CHAPTER ONE

INTRODUCTION

1.0 Introduction
World oil price is controlling by Organization of Petroleum Exporting
Countries (OPEC) which was formed in 1960 with five founding members from Iraq,
Saudi Arabia, Iran, Venezuela and Kuwait. The OPEC member countries coordinate
their oil production policies in order to help stabilize the oil market and to help oil
producers achieve a reasonable rate of return on their investments. This policy is also
designed to ensure that oil consumers continue to receive stable supplies of oil (OPEC
Website). Recently, Malaysia is experiencing with the problem on the world oil prices.
This issue has been discovered since a long time ago and it seems that doesnt have a
solution yet.
Tentatively, a rise in petrol price would cause the cost of production and cost
of living to rise. Most of the studies established that a hike in oil price caused
inflation, higher unemployment rate and others.

The world oil price has been

decreased from year 2012 to 2015. In 2012, the world oil price is 109.45 US dollars
per barrel decreased to 49.58 US dollars per barrel in 2015. There is almost a drop of
59.87 US dollars per barrel within four years (OPEC basket price, 2015). When the
world oil price dropped, it is actually reduced the burden of many people especially
those who are from the lower income group.
Due to the history of Malaysian petroleum industry, the earliest oil recorded
found in Malaysia was made in July 1882 by the British Resident of the Baram
district in the Miri, Sarawak. The oil was official used by the local residents for the
purposes in medicinal. After that, it was used for waterproofing boats and lighting
lamps. In 1910, commercial exploitation arose when the Anglo-Saxon Petroleum
Company which is also the forerunner of the Sarawak Shell nowadays granted the
sole right to explore for petroleum in Sarawak and struck oil in the Miris town. The
Miri was success refreshed with additional efforts to discover other onshore fields.

But, only petroleums traces were found and these were not huge enough to justify
drilling activities. (www.miricity.com.my, 2008)
In short, Malaysia has the 13th largest gas reserves and the 24th largest crude
oil reserves in the world. Malaysia has total domestic capitals of 19.34 billion barrels
of oil corresponding; 25 % of oil and 75 % of gas. In 1 January 2005, crude oil
reserves in Malaysia which including condensates were at 4.84 billion barrels and
natural gas reserves were at 87 tcf. Furthermore, the reserves on gas remained three
times the size of oil reserves. (MIDA, 2005)
The purpose of this study is to determine the relationship between world oil
price and the standard of living in Malaysia. Standard of living refers to the level of
comfort, wealth, material goods and necessities available to a certain socioeconomic
class in a certain geographical area. It is also closely related to quality of life.
According to United Nation Development Programme (UNDP), standard of living is
measured by Growth Domestic Product (GDP) per capita. Other measurements are
human poverty index, unemployment rate, homeland safety index and the purchasing
power index. GDP per capita is used as an indicator of standard of living in this paper
as well. GDP per capita is a measure of the total output of a country that takes the
Gross Domestic Product (GDP) divided by the number of people in the country. GDP
per capita would show virtual performance of the countries when comparing one
country to another country. An increase in GDP per capita showed the growth in the
economy and it is apt to interpret as an increase in productivity. For instance, higher
GDP per capita showed higher standard of living.
World oil price plays a vital role in Malaysias economy because fuel and food
are the core element in Malaysia household budgets. However, it may influence the
GDP per capita and hence the standard of living in Malaysia. Higher fuel prices along
with other price increases reduced the disposable income and social welfare. Easterly
& Fischer (2001) said that rising in almost all food prices and other necessary cost for
human life given their fixed income will produce unfavorable conditions for the
people. This situation happened due to the real balance effect. McConnell & Brue
(2008) stated the inverse relationship between price level and the quantity demanded
of real GDP proven through the changes in the value of monetary wealth. Monetary
wealth of businesses and households, and purchasing power reduced when the price

level in the economy rise. Hence, quantity demanded of goods and services in the
economy decreases.
Today, we can observe that most of the price especially food prices have
increased dramatically. Not only the price of the food but also increased on the rental
house cost, public transportation cost and utilities. Most of the price is increasing with
the increase of the oil price. Once price level and cost of living keep increasing with
the fixed salary given, public is not able to bear such burden. As a result, purchasing
power reduced and hence reduced the standard of living.
On the other hand, according to Cologni & Manera (2005), oil price had an
effect on output growth and inflation. It showed that the higher the oil price caused
lower output growth and higher inflation. However, Arinze (2011) found out that the
influence of the change in the price of petrol on inflation can be proven through the
increase in Consumer Price Index (CPI). Furthermore, world oil price caused food
inflation. Ali and Ramzam, et al (2012) found that there was a positive effect of oil
price on food inflation such as price of cooking oil, rice, wheat, maize and chicken.
All of these would decline the purchasing power and caused lower standard of living.
1.1 Background of study
World Oil Price
In the world crude oil price, the Saudi Arabia is the great affect to the price in year
2014. Past 6 years, the crude oil price has been around 100 US dollars a barrel but is
suddenly collapsed and become below 50 US dollars. The main explanation for this
situation is the simply terms which is the demand and supply. The supply of the crude
oil is increase sharply in this few months. The main factor for increasing the quantity
of crude oil is the United State has become the worlds largest producer of crude oil.
The United State promotes the new technology to increase its crude oil productivity.
Therefore, the United State oil boom had surprisingly little effect on global prices. At
the same time, the demand for the crude oil is not that good. On the other hand, Saudi
Arabia is the one of the question that affects the crude oil price. Like I say before, the
United State is started to increasing the crude oil supply and the demand in no
increase well. So in the market have the surplus of crude oil. The Saudi Arabia does
not want to give out their market share of the crude oil. Therefore, the Saudi Arabia is

permitting the price to collapse. For sure, there are not the best economic interests
from the view maximizing the profit. The main motivation for the Saudi Arabia to
permit the price fall is to put their competitors out of the business. Even it will reduce
the profit in the short term by no cutting the production quantity, but the Saudi Arabia
still wants to reduce the price. The figure below has shown the world crude price in
years 1987 to 2015.

