The Impacts of Increase in the Domestic Petroleum Prices on Cost Production in the Agricultural and Agro-Based Sectors

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ABSTRACT

By using an input-output model, the present paper examines the impacts of increase in the domestic petroleum prices on cost production in the Malaysian agricultural and agro-based sectors. This study simulates the different scenarios of the petroleum price changes on sectoral cost production, which comprises of domestic materials cost, imports and labor. The simulation results indicated that the agricultural sector particularly fishing, forestry and logging products, as well as oil palm primary products industries are mostly affected by the increase of the domestic petroleum price. These industries are significantly affected by domestic petroleum price increase because they consume large amount of petroleum products as intermediate inputs in their production process.

Keywords: Input-output analysis; Domestic petroleum price; Leontief price model.

I. INTRODUCTION

Malaysia's economy, like the other developing countries, used large amounts of energy in its production sectors as intermediate inputs especially in the manufacturing and transportation sectors. The expansion in these sectors have increased the final consumption of energy which grew at 7.8 per cent annually from 1,167.1 petajoules1 (PJ) in 2000 to 1,699.8 PJ in 2005 as shown in Table 1. Among the energy types, the petroleum products were intensively used by the production sector, which accounted about 67 per cent of the total energy used in 2005.

Petroleum products are mainly consumed by local industry, transport and household sectors, which absorbed nearly one-half of the total production. The industrial sector is the largest energy consumer, which utilized 37.1 per cent of the total final energy demand in 2000 and increased to 38.2 per cent in 2005. Industries such as rubber, wood, glass, cement and food processing recorded among the highest energy consumers.

Recently, the increase in petroleum product price was among the most topical issues in Malaysia, even though they remained relatively low in comparison to its neighbors in the ASEAN region, except for Brunei. For the last two years there has been a significant rise in the domestic petroleum price in Malaysia. The retail prices of petroleum, diesel and liquefied petroleum gas (LPG) had increased six times as announced by the government from October 2004 to March 2006. Between this period of time, the retail prices of petrol and diesel increased to about 40 per cent from MR 1.37 to MR 1.92 per liter and from MR 0.781 to MR 1.581 per liter, respectively, as shown in Table 2. The main reason that lead the government to cut down the subsidy was to reduce the government's burden from the price subsidy given to consumers, hence the increase in the domestic petroleum product prices. This measure was taken due to the increase of the world crude oil prices and Malaysia imported high volume of the petroleum. By reducing the price subsidy which subsequently increases the retail petroleum and diesel prices, the government expects to save RM4.4 billion a year, and this saving will be spent on other development projects mainly for improving the public transportation systems.

The government's decision to increase the prices of petroleum products caused pressure on consumers and manufacturers in terms of household expenditures and production cost. Higher oil and petroleum prices will definitely have direct and indirect impacts on the national economy. Direct impacts are the increased in the procurement expenses by manufacturers for purchasing oil or petroleum as direct inputs. Besides that, indirect impacts include the changed prices paid for other products and services, which pass along the supply chain due to higher fuel costs in the product prices.

Under normal circumstances, manufacturers tend to increase their goods and services prices as their cost of production increases; thus the increased cost directly affects the consumers. But if the increase in the cost of production is small, manufacturers will normally absorb part of the cost, thus narrowing profit margins. …