Iran-Israel conflict impact on Malaysia oil trade

WAR and conflict are terrible things. In recent months, we have seen the rising conflict between Iran and Israel due to the situation in the Gaza Strip, which then escalated due to Israel’s military strike on an Iranian diplomatic compound in Syria. Yesterday, we may have seen this conflict escalate once again due to Iran’s retaliatory military strike on Israel for the above reasons. Although what is happening is thousands of miles away from Malaysia, it can have a drastic effect on our country, both positively and negatively, especially when it comes to our oil trade.

During the Russia-Ukraine war, global oil prices spiked, with prices rising above US$100 at their peak due to sanctions placed on Russia. A similar pattern may emerge if Western countries, particularly the United States, decide to increase sanctions on Iran. Iran produces around 3 million barrels of oil a year. Goldman Sachs predicts that a cut of 1 million barrels a day of oil could increase oil prices by US$10, a development that is worrisome if heavy sanctions are placed. Moreover, Iran controls most of the islands in the Strait of Hormuz, a critical chokepoint. If Iran were to impose a blockade, it could prevent oil shipments, potentially shocking the entire market as 17 million barrels travel through it every day, hence leading to an increase in oil prices.

Moreover, this increase in oil prices has both positive and negative ramifications for Malaysia. On the downside, even though Malaysia is an oil-producing country, much of the oil used for downstream production in Malaysia is not local oil. We produce very high-quality Tapis oil, most of which is exported, while we use lower-quality oil for most of our local uses. Consequently, similar to the price hikes during the Russia-Ukraine conflict, we may see an increase in fuel prices. For instance, on March 10, 2022, fuel prices increased to RM3.75 from RM3.27 on February 24 of the same year, a staggering 0.48 sen increase per litre in a short period. This impact could have been more severe if there was no price ceiling and if the Malaysian government had not subsidised fuel prices, which is an expensive burden on the government. Rising fuel costs mean increased government spending on subsidies.

On the other hand, there are potential benefits for Malaysian oil and gas companies. An increase in global oil prices can significantly boost revenue due to a shortage of supply. For every one-dollar increase in oil prices, Malaysia can gain RM320 million in revenue. This additional income can help improve the Malaysian balance sheet. The extra funds could be used to support more government projects that benefit Malaysians, such as investments in infrastructure and education. This financial boost could be instrumental for the Madani government as it plans to implement the Madani framework and NIMP, enabling more funds for their projects next year. Additionally, the increased revenue could also help reduce our national debt.

At the end of the day, whether it is more positive or negative depends on the balance between the revenue made from the increased price of oil and the increase in expenses that it may cause the government. – April 16, 2024.

* Yugendran T Kannu Sivakumaran reads the Malaysian Insight.

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