This article first appeared in The Edge Malaysia Weekly, on December 21 - 27, 2015.    

IT may not be an exaggeration to say that never in the history of Malaysia has the movement of crude oil prices had such a great impact on its economy.

Having substantial hydrocarbon (oil and gas) reserves is certainly a blessing to Malaysia and it is usually the envy of others in the region. However, the black gold seems to have done more harm than good in the past 16 months.

The low oil prices pushed Malaysia to the verge of a possible downgrade by Fitch Rating — the first time since the 1997/98 Asia financial crisis — amid concerns that the government’s fiscal deficit would widen further with less oil revenue to spend. That put tremendous pressure on the ringgit, apart from the negative perception political uncertainties bring.

In June when Fitch was due to review Malaysia’s outlook, we managed to escape the downgrade. Instead of a downgrade, it revised the outlook for Malaysia’s A- grade to stable from negative, citing the Goods and Services Tax and fuel subsidy reform — which  would be supportive of the fiscal finances — as the reason.

But it was just a brief respite for the country. Crude oil prices continued to head south as oil-producing countries — including members of the Organization of the Petroleum Exporting Countries (Opec), led by Saudi Arabia — refused to cut production. The fall in oil prices accelerated in the second half of 2015. This kept the ringgit well below 4.2 against the US dollar, making it the worst performing currency versus the greenback globally.

The thorny economic issues — the nation’s shrinking coffers and depreciating ringgit — mainly caused by the collapse of the oil prices, are already tough enough for the policymakers to deal with at the moment. On top of that, the oil price slump has brought about adverse effects on the micro-economic level.

The domestic oil and gas industry has grown notably over the last 15 years, thanks to the buoyant crude oil prices since the turn of the millennium.

Before that, oil prices were within the US$20 per barrel range most of time, except in 1990 when it soared to US$40 due to the Gulf War. Opec’s target then was to maintain oil prices at between US$18 and US$25 per barrel and bring normalcy to the market after the two oil shocks in the 1970s had dragged the world into recession.

The local oil and gas (O&G) industry began to flourish in 2004 when crude oil prices were on a steady climb. An increasing number of Malaysian companies, with expertise or otherwise, were jumping on the O&G bandwagon as national oil company Petroliam Nasional Bhd (Petronas) and other oil majors awarded more jobs to the local firms.

At the initial stage, most Malaysian O&G companies were mainly involved in the chartering of supportive vessels. Some have climbed the value chain over the years — getting into the fabrication, exploration and specialised vessel business — like SapuraKencana Petroleum Bhd, Dialog Bhd, Bumi Armada Bhd and Yinson Bhd, plus the small but nimble ones such as Petra Energy Bhd and Uzma Bhd.

The O&G boom helped fuel domestic economic growth, creating employment and business opportunities within the supply chain.

Now, these once high-flying companies are facing strong headwinds. Jobs and chartered contracts are getting scarce as oil majors halt new exploration and production activities. Margins are being squeezed because clients are renegotiating the contract terms.

Order books are depleting and many O&G companies are financially stressed, as reflected by the quarterly earnings numbers of the public-listed firms on Bursa Malaysia. Red ink is showing in their accounts, while share prices tumbled to multi-year lows. It is one sector on Bursa that investors are shying away from.

The O&G industry has also embacked on job cuts and had its second round of retrenchment in the past 1½ year.

Shell, for example, is slashing 1,300 upstream jobs — about 20% of its workforce in Malaysia — over the next two years. Petronas and UMW Oil & Gas Corp Bhd have put a freeze on hiring. Industry players estimate that at least 7,000 in the O&G sector, particularly contract workers, will be out of jobs.

Despite the current slump, it does not mean that the country should not grow O&G industry further given its sizeable hydrocarbon reserves.

Nonetheless, the downturn should be taken as an experience — a painful one — for the O&G companies to understand the cyclical risks of this capital-intensive industry and learn how to mitigate them.

Last week, Brent crude dipped to US$36.33 per barrel — the lowest level since December 2008. Again, this raises the worry that the national budget for the coming year may be inadequent as oil prices have dipped below the government’s target price of US$48 per barrel.

When asked by the media last week, Minister in the Prime Minister’s Department Datuk Seri Abdul Wahid Omar said the government might have to revise the 2016 budget if oil prices stayed below the US$40 per barrel level.

If that happens, this will be the second time that Malaysia had to revise its national budget due to the falling oil prices in less than two years. The government trimmed the 2015 budget by RM5.5 billion in January as oil prices had halved compared with the assumption of US$100 per barrel.

A revision of the national budget is a sensible move for the policymakers to make. On the flip side, this reflects the country’s dependency on oil revenue.

Oil prices did collapse in 2008 at the onset of the global financial crisis and it jolted the industry players. But the O&G industry bounced back in less than two years because  of a V-shape recovery in crude prices.

It is different this time round. Oil prices have stayed below US$60 per barrel since October last year, ruling out the likelihood of a repeat of the 2009 V-shape recovery. Citi Research predicts that US oil prices could drop further from the current low to US$20s while Brent could decline to test the US$30 level if there is no production cut in sight.

What goes up must come down, and that applies to prices too —something policymakers should understand.

But whether or not crude oil prices will ever bounce back to US$50, US$80 or US$100 per barrel, it will not be a matter of concern if the government spends within its means.

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