TO REVIEW THE IMPACT OF LOWERED WORLD’S OIL PRICE

OPEC believed that world's oil price might soar through USD 200 per barrel due to declining investment in oil and gas operations.

Such was the statement of OPEC Secretary General Abdalla El Badri in London (27/1) without explaining what would happen; but El Badri’s statement did no it jack up global oil price. West Texas Intermediate (WTI) America’s benchmark oil weakened by around 3%.

So far price of oil at the world’s market dropped close to 50% last year driven by Saudi Arabia and other OPEC member who stated that they would not reduce output capacity in spite of supply demand gap between supply and demand.

Meanwhile the International Energy Board (IEI) based in Paris state that lowered oil price might hold back investment in all energy operation activities. IEA set forth reasonable anxiety that decline of investment might end up scarcity of oil in the next rew years, but the price upjump to USD 200 never seemed to happen.

To illustrate, WTI delivery contract per March strengthened by 1.3% to become USD 46.19 per barrel in New York Merchantile Exchange while price of Brent for delivery of March 2015 also rose to become USD 48.95 per barrel in ICE Future Europe London.

According to EI Badri, to day there was around 1.5 million barrels of over supply per day at the global oil market and open to talk countries other than the 12 members of the KARTEL to overcome the problem. OPEC was expecting the market would be stabilized by reduction of supply, not increasing demand.

Because of failing oil price, investment in oil industry was predicted to drop by USD 100 billion or around 15% this year against 2014. This was IEA calculation exposes at WEF in Davos, Swiss on January 24 last. Meaning oil price at USD 45 per barrel was only temporary trend.

World’s oil price which had been weakening since last year was predicted to increase once more this year. The potential of oil price stemmed from a concensus made. Naturally by IEA calculation which was different from analysts’ survey

Based on consensus, international oil price could still rise to USD 90 per barrel for WTI; but by analysts survey the average price would be in the range of USD 50 – USD 54 per barrel.

Lowered oil price was a positive thing for net importer of oil, but if the country still relied their export on other raw materials, the impact would be just as bed. Take for example Indonesia; most of Indonesia’s export were primary commodities which were substitute to oil

Analysts saw that it would be hard for oil price to once again break through USD 100 per barrel. Government’s assumption of US 70 per barrel in State Budget was rated as unrealistic.

The cause of falling oil price was over supply, but it did not mean that oil price could not rebound. Many analysts saw that oil price could once again rebound to USD 70 USD 90 per barrel

It was interesting that amidst the polemic over future oil price, there was different opinion from President of Goldman Sach Group Gary Cohn who estimated that global weakening of oil price might continue, even below USD 30 per barrel.

Goldman Sach even predicted lower price of oil. For information, Gary Cohn was an ex-oil trader. As footnote. Us benchmark of oil Price, WTI, had dropped by 44 cent to become USD 45.15 per barrel at New York Merchantile Exchange which was the lowest point since March 11 2009.

Since June 2014, price of oil had sank by nearly 60%, to be exact after OPEC refused to axe output and the USA pumping out fastest in more than 3 decades.

According to Cohn, the commodity was “extremely strong” as buyer countries and seller countries were in a different position compared to the condition some years ago. Oil price sank again as IMF lowered global economic projection and China was moving at lowest speed in the past decade.

Although lower oil price would help to jack up growth, IMF believed that the benefit would be axed be negative factors. To oil importer countries the benefit would be axed by depreciation of their currency against USD which made commodities quoted in USD more expensive.

In their latest report IMF stated that the prospect of growth in those countries depended how they could take advantage of the low oil prices to make ends meet.

Evidently low oil price June 2014 dis not managed to jack up China’s economy. On January 2015 last the Government of China announced China’s economic growth slowed down to become 7.4%, the lowest in a quarter of a century below Beijing’s target of 7.5%.

In this year 2015 the challenges faced by China would remain high compared to the year before. How about Indonesia? To Indonesia, fallen oil price would help the Government to lower local oil price and reduce oil subsidy.

Unfortunately the momentum to end subsidy was not fully benefited by investors. The main handicap to investors was continued currency volatility due to strengthening USD and uncertainty when the oil price downturn would end.

If low oil persisted, a condition as such would reduce room for fiscal from elimination of oil subsidy. The Government of Indonesia had estimated budget for infra-structure up to 1% of GDP assuming oil price was USD 70 per barrel. The only thing was that room for fiscal would narrow down if oil price was USD 50 per barrel.

There would be big change in fiscal balance which would help the Government to survive from uncertainty of oil price. Expenditure for infra structure was no longer by subsidy for oil.

Lower oil price was lake “a two side blade” for Indonesia; on the one hand it would reduce current account deficit but on the other hand it would lessen fiscal flexibility and income.

Lowered import due to less domestic demand and depreciation of Rupiah was the cause of reduced deficit in current account

Deficit oil and trading amounting to 1,5% of GDP implied there was reduction of deficit by 1.5 basic points for every 10% lowered oil price. Current account deficit would be reduced to below 2.5% barrel.

The Government was expected to be wise in responding to the changing world’s oil price so as not to bring worse negative affect on national economy. The policy of reviewing local oil price every 2 weeks might not be necessary because lowered local oil price did not bring notable effect on commodity prices in the market. (SS)

Business News - February 6, 2015