The impact of oil price changes: Evidence from the Malaysian and Indonesian economies

Abstract

Oil is of great importance for the Malaysian and Indonesian economies. It is extremely difficult to view these two countries’ economic development without their oil resources and the revenue from oil. The oil industry also has made substantial contributions to the infrastructure development of these countries. In December 2005, Asia's oil-guzzling economies were bracing for the worst as the price of crude oil threatened to hit US$70 a barrel, stoking fears of slower economic growth, soaring inflation, and rising interest rates. Even Malaysia as a net oil exporter believed it should take appropriate action to ensure that an increase in the price of oil would have a positive impact on its economy. Also, Indonesia has recently become a net oil importer as a result of dwindling production and rising consumption. If these countries do not address this situation, they will reach the point where their oil bill will threaten the foreign exchange reserves. This study will examine the consequences of a hike in the oil price to the Malaysian and Indonesian economy by analyzing the microeconomic impact as well as the impact to the overall economic system. The study will also look into related factors such as the causes of price increases and the actions taken by the government to overcome this problem. Finally, the study will bring forward the market outlook for the oil industry and propose several solutions that can help government fix this problem. The main objective of this study is to ensure that an increase in the oil price in this region will not harm the citizens of these countries or the Muslim community. On the other hand, as net natural resources (oil and gas) exporters, the countries should benefit from the situation and manage to enhance the distribution of Muslim wealth.