DECEMBER 4 — Just when everyone took delight in the lower fuel prices on Monday, both the local stock market and the ringgit tumbled.

Many people were confused: Isn’t it great that petrol prices are lower now? The government can subsidise less and our budgetary deficit could be narrowed. People no longer need to worry about the additional financial burden as goods prices are expected to come down and the impact of GST tamed.

This should have been a piece of wonderful news in any way, but why did the equity and money markets slide? As if that is not enough, experts said the country’s economic prospects were gloomy.

The answer couldn’t have been more straightforward: Malaysia is an oil-producing country with oil revenue making up about 30 per cent of the government’s spending budget. Although the government will have less of fuel subsidy to worry about, the saving would not be enough to offset drastic loss in revenue.

International oil prices have plummeted from more than US$100 per barrel to under US$70 today. Economists estimate that the government’s revenue will shrink by RM2 to RM3 billion for every US$10 drop in international oil prices.

Petronas president Shamsul Azhar Abbas has put it very frankly that the government’s receipt from the national oil company could be RM25 billion short next year, and this is established upon the basis of US$75 per barrel. Some have even predicted crude prices to dip below US$40!

Sure enough some would argue that the current slide is only momentary and international oil prices would rebound soon, and so will not have a major impact on the national economy.

But this notion will never be able to explain the dramatic changes taking place today. The structural changes in oil economics are no longer tied to the periodic changes in output and demand, nor short-term influences from wars or natural disasters.

We will need to look at this thing called shale oil.

The traditional way of oil rigging that has been carried out for hundreds of years now is derived from subterranean or submarine oil fields.

But that is not all, for we have another source of petroleum that has so far commanded little attention: extracting the petroleum and natural gas from shale.

This new extraction method used to involve exorbitantly high cost and environmental impact, but with new technologies, the operating cost has been significantly brought down for mass production.

The United States is the primary producer of shale oil with an estimated 70 per cent of total global deposits enough for the next 300 years.

The US daily output has jumped from 6.4 million barrels to 7.3 million barrels, with the additional output entirely from shale oil. It is a matter of time the US will eventually emerge as the world’s number one oil and natural gas producer.

Such a change puts the US in firm grips of global energy supply once again.

The US has exploited shale oil to bring down international oil prices not only for its own economic needs but also with a strategic objective: pinching its rivals Russia by suppressing oil prices.

Currently one of the biggest oil and natural gas producers in the world, Russia has experienced phenomenal economic boom in recent years thanks to the sharp rise in natural gas prices. This has given the country impetus to once again expand its military presence in confronting the US and Western Europe. The armed conflicts in Eastern Ukraine and several other Eastern European states are reminiscent of the post-WWII Cold War.

With oil prices now nosediving, the Russian economy is suffering a chill, the rouble fast depreciating, foreign reserves shrinking, banks and companies on the verge of bankruptcy.

Other minor producers such as Malaysia can only look to high oil prices for a slice of the prosperity, but even this is less promising now given the stiff competition from other producers.

Malaysia’s oil-dependent economy is in for a bigger blow in the months to come. It is imperative that we make essential adjustments to our economic development strategies to stay afloat. The erstwhile model that heavily relies on oil revenue is no longer sustainable and it is time for us to expedite economic liberalisation and diversification.

China, meanwhile, is a direct beneficiary of low oil prices. The country has acted fast to import large quantities of cheap petroleum to boost its stockpile. China has been able to lower its manufacturing cost thanks to the low oil prices, thus enhancing its export competitiveness while relieving the spiral inflationary pressure. — Sin Chew

* This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail Online.