4.2% of their household expenditure on transportation compared to the richer individuals (above Rm 5,000) that spends 27.8% on the transportation. This indirectly and ironically shows us that our painful fuel subsidy (Rm 16 billion, January-August 2007) helps the rich more than the poor. Furthermore, while poorer individuals would have no choice but to tighten their belts when the prices of food soar as a high proportion of their income goes into food and energy.


Interest rate outlook

Despite inflationary pressures building up, the Malaysian central bank has recently decided to leave interest rates unchanged by maintaining the overnight policy rate (OPR) after the monetary policy meeting held on 26 July 2008. The decision by Bank Negara to leave the OPR at 3.5% immediately resulted in the stock market rallying (KLCI ended up 12.34 points, or 1.08% higher) and the weakening of the Malaysian ringgit (Loong Tse Min, 2008).[11] However, according to the same source, the weakening of the ringgit may also be due to the political risk expectations of foreign investors in the country.

Bank Negara stated in an issued statement that, “while both the risks to higher inflation and the risks to slower growth have increased, the immediate concern is to avoid a fundamental economic slowdown that would involve higher unemployment.” By leaving the OPR at 3.5%, the interest rate in Malaysia is among the lowest in Asia (together with interest rates in Hong Kong and Thailand). In a way, the central bank’s move to maintain the benchmark interest rate is justified as the high inflation in June was not demand driven (demand-pull inflation) but due to the adjustments made by households and businesses to the increase in energy prices (Izwan Idris, 2008).[12]

Furthermore, cost-push inflation driven by supply shocks (a leftward shift of short-run aggregate supply) limits the effectiveness of monetary policy in reigning in inflation. The rationale is that reducing the money supply in the market by increasing interest rates which is the cost of borrowing money would not reduce international oil prices. On top of that, raising the OPR would add additional burden to manufacturers, property developers, and business firms that are already facing the increase costs of raw materials and operating costs.

However, keeping interest rates low has also widen the negative gap between the OPR and the CPI. This means that the erosion of purchasing power of money would increase more rapidly and there would be less foreign capital entering Malaysia. This would result in the ringgit weakening against foreign currencies which would increase the cost of imports. As Malaysia is a net importer of food (which prices have risen to record levels), imported inflation would add more fuel to inflationary pressures in the country. The alternative would be to gradually raise interest rates (by 25-basis points) to shield local consumers from imported inflation at the expense of a decline in economic growth.


Currency Outlook

The Malaysian ringgit has appreciated last year due to the removal of some of the capital controls that were put in place in the 1997 Asian financial crisis, and the weakening of the US dollar due to the subprime and financial crisis. The upward trend of the ringgit is likely to be at its end as the Malaysian economy faces twin shocks from food and fuel prices. According to Alan C. Shapiro (2005), a currency’s exchange rate is determined by its supply and demand which is affected by factors such as inflation rates, interest rates, economic growth, and political and economic risk.[13]

As seen from the previous findings the impact of the increase in oil prices on GDP, and inflation, we can see that Malaysia faces an economic slowdown and high inflation that would put pressures on the ringgit to depreciate. Bank Negara has also recently chose not to increase the benchmark interest rate to maintain economic growth and employment at the expense of a higher price level which prompted the ringgit to depreciate further (refer to interest rate outlook). Contradicting the monetary policy of Bank Negara, regional central banks are taking a tougher stand against inflation by tightening monetary policy to strengthen their currencies (Yeow Pooi Ling & Yvonne Tan, 2008).[14]

Most notable of all is Singapore and China which are using currency appreciation to control inflation. By strengthening the local currency, Malaysia would have to sacrifice a certain degree of its export competitiveness to shield domestic consumers against imported inflation. Though Malaysia is a crude oil exporting country, it is also a net importer of food which in part due to surging oil prices have spiked to record levels. To strengthen the local currency, the central bank should increase interest rates or widen the currency-trading band. This would reduce the money supply in the market, and partially shield consumers from imported inflation.


Impact on fiscal budget

A country’s fiscal budget comprises of government expenditures (the sum of government purchases and government transfer payments) and tax revenues (Arnold, 2008).[15] Malaysia has a long standing fiscal deficit whereby government expenditures are greater than tax revenues of approximately 3% to 4% of gross domestic product. According to Datuk Dr Mohamed Ariff Abdul Kareem, Malaysia has the highest budget deficit as a percentage of GDP within Asean. However, the budget deficit is said to be within a manageable range and is forecasted to remain at current levels.

