Oil prices are too high and the global economy may not be able to adjust to levels above $70 a barrel, according to Nor Mohamed Yakcop, second finance minister of oil-exporter Malaysia. The cost of crude rose to new records towards the end of April as tensions with Iran over the country’s nuclear ambitions spooked traders. Oil prices have gained 15% this year with futures peaking at $75.35 on April 24.
“We think the way the prices have gone up and the way they continue to go up is not healthy,” Nor told Emerging Markets in an interview. “Up to $60 the global economy has adjusted quite well, as it goes beyond $70 and possibly to $100 we’re not sure” whether countries can adapt so easily, he continued.
Nor noted that Malaysia, which has 3.1 billion barrels of proven oil reserves will benefit from the short-term effects of rising oil prices but said he’s worried that the cost may cripple the world economy, ravaging markets for Malaysia’s other exports.
“If that happens and there’s a recession in the international arena all countries, whether they are oil importers or exporters, will suffer,” he warned.
Malaysian citizens will be insulated from further rises following the government’s pledge, made following a 20% increase in fuel prices in February, not to allow further upward moves this year.
Indian prime minister Manmohan Singh and ADB president Haruhiko Kuroda are among a plethora of leaders at this year’s meeting to warn that oil prices are one of the few risks capable of derailing the world’s impressive economic progress. Asian importers are particularly susceptible because their spiralling growth rates have led to a thirst for oil that the region can’t supply.
But Kuroda indicated a decline in prices is likely by suggesting they are “unsustainable” at $75 and Yusuke Horiguchi, chief economist at the Institute of International Finance suggested that fears of the impact of Iran withholding oil exports are overblown. Even if the country does decide to restrict the daily flow to one from three million barrels, the loss could be compensated by the limited spare capacity that remains in Saudi Arabia, Horiguchi noted. Besides, the OECD countries have 1.5 billion barrels in reserve, enough to see them through a lengthy siege.
Nor urged more progress in regional cooperation on energy policy, giving particular emphasis to use of alternative fuels. In this respect Malaysia could be a double beneficiary from the jump in crude costs because it is the world’s largest producer of palm oil, which it wants to convert to biodiesel used to power vehicles.
Malaysia plans to open its first plants later in the year to prepare for the mandatory inclusion of a proportion of biofuel in pumps next year.