Oil, Spending … And The Economy

Posted: 19 December, 2008 in Babbles & Rants
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At first, I smiled after reading the headline …

“Oil falls below US$40 despite OPEC output cut”

This would mean lower fuel prices in the near future. But then, I asked myself, how or why did the price of oil dropped so much after going up so high.

A few months ago, the price of oil was near the $150 region (I can’t recall the exact figure) and I was made to belive that there was not enough oil to go around. As demand exceeds supply, the price of the fossil fuel skyrocketed. 

Now, OPEC countries already cut down their daily production, still the price of oil goes down. I am thinking now, what happened to all the demand?  The high demand that caused the sharp increase in oil prices earlier this year. It looks like there are less people wanting to buy oil, or they just can’t afford the high oil prices anymore.

And. that thought worries me.

Most people know that the US is the greatest consumer of oil and the falling demand for oil relects the worsening  US economy. Here, in Malaysia, as published in various medias, we are told that Malaysia will not be affected much  by the downturn. Half of me want to believe that, the other half finds it difficult to take that for a fact, but I think I understand why our leaders said what they had to say.

Malaysia is a country that depends a lot on exports, either products made from local raw materials, or products that are assembled here and re-exported to other countries. The US is a major trade partner with lots of our products made it to the American shores. When the US economy shrinks  (the EU doesn’t look any much better), spending in that country would reduce to buying necessities. We can make things, but they (the US, or other nations for that matter) will not want to buy them. There would be a pressure on our exporters to reduce output, leading to reduced earnings … even cutting on production. Unemployment comes to mind after that.

Foreign direct invesment could also shrink because these multinationals will take back what they earned here to save their parent companies. They could even cease their operations here as a cost cutting measure. Again this translates to more unemployment. With more people out of work, there would be less money to generate the economy.

Low demand … reduced production … unemployment … reduced spending … drop in demand  …. and the cycle continues.

Domestic spending is the one thing we hope to help our economy going. As long as spending is maintained, demand will hold, the economy will continue on producing to meet the demands. That will keep the local economy going. Hopefully as long as there’s confidence in the economy, people would still spend. And as said by out leaders, we would not suffer as much. 

The reports and statements made by our leaders does hold some truth to it (though not necessarily the whole truth). The government is doing its best to secure the nation’s confidence in the economy. 

Spend … or you won’t be able to earn to spend.


Cutout from The Star Online:

Published: Thursday December 18, 2008 MYT 1:46:00 PM

Oil falls below US$40 despite OPEC output cut

SINGAPORE: Oil prices fell to 4 1/2-year lows on Thursday in Asia as investor pessimism over global crude demand outweighed OPEC’s largest-ever production cut.      

Light, sweet crude for January delivery was down 15 cents to US$39.91 a barrel in electronic trading on the New York Mercantile Exchange by midday in Singapore. At one point, it fell as low as US$39.19 — a level not seen since at least July 2004.

Overnight, the contract fell US$3.54 to settle at US$40.06 a barrel, after touching US$39.88.

The 13-nation Organization of Petroleum Exporting Countries, which accounts for about 40 of global oil supply, said Wednesday it planned to reduce its output quotas by 2.2 million barrels a day.

But markets had already expected a vastly reduced flow of oil and traders focused instead on troubling economic data that points to a long and severe global economic slump.

”The market apparently had already priced in this cut,’’ said Peter McGuire, managing director at investment firm Commodity Warrants Australia in Sydney. “I think OPEC will have to have another meeting in January, and I wouldn’t be surprised to see possibly a 3 million cut next time.’’

OPEC’s next official meeting is scheduled for March. The group had already announced cuts totaling 2 million barrels earlier this year, also with little effect. The unprecedented production cuts and the market reaction show just how fast energy demand has fallen during the worst economic downturn in at least a generation.

Oil prices have tumbled 73% since July. What started as a crisis in the U.S. sub-prime mortgage sector last year has mushroomed into a recession in most developed countries and a sharp downturn in emerging nations.

Companies across the world are laying off workers and banks are reluctant to lend. Plunging property values and high debt levels have led many consumers to pull back spending.

”I’m worried about growth,’’ McGuire said. “You have to get people spending.’’

Oil prices may fall as low as US$35 a barrel during the next few weeks, he said.

US crude inventories rose slightly last week and gasoline reserves increased as demand stayed below year-ago levels, according to government data released Wednesday.

Analysts had expected crude stocks to fall 900,000 barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

In other Nymex trading, gasoline futures fell 0.45 cents to US$1 a gallon. Heating oil was steady US$1.44 a gallon while natural gas for January delivery was steady at US$5.62 per 1,000 cubic feet.

In London, February Brent crude rose 2 cents to US$45.55 a barrel on the ICE Futures exchange. — AP

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