Retail oil price hike imminent, GE will have to wait

So much speculation about the General Elections will be held first quarter of 2008. It is because the last GE was held on 21 March 2004 and March 2008, would mark the exact four years, which is the average and ‘fashionable’ period in between the full parliamentary terms before a compulsory GE is required to be held within sixty months full term of the last one.

However signs are not showing in that direction. Crude oil prices have been galloping now, very recently almost breaching the USD 90.00/barrel mark. At the moment, it has been lingering at the level of almost USD 88.00/barrel. There have been projections that the crude oil price will hit above the much feared psychological level of USD 100.00/barrel early first quarter 2008.

Therefore, the domestic retail petrol price hike is very eminent. At the current almost USD 88.00/barrel crude oil price, Government is already more than double the subsidy on the domestic retail petrol prices, since the last sharp increase of RM 0.30/litre to RM 1.92/litre, early last year the consumers paying at the moment.

Domestic Trade and Consumer Minister Dato’ Shafiee Afdal confirmed this domestic retail petrol price hike speculations today. The Star has the story about this:

MYT 5:40:09 PM

Get ready for higher fuel prices: Shafie

SEMPORNA: Malaysians should brace themselves for the prospect of higher fuel cost in view of the increasing world oil prices.

Domestic Trade and Consumer Affairs Minister Datuk Shafie Apdal said the Government may not be able to continue subsidies in view of the high international oil price and other factors.

Shafie, however, assured that the Government will keep its promise not to increase oil prices this year despite the rising international prices.

“High cost of fuel is not only affecting oil-importing countries but also oil-producing countries like Iran,” he said, adding that weather situations as well as wars were forcing international oil prices to rise.

“Our oil reserves could only last us for about another 10 to 15 years,” he told reporters at his Hari Raya open house here.

Shafie said the Government was taking steps to reduce the country’s reliance on oil by encouraging the use of alternative renewable energy, among other steps.

He said the alternative energies being adopted included the use of bio-diesel as well as solar energy in rural areas.

People must be prudent in the use of fuel and prepare themselves for any increase in fuel prices that could be expected some time in the future, he added.

The Malaysian economy will suffer a major shift in the inflation index as cost of production and operation of almost everything would be immensely affected by this domestic retail petrol price hike. As is, except for three sectors, which is primary products such as rubber, palm oil and oil and gas, the other sectors have had very little growth, especially construction and property. Even the backbone of the economy which is manufacturing is stagnant and this much reflective of the low investments from abroad, in favour of countries in the ASEAN region such as Indonesia, Thailand and Vietnam.

Industries such as logistics, which is heavily dependent on fuel prices would be severely affected by these new developments; cost of operations will increase and create a spiral effect on the cost of other products and services.

This is The Star‘s report on Malaysia Airlines with regards to this sharp fuel price hike:

Airlines shares under pressure

PETALING JAYA: Volatility in the oil market over the past few months has kept the world on the edge. Oil prices settled at a fresh record high of US$87.48 on Tuesday triggered by a weaker dollar and tensions between Turkey and Kurdish separatists in northern Iraq.

Consequently, shares in airline companies, for which fuel is a major cost component, were marginally lower in anticipation of higher fuel prices slashing profit margins.

According to Bloomberg data, jet fuel rose 3.5% to a record US$98.05 a barrel on Tuesday, the biggest single day increase since February 2006.

Analysts said some selling pressure was seen yesterday as investors worried earnings of airlines would be affected if oil prices continued to surge. They said the costlier oil was expected to weigh on the airlines’ earnings outlook

OSK Investment Bank analyst Chris Eng said airlines with hedging strategies in place would better weather high oil prices.

However, with the current oil prices, the bank believed airlines would soon raise their fuel surcharges.

“Jet fuel prices had narrowed their margins earlier but have now almost touched US$100 per barrel with the recent spike.

“We believe the airlines are still enjoying strong profits given demand growth for air travel despite the hike in fuel surcharges.

“Our fair values are conservative but we have a ‘buy’ call for Malaysia Airlines and a ‘neutral’ call for AirAsia Bhd,” he said.

In an e-mail reply to StarBiz, Malaysian Airline System Bhd (MAS) managing director Datuk Idris Jala said oil was the single largest cost element for MAS, representing 30% of its operating cost. He said any increase in oil price would unfavourably impact its financial position.

“We hedged 60% of our fuel requirements at US$62 per barrel. We recover part of the fuel cost through a fair and competitive fuel surcharge in line with the industry.

“We have also implemented the best practices as per the International Air Transport Association’s guidelines on fuel efficiency,” he said.

Idris said industry-wide, the higher oil price was expected to be offset by stronger-than-expected demand for passenger traffic and a general improvement in the airlines’ financial performance.

He said MAS would monitor the oil price situation closely and watch what other airlines were doing before deciding if it would increase its fuel surcharge.

“However, it is important to note that fuel surcharge only offers partial relief from the price of jet fuel,” he added. MAS has hedged 20% of next year’s fuel requirement at US$69 per barrel.

CIMB Research said investors in airline stocks should not be unduly worried despite the substantial increase in oil prices since early 2007.

“In a strong demand environment, airlines have an arsenal of defences that will limit the hit to the bottom line, including raising fuel surcharges and traditional hedging instruments,” it said.

In Seoul, Korean Air Lines Co fell the most in two months on concern costs may rise as oil prices climbed to a record. Its shares fell 4.82% to 73,000 won.

Despite two economic development corridors launched and another soon, the affects of these planned multi billion Ringgit economic development plans have not trickled down on the hands of the man-on-the-street. So is the Ninth Malaysia Plan (RMK 9) projects announced early last year.

The likeliness of the Government maintaining the “Feel Good”, despite media like the Media Prima Group trumpetting the message across boldly, the much talked about unsustainable factors are seriously doubtful within the short term. More over, Barisan Nasional is under tremendous pressure to retain its 90% control of the Dewan Rakyat, since the 21 March 2004 thunderous landslide General Elections results given to the newly succeeded Prime Minister Dato’ Seri Abdullah Ahmad Badawi then.

It seems that PM is unable to fulfill most of what had been promised in the BN 2004 GE manifesto. Thus now, on top of the inadequate deliverance on the last manifesto, BN has to face the people again but added challenge of increased petrol price hike. That is not too favourable variable for the PM to take BN and face the people.

It is not likely that PM (who is not known to “take the bull by its horn”) will take BN head on to face the Malaysian voters with these accumulated issues and adverse points. Many believe that the Government would bank on stabilising these factors first and bring back the “Feel Good” factor, before they are confident of maintaining a comfortable position at the next General Elections.

Published in: on October 18, 2007 at 03:22  Comments (6)