As stated above, the fiscal deficit of a country depends on government expenditure and tax revenues. Holding everything else constant, a decline in Real GDP due to rising oil prices would result in a decline of Malaysia’s tax base and if tax rates are held constant, tax revenues will fall. Furthermore, should oil prices continue to increase, the amount of government subsidies on fuel and other essential items would also increase. Thus, the Government’s expenditure will rise and tax revenues would fall resulting in an increase in the country’s fiscal deficit.

However, Malaysia is a net exporter of crude oil (unrefined petrol) which according to Petronas, churns out 600,000 barrels per day of which 339,000 barrels per day are refined locally (the balance is exported as crude oil). Based on the demand growth before the petrol price hike in June of six percent per year, Malaysia’s demand will exceed local production in 2011. This would result the country becoming a net importer of oil even though Malaysia still has oil reserves for another 22 years and gas reserves for 39 years.[16]

It is likely that the Malaysian fiscal budget remains unchanged in the coming years. Due to the presence of both inflation and an economic slowdown, the usage of fiscal policy to solve domestic economic problems is severely limited. Suppose the economy is at point 1 in Figure 5 due to the increase in oil prices that shift the short-run aggregate supply curve to the left away from the long-run aggregate supply. Should the government attempt the make use of expansionary fiscal policy measures either by increasing government expenditure or reducing taxes, the aggregate demand curve would shift to the right from point 1 to point 2.

At point 2, the economy is back at the natural rate of unemployment and the Real GDP has increased but price level has increased from P1 to P2. Due to the present of high inflation caused by the price hike in petrol, further expansionary policies by the government would add to already mounting inflation rates and expectations of inflation. Similarly, continuing the fuel subsidy would be equally disastrous as it would result in a long-run shortage of fuel in the country. Figure 6 shows that suppose price of petrol is at point A while market equilibrium prices are at point E, the long-run impact would be that there would be a shortage a fuel due to the difference between quantity demanded of fuel (point A) and quantity supplied of fuel (point B).


Domestic Risk

The rising trend in international oil prices is likely to increase the domestic risk in Malaysia. It is important for both the government and citizens alike to understand that the economy works in a circular flow by which a change in a single part or industry in an economy is likely to cause changes in other parts of the economy as well. A good example of this is the spillover effect of high energy prices into other sectors of the economy like agriculture through the increased costs in fertilizers and transportation.

Knowing that no economy or sector is an island that is unaffected by occurrences happening elsewhere in seemingly unrelated industries is a good vantage point in which to judge the domestic risk in Malaysia. Through the easing of petrol subsidies in June, producers of goods and services faced an increase in their production and distribution costs that are eating into their profitability. In order to protect their real income, producers past on the cost to consumers which results in an increase in the general price level of the economy.

As consumers now face higher prices for their goods and services, they cut back on consumption and the real GDP of the economy falls. Faced with both inflation and a decline a real GDP, the central bank is trapped in a position whereby an increase in interest rates to rein in inflation would cause a more severe economic slowdown. On the other hand, leaving the Malaysian OPR rate unchanged at its current 3.5% would cause a drop in value of the Malaysian ringgit against foreign currencies which would further fuel inflation.

The combination of a slowdown in the domestic economy, high inflation, and a decline in the ringgit’s value relative to other currencies increases the risk of doing business in Malaysia. Foreigner investors with assets denominated in ringgit would fear that a drop in the country’s currency would affect the value of their assets. Furthermore, local investors face an interest rate risk should the central bank decide to increase interest rate to combat inflation. An increase in interest rate would cause some borrowers to default and the value of certain assets (like property) to decline.

According to the Star newspaper, some of the potential risks and challenges facing the domestic market include[17]:

· Rising operational costs resulting from surging prices of commodities

· Government’s on-going reduction on petrol subsidies causing higher fuel prices

· Possible electricity tariff hikes

· Malaysia’s growth slows down more than anticipated

· Execution risk on implementation of 9th Malaysian Plan development projects, hence dampening the multiplier effect

· Substantial softening of crude palm oil prices

· The Visit Malaysia Year 2007 (which was extended to 2008) fails to generate interest as it did last year

· Poor response from EPF members on the monthly EPF withdrawal scheme

· Resurgence of inflation

Also to be noted is the results of the recent 2008 elections which indicate that the National Front has los the popular vote in peninsular Malaysia. The country risk of Malaysia as of now is relatively high as foreign investors now shun committing funds and resources in Malaysia for fears of political instability.


Impact on Malaysia’s competitiveness

It is a common misperception that countries blessed with natural resources like oil would result in higher economic growth prospects and higher competitiveness against countries that are forced to spend large amounts of money to import these resources. Yet as history has often proven to us, this is seldom true and countries with natural resources are often plagued with a resource curse which leads to corruption, wastage, and mismanagement of the economy. Topping the list are countries like Russia and Venezuela that though are rich in natural resources are plagued with economic mismanagement.