In the graph, we can see that the crude price is starting increasing when the demand
from China is increase. But it was fall when the financial crisis is occurring. The
crude oil starts to increase when the economic is recovery and the civil war in Libya.
In the recent year, the permitting for price fall from Saudi Arabia make the crude oil
price fall from 100 US dollars in year 2010 until now 49 US dollars per barrel. For the
purposes and intents, the Saudi Arabia is now engaged the price war with United
State. It also the member hopes for OPEC.
GDP Per Capita in Malaysia
As we know, the GDP per capita is the gross domestic product divided by the
population in the particular country. It also has an indicator of the standard of living,
with the higher GDP per capita as having a higher standard of living. GDP per capita
is very useful when we use to comparing one country to another because it shows the
relative performance of the countries.

GDP per capita

8000
6000
4000

GDP per capita

2000
0

Years

In Malaysia, the GDP per capita is continually increasing from year 1960 to 2013.
Fortunately, Malaysia is successfully to reduce the high poverty rate and the increase
the income in the country. It makes Malaysia become a high open upper-middle
income country in the world. The accelerated implementation of productivityenhancing reforms to increase the quality of human capital and create more
competition in the economy will be a key for Malaysia secure a lasting place among
the ranks of high-income economics. Therefore, it is the reason that the Malaysia can
be improving it GDP per capita fast in this 55 years.
Consumer Price Index in Malaysia
The consumer price index is the measure changes in the price level of the basket of
goods and services purchased by household. The CPI also has a measurement of
inflation. The basket of goods and the services is determined by the necessary goods
that choose by the particular country. In Malaysia, the CPI is counted by Statistic
Department. The statistic department have collected the data shows that Malaysia CPI
in continually increase from year 1960 to 2014. It is also impacted our country
economy. It is because the higher price that consumer pay, the lower standard of
living of consumer is. The figure below has shown the CPI in Malaysia from year
1960 to 2014 by based on year 2010.

Consumer price index (2010 = 100)

120
100
80
60

Consumer price index (2010 = 100)

40
20
0

YEARS

The figure had shown that the CPI Malaysia is increasing from 21.29 in year 1960 to
110.4 in year 2014. It is a great number of increasing and meaning that the standard of
living in Malaysia in become higher and higher. The price of the necessary goods has
become more expansive compare with 55 years ago. It will impact our GDP or as well
as the GNI.
1.2 Motivation of study
Since the previous studies on Malaysia have been done by Yip, Lim & Hassan
(2009) found the relationship between the oil price changes and GDP growth. In the
same studied also found that the increase of oil price will cause economic slowdown
but economic boom will not happen. Besides that, there are few studies that increase
in oil price will cause inflation. There are not many studies on the relationship
between the changes of world oil price and the standard of living in Malaysia. Based
on the findings of this study will contribute to the policy maker and the producer to
make decision on setting the price of goods and they will know more what type of
relationship between both of them.
1.3 Problem Statement
The relationship between the world oil price and a countrys GDP has been
shown in various academic research. Based on Lescaroux and Mignon (2008) study, it
has been proven that the world oil price is evolved together with GDP of an oilexporting country such as Iran, Iraq, Qatar and Saudi Arabia. Therefore, it implied

that the world oil price will affect the GDP in other oil-exporting country. Thus, it is
remarkable to know if the world oil price will affect Malaysias GDP.
According to Ahmed and Wadud (2011), Malaysias economy is affected by
world oil price and US monetary policy. However, the pure relationship between the
world oil price and Malaysias GDP is still remain unknown. In order to clarify the
effects of world oil price towards Malaysias GDP, the problem to be stated is: Are
there any relationship between world oil price and Malaysias GDP.

1.4 Objective of study

The main objective of this research is to investigate the relationship between
the world oil price and the standard of living in Malaysia.
Specific objectives:

To study the relationship between the world oil price and the standard

living of Malaysian
To study how should the Malaysian to maintain the standard of living

when the world oil price increase

To find out the effect of the changes world oil price.
The factors of the changes of the world oil price

1.5 Significant of study

The study is to find out the relationship between the world oil prices and the
standard of living of the Malaysian. If the relationship between the two variables can
be determine, therefore the government or the policy maker will have the clear idea to
carry out the policy that is more beneficial to the people to maintain the standard of
living. Besides that, the research will find out the factors that influent the price of the
world and the impact of it. This will help the parties that involve have/has to consider
well before making the decision.

1.6 Organization of study

This study examined how the world oil price affects the standard of living in
Malaysia. Chapter 1 is introduction such as the background of Malaysia economy and
the trend of world oil price, motivation, problem statement, objective and significant
of study. Chapter 2 is literature reviews of world oil price and other related reviews to
this study. Chapter 3, explained the methodology that will be conducted the empirical
analysis for this study. Chapter 4 wills discuss the result of the empirical analysis.
Last but not least, the conclusion of this study with the relevant recommendation and
policy implantation are in Chapter 5.

References
Ahmed, H., & Wadud, I. (2011). Role of oil price shock on macroeconomics
activities: An SVAR approach to the Malaysian economy and monetary
responses. Energy Policy, 8062-8069.
Lescaroux, F., & Mignon, V. (2008). On the inuence of oil prices on economic
activity and other macroeconomic and nancial variables. OPEC Energy
Review, 2(34), 343-380.