Relationship between Oil Price and Exchange Rate.

8/9/2019 Relationship between Oil Price and Exchange Rate.

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ACKNOWLEDGEMENT

First and foremost I offer my sincerest gratitude to my supervisor, Madam Zuraidah Redzuan,

who has supported me throughout my research project with her excellent guidance, patience

and knowledge whilst allowing me the room to work in my own way I attri!ute my research

project to her encouragement and effort and without her this project, too, would not have

!een completed or written "ne simply could not wish for a !etter or friendlier supervisor

I would like to express my deepest gratitude to my family, for they guidance, support, caring,

patience, and providing me with an excellent atmosphere to complete my research project

I gratefully appreciated and also like to thank especially my mother, to the rest of my families

and friends and a special thank you to, Zulhilmi #yader and Faai$a %yahirah, they were

always supporting me and encouraging me with their !est wishes and prayers

Finally, I would like to thank my !rother, %hiekh Rajjish &hmad #e always pray for me and

was always there cheering me up and stood !y me through the good times and !ad I am

inde!ted to him more than he knows

RESEARCH PROJECT DRS 3023

0


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ABSTRACT

'his work is intended to find out the relationship !etween "il (rice and )xchange

Rate 'he data that used to complete this research is the secondary data which it was o!tained

from the relia!le sources which is from the previous journal that are related in my study,

historical data on *rude "il (rice, historical data on )xchange Rate in Ringgit Malaysia

'ime series data from +anuary -- . -- /01 to 2ecem!er -0 . -0 /0 1 are used for all

varia!les in Malaysian country From the analysis of the data, that correlation !etween *rude

"il (rice and )xchange Rate for .3%24M5R1 and .M5R43%21 has high correlation, since

that !oth *rude "il (rice and )xchange Rates are volatile Means that !oth varia!le have

positive relationship For stationary test, all varia!les ."il *rude (rice, and )xchange Rate1

are stationary at 6 percent significant level 'his finding will contri!ute to Malaysian

government in making policies to strictly control the petrol price since that we know

)xchange Rates do affects the increase in *rude "il (rice


1


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CHAPTER 1

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

7etween -- to -0 , the price of crude oil has increased su!stantially in the world

market, especially in --8, --9 and --: For example, the ;est 'exas Intermediate .;'I,

a reference price used in the 3nited %tates and glo!ally1 increased from 3%


4/39

higher oil prices directly means taking a !igger percent of their income for gasoline expenses

Moreover, the inflation that results from higher oil prices will reduce the monetary value and

adversely affect their expenditures and demand for goods and services "n the producers@

side, a higher oil price is associated with higher input price (roduction at higher cost will not

only cause reduction in $uantity of output produced !ut also push the price of output sold in

the market to !e higher 'he event of oil price increase and the pu!lics@ reaction to it has

raised an important $uestion of the impact of oil price on the economy

The increase of oil price will adversel a!ec"ed "o "he inves"or #eca$se of

in%a"ion& "he ra"e of in%a"ion is i'por"an" as i" represen"s "he ra"e a" which "he

real val$e of an inves"'en" is eroded and "he loss in spendin( power over "i'e)

*n%a"ion also "ells inves"ors e+ac"l how '$ch of a re"$rn "heir inves"'en"s need

"o 'a,e for "he' "o 'ain"ain "heir s"andard of livin() As in%a"ion hi""in( a

co$n"r & "he inves"ors need "o aware and have "o 'a,e a ri(h" decisions #efore

"hin( #eco'es worse)

"n the other hand, the perception that oil price spikes have a serious negative effect

on the economic as it effects the economic growth &kpieyi .0==91 noted that prices of oil

kept increasing !ecause the oil producing nations have raised the prices of crude oil &s the

prices of oil are also affected !y 3% 2ollar exchange rates, since the oil companies use 3%

2ollars to !uy oil from the world market 'he relationship !etween oil price and the

exchange rate of 3% dollar, from the financial press suggesting that a weak dollar has pushed

oil prices higher, oil prices rise if the dollar falls %ince oil is denominated in 3% dollars, a

weaker dollar might lead to an increase in the demand for oil in nonAdollar economies, which

would cause the oil price to rise In general, the increases in oil prices will give the !enefit to

the exporter where is the exporter can take the advantage of inflation and to the importer have


3


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no chance except to !uy or reduce their demand 'here is further argued that !oth the

exchange rate and oil prices might !e reacting to some other common factor "ne such factor

might !e monetary policy %ince oil is a stora!le commodity, it reacts not only to current !ut

also expected future monetary policy Bikewise, the exchange rate is also determined !y

current and expected monetary policy 'herefore, we should expect to see !oth oil prices and

exchange rates as jointly determined Increase in the oil prices is similar to a tax increase,

decreasing household disposa!le income will lead to a tighter monetary policy and have

higher interest rates with higher inflation and weaker economic growth

2epreciated ringgit has caused imported goods increased, when ringgit depreciate the

home currency !ecomes relatively cheaper for foreigners to !uy and foreign currency

!ecomes relatively more expensive to !uy and this directly will cause the imported goods

price increased If prices in !oth countries remain the same, depreciation will make foreign

goods relatively more expensive, leading to fall in imports It also means that even if prices

remain the same, goods will !e cheaper to foreigners 'hey will !uy more goods and exports

will rise &s a result, a country@s export will increase Figure 0 shows the trend of exchange

rate In Malaysia from -- to -0 'he figure depicts the fluctuation of exchange rate

happened in that period

CFigure 0/ Refer to &ppendixD

Figure shows the trend of oil price In Malaysia from -- to -0 'he figure depicts the

fluctuation of oil price happened in that period, it was recorded a drastic increase in --8,

--9 and --: 'he graph was fluctuate !ecause of Malaysian Eovernment decontrolled the

petrol price due to a huge !urden of the cost to the government

CFigure / Refer to &ppendixD


-


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1.2 PROBLEM STATEMENT

'oday the increase in the oil prices has grown throughout the years and it has caused

the pro!lem especially to the society 3ntil now increases in the price of oil have !ecome one

of the most crucial matters confronting society in general and industries and manufacturing

companies in particular

For example, there are several pro!lems happened in other countries especially in

India and *hina as there are the !iggest consumption of oil In India increases in the price of

oil since 2ecem!er --: !y Rs 6 a litre and that was the steepest increase on that year & part

of that, the increase in oil price has caused the increased to the price of goods !y almost Rs 9

when the government decontrolled the price in +un -0- "n May 06th, -00 the petrol price

was at Rs 8> >9 which was Rs 06 ?? higher than the petrol price on &pril 0, -0- India

always faced the increase in petrol price from -0- to -00 and this indirectly result the

unemployment amongst them

From issue a!ove, rising prices causes worsening poverty as the essentials for survival

!ecome more expensive and thus less attaina!le to those with low incomes In an economy

where unemployment and underemployment is increasing, family incomes are less a!le to

purchase the !asic re$uirements such as staple foodstuffs

'he arising in oil price is not just stop there, the cost of food also rises as well, partly

!ecause oil is used in many ways in growing and transporting food and partly !ecause of the

competition from !iofuels for land