According to the Centre for Public Policy Studies director Tricia Yeoh, natural resources do not necessarily bring greater growth and development to a country.[18] In her paper titled Promoting Revenue Transparency in Malaysia, Tricia takes for example how per capita incomes in resource-deficient countries grew two to three times faster than resource-reliant export-driven countries between 1960 and 1990. According to the International Monetary Fund, a country is resource-reliant of at least 26% of its national revenues derive from extractive industries like oil, gas, and minerals.

Malaysia is a resource-reliant country with a huge portion of government revenues coming from the oil and gas industry. Similar with most resource-reliant countries like those in the Middle East and Latin America, Malaysia is behind the curve in adopting freer trade, property rights (remember the Boonsom Boonyanit land law case), economic freedom, and privatization of state owned companies. The presence of oil and gas in Malaysia has created and artificial sense of wealth to which the petrol-dollars are used to pump and prim the economy and subsidize a number of essential consumer items.

On top of that, the Malaysian ringgit used to be pegged to the greenback thus making it undervalued in terms of purchasing power parity to other regional currencies. This has made Malaysian exports cheaper relative to other countries and resulted in a booming export industry and a current account surplus. While the oil price hike in June is detrimental to the Malaysian export industry, it is likely that domestic firms in Malaysia would become more competitive. The reason for this is that as the costs of doing business increase, Malaysian companies would be forced to innovate and generate more income in order to protect their profit margins and ensure their survival.

Furthermore, the increase in costs would breed an environment to which companies with substandard performance in certain industries are forced to stop operations and change into more profitable industries. A highly competitive environment like this would foster more creative destruction which according to Joseph Schumpeter would revitalize itself by scrapping old and failing businesses and reallocating resources to newer and more productive industries.[19] This is the cornerstone and ultimate advantage that capitalist economies have over centrally planned ones.

Table 5 shows us that the foreign direct investments flowing into Malaysia have not reached pre-Asian crisis levels. This is a signal that should Malaysia continue to delay opening up its economy, it is going to lose out against regional economies like Thailand and Singapore. In a globalized world, foreign funds flow to countries with the most well managed economy and shun countries which adopt protectionist policies. It is important for Malaysia to move up the value chain by forcing local companies to be more competitive in their struggle for survival and profitability.


Impact on Asian economies

The impact on Asian economies depends on the individual characteristics of the countries in the region. Generally households in developing countries in Asia spend a larger portion of their household income on energy and food compared to developed countries in North America and Europe. This implies to us that the exposure of Asian economies towards high oil prices is relatively high. However, countries in Asia are very diverse and the effects of the high oil prices should be measured separately.

Among all the countries in Asia, China stands out as the economic powerhouse in the region. The country accounts for a fifth of the world’s population, yet it consumes up to half of the world’s pork, half of its cement, a third of its steel, and over a quarter of its aluminum.[20] While inflation in China is likely to spike, China’s GDP growth is likely to remain approximately 10% for the year 2008 before falling to 8-9% in 2009 due to strong domestic demand. China is increasing the reserve requirements of its banks and gradually allowing the yuan to appreciate against foreign currencies to control inflation.

However, countries like China and India with a big population base and high income inequality is likely to suffer the adverse consequences of high inflation. All across the region, inflation is eating into the economic growth of Asian economies. Vietnam in particular has an inflation rate of 26.8% in the month of June largely due to higher oil prices and its local economy overheating. Not far behind is Indonesia and the Philippines which both have an inflation rate of 11% in the month of June

Furthermore, most Asian economies are export-oriented economies and have strong trade links to the developed countries like the United States. The economic slowdown in the United States is likely to result in a slowdown in Asian economies. Most adversely affected would be countries like Singapore which has a strong exposure to a economic slowdown in the United States but also imports most of its essential items. To mitigate the risk of imported inflation, Singapore has also allowed its currency to appreciate further against other foreign currencies.

According to the Star newspaper on 23rd June, Asian economies are likely to sustain their economic growth even though they suffer from the twin shocks of inflation and an economic slowdown in the United States. My own personal forecast is that there would be a slowdown in Asian economies as inflation start eating into Real GDP growth. Besides that, the demand for Asian exports (with maybe only the exception of China) is likely to decline. Domestic demand in Asian economies may also face a decline as high energy and food prices take out a chunk of real household income.

