Falling Oil Price - Good & Bad News

First the good news to the consumers - oil and commodity prices are falling.

Then the bad news to the government - it means a shortfall of billions of Ringgit in revenue. Crude oil price dipped as low as US$67.40 per barrel last Thursday. Palm oil prices have fallen by as much as 65%. In March, it was at RM4,486 per ton. Last Thursday it was US$1,565.

Now, the scary part - when the government planned its 2009 budget, it did so by calculating its revenue based on oil prices at US$125 per barrel. To take it worse, petroleum-based revenue account for 40% of the government’s projected income.

The full impact from falling petroleum price would only be felt in 2010 as government revenue should remain good next year because petroleum companies would pay the taxes based on their 2008 incomes, where on average the crude oil price remained at a reasonably high level.

However, in 2010 it could become an issue if the crude oil price in 2009 were to stay at US$70 per barrel level as the companies will pay taxes and dividends based on a lower crude oil price. (Based on the above, there is definitely a case for a review of 2009 budget although the full impact would only be felt in 2010!)

Lastly, the government must find new streams of revenue to meet this shortfall to balance the book!