Oil price rout: Discuss how falling oil prices impact the Singapore economy, businesses and consumers.

The price of oil has plunged more than 55 per cent to under US$50 a barrel since June 2014. This is the lowest price since the depths of the 2009 recession, and some analysts are saying the  rout could continue to US$35 a barrel in the near term. As a net oil importer, the oil price rout affects Singapore at all fronts. In this essay, we will discuss how it impacts our economy, businesses and consumers.

The oil price rout will benefit our current account markedly in view of cheaper crude oil prices. Singapore is a net oil importer. This means that we import more oil than we export. The reason is because Singapore imports crude oil for refinery and then re-exports them to various countries. As a result of the decrease in price of crude oil, the cost of refining it decreases drastically, bringing more profits for firms and Singapore as a whole. Since more money comes into Singapore when foreign countries purchase our refined oil versus less money going out when we purchase crude oil, our current account will improve. For example, a study done by Oxford Economics concludes that  if oil prices fall to US$40, the current account here could grow from the baseline scenario’s 18 per cent to as large as 22.8 per cent of GDP.

Falling oil prices could also help to improve our GDP or economic growth. For Singapore, economists expect growth of 3.2 per cent this year, an improvement from last year’s estimated 2.8 per cent. This is largely on the assumption that cheaper oil will fuel US economic strength, which will in turn power demand for exports, making up for softer growth in Singapore’s other key trading partners China, the euro zone and Japan. Barclays Capital economist Leong Wai Ho sees Singapore exports to the US and industrial production picking up by the middle of this year as lower petrol prices stimulate more US consumer and business spending and, in turn, orders and, thus, Singapore exports.

Diagram

Refer to AD/AS graph showing that an increase in exports will lead to an increase in AD and national income.

However, the decrease in prices of crude oil could lead to disinflation. Disinflation or deflation means a general and in ordinate decrease in prices. In the worst-case scenario, a deflationary spiral can occur if consumers and businesses cut spending in anticipation of further price falls. That slashes businesses’ sales and earnings, triggering wage cuts and unemployment, and more dips in demand and prices.

Diagram

Since AD = C+I+G+X-M, a decrease in consumption (C) will lead to a decrease in AD. Decrease in AD will lead to a decrease in national income. A decrease in national income could lead to unemployment as businesses confidence drops and businesses halt hiring.

But in Singapore’s case, economists are not unduly concerned as long as core inflation, which excludes private road transport and accommodation costs and is seen as a better gauge of everyday expenses, stays in positive territory.

A decrease in oil prices could also lead to a depreciation in our currency. The reason is because should deflation occur, Singapore will have to utilise expansionary exchange rate policy to boost it’s economy. As mentioned above, deflation is undesirable and could lead to other ill effects like unemployment and slump in business confidence. Hence the MAS will likely have to depreciate the currency to expand the economy.

A decrease in oil prices could also adversely affect our trading partners and thus our exports. Malaysia, a net oil and gas exporter, is the sole loser among emerging Asian economies from the drop in crude prices as 30 per cent of state revenues are oil-related. They estimate that every 10 per cent drop in the price of oil takes away 0.2 per cent from Malaysia’s gross domestic product. Since Malaysia is Singapore’s top trading partner, a decrease in their GDP or national income will only mean that they will import less from us. Hence our exports will be affected.

We will next look at how falling oil prices affects businesses.

Not all sectors of Singapore’s economy will gain equally from lower oil prices. A closer look reveals the beneficiaries and losers of cheaper oil.

Petroleum refining, which accounts for 0.4 per cent of Singapore’s GDP, should benefit as feedstock prices drop.Other beneficiaries include petrochemicals and utilities companies, where petroleum accounts for between 15 and 33 per cent of input costs, and industrial users of electricity such as semiconductor plants. Meanwhile, companies for which oil makes up a large part of costs will benefit. These include transportation companies such as SMRT and ComfortDelGro, logistics firms like SingPost, airlines and shipping firms.

But a number of industries that are part of the oil supply chain could be hurt by weaker oil demand – like marine and offshore engineering, which accounts for more than 10 per cent of Singapore’s industrial production.Companies such as Keppel Corp and Sembcorp Marine are likely to be affected. The reason why they are affected is because they supply oil rigs or machinery for the extraction of crude oil. Since oil price decreases, there will be less demand for such orders.

Next we will look at how decreasing oil prices affects consumers.

Consumers will benefit from lower prices. Standard of living will thus improve with cheaper prices. Like motorists the world over, Singaporeans are enjoying lower pump prices, with the commonly used 95-octane grade falling further to $1.79 per litre as of Friday, down 35 cents from last October. Also, businesses and households could enjoy lower electricity tariffs.

As a result of the drop in Malaysia GDP, their currency ringgit could also depreciate. Singapore consumers can also benefit from the cheaper prices in our neighbour. This in turn could help to boost Malaysia’s economy as more Singaporeans choose to spend there.

In conclusion, decreasing oil prices is generally beneficial to Singapore’s economy barring any deflation, benefits consumers due to lower prices and impacts businesses depending on which sector they are in.