The surging energy prices are also likely to result in political instability in the region. South Korea and Taiwan have already changed their ruling government. Other countries like Malaysia and Thailand is deemed by investors to be politically unstable. It is likely that the drop in the standard of living and economic mismanagement in Asian countries are the critical factors to which politicians in Asia will utilize to win votes in the elections. Such populists’ promises may result in greater economic problems like those seen in Latin America.



As my findings have shown, the rapid increase in oil prices would spillover into other major sectors of the economy and fueling headline and core inflation while at the same causing a slowdown in Malaysia’s economy. This period of stagflation would limit the use of fiscal and monetary policy to solve short-term economic problems in the country. On top of that, many economists have argued that increasing interest rates to put a lid on inflation may not be an option as inflation is not driven by demand but by increases in costs. The best solution would be to open up the Malaysian economy by fostering more open competition, freer trade, and the removal of price controls. This would enable the retaining of human capital, the increase in domestic firms’ competitiveness, and a better allocation of scarce resources. Yet for authorities to do so, a lot of political discipline is needed as beneficiaries from the current system groups would firmly campaign against such a move. As usual, there is no such thing as a free lunch and short-term sacrifices need to be made to guarantee long-term prosperity.

[1] Daniel Gross, September 24, 2007, The Greenspan Gospel, Newsweek, Inc, Vol. CL, No.13, New York, pp 17

[2] Tee Lin Say, July 26, 2008, Oil – how low can it go?, The Star Newspaper, No. 17899, BizWeek, pp12

[3] Daniel Gross, June 16, 2008, Why It’s Worse Than You Think, Newsweek, Inc, Vol. CLI, No. 24, New York, pp17-27

[4] Paul Roberts, June 2008,Tapped Out, National Geographic, Vol. 213. No. 6, National Geographic Society, United States, pp87-91

[5] Roger A. Arnold, 2008, Economics 8th edition, Thomson South-Western, Thomson Corporation, United States of America

[6] McConnell & Brue, 2008, Economics, McGraw-Hill/Irwin, The McGraw-Hill Companies Inc, New York

[7] Malaysian Institute of Economic Research, Mier growth forecast lower than Government’s target, Starbiz, The Star Newspaper, 18 July 2008, No. 17891

[8] Fintan Ng & Suraj Raj, Emerging economies still rely on the super powers, Special Focus, The Star Newspaper, 9 June 2008, No. 17852 pp15

[9] Frederic Mishkin, 1997, Strategies for controlling inflation, National Bureau of Economic Research, NBER working paper series, Working paper 6122, Cambridge

[10] Fintan Ng, Rates: To raise or not to raise?, News, The Star Newspaper, 25 June 2008, No. 17898, pp5

[11] Loong Tse Min, Two-pronged impact, Starbiz, The Star Newspaper, 29th July 2008, No. 17902, pp3

[12] Izwan Idris, Bank Negara holds off raising rates, Starbiz, The Star Newspaper, 26th July 2008, No. 17899, pp1

[13] Alan C. Shapiro, 2005, Multinational Finance 5th Edition, John Wiley & Sons, Inc, United States of America p36-37

[14] Yeow Pooi Ling & Yvonne Tan, Rocky road ahead for Asian currencies, Starbiz, The Star Newspaper, No. 17890, p8

[15] Roger A. Arnold, 2008, Economics 8th edition, Thomson South-Western, Thomson Corporation, United States of America

[16] Santha Oorjitham, On managing and allocating subsidies, The News Strait Times, 18th June 2008, No. 10597, p22-23

[17] Daljit Dhesi, Strong spending seen despite volatile market, Starbiz, The Star Newspaper, 28th January 2008, p5

[18] Tricia Yeoh, ‘Resource curse’ leads to wastage, Starbiz, The Star Newspaper, 23rd July 2008, p2

[19] Alan Greenspan, 2007, The Age of Turbulence, Allen Lane, Penguin Group, England, p48

[20] The Economists, The new colonialist, The Economist Newspaper Limited, London, 15th March 2008, volume 386, number 8571, p13

6 Responses to “Impact of High Oil Prices on the Malaysian Economy”
  1. chai liang says:

    who is the author for this article? full name please…

  2. Saiful Azlan bin Abu Hassan says:

    can i get the full report of this articles. I want to see the figure and the table…plz

  3. jamesesz says:

    Dear Saiful,

    I am extremely sorry for the extremely late reply.

    I have been super busy recently. Please find the link to the pdf version of this assignment below

    You will be able to view the graphs there.

    Thank you.


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  1. […] Posted by jamesesz on March 23, 2009 Impact of High Oil Prices on the Malaysian Economy […]

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