THEY say, the only permanent thing about life, is change. Thus, any long-term formula for social betterment will tell us that all factors are variable and there are no constants, including our value system. Hence, the popular phrase ceteris paribus, as used by most economists, meaning all other factors remaining equal, is no longer valid.
Lord John M. Keynes, the father of Keynesian economics, went on further to say that in the long run, we will all be dead.
The oil price, which has been high for much of the 1990s, has nose-dived recently, from about US$113 (RM361) per barrel several months ago (June to be exact) to about US$80 per barrel in mid-October, a significant decline.
This marked drop has tremendous implications to countries which rely heavily on oil revenue. A country is said to suffer from Dutch disease if it is heavily reliant on earnings from commodities, oil included.
One factor identified for this sudden development is the increase in supplies of oil and the discovery of shale oil and shale gas deposits in the United States. The US has pumped more oil now, about 60 per cent higher than its level in 1986. It may not need to import oil any more from Africa.
With advances in energy-efficient technology (thus, reducing consumption) and prospects of better supplies, energy prices may be bearish. In addition, some countries, like Iran and Iraq, are cutting their oil prices so as to maintain market share.
At the back of a more uncertain world economy, especially of Europe’s uncertain economic growth, and China’s attempt to curb potential inflation by going for more sustained growth (seven to eight per cent), the demand for oil may be quite dampened.
Of course, the drop in oil prices may be good for the net oil importing countries because their cost of imports will be reduced and the savings can be used for other productive purposes. Additionally, their costs of production will be lower and thus support a higher growth potential.
Oil prices have been the cause for much of the volatility in the world economy beginning in 1973 (leading to imported inflation), in the mid-1980s (decline in petroleum prices), and later in 2008 (it reached a high of US$148 per barrel).
When oil prices are high, income is transferred from net oil importers to exporters, and the worst affected were the low-income nations, such as Pakistan and Bangladesh. It is a boon to oil exporters and a bane to oil importers.
The high oil price has caught Malaysia in a subsidy mentality, a culture that is difficult to erase since society has taken it as a given. This is a past legacy which the current administration has to rationalise.
To make it worse, we have taken that facility as permanent, and this has made us less cautious on our petrol consumption. To make it even worse, the matter of subsidy rationalisation has been quite politicised.
While we are on the same subject, this sudden drop in the oil price has brought an immediate risk to our budgetary target. The current price may be way below the projected oil price level for this year and next year, the bases of our public sector revenue projection.
If the current price level persists or even declines further, we may not be able to achieve the targeted deficit of 3.5 per cent and three per cent, this year and next year, respectively.
Looking at international experiences, the high oil price by itself does not ensure that the current account (external balance) and the public sector budget will be in balance or surplus.
Venezuela and Indonesia, major oil producers, have budget deficits of 12.2 per cent and 2.2 per cent in 2014 (The Economist, Oct 11th–17th, 2014). However, Saudi Arabia does register surplus in these two key balances of the national accounts.
Norway, a country that is a model of good national economic management, has invested all of its petroleum earnings and not used it for current consumption. Its future generation will, therefore, enjoy the earnings from those investments once its oil reserves become depleted.
This means that Norwegian ownership is high in both financial and fixed assets in Europe and elsewhere, ensuring a reasonable and sustained standard of living for its future generation.
It is, therefore, quite critical that our government be committed to its oil subsidy rationalisation and pursue it religiously. Yes, I do mean religiously, because we have a duty to our future generations, who have equal right to the earnings from our nation’s natural resources.
We should not forget that we are able to enjoy the benefits from natural resources now for the simple fact that our forefathers did not consume all of them during their time. If they did, we may not have much to support our living standards now. Similarly, we need to reserve much of our natural resources, oil deposits and forestry in the main, for the benefit of our future generations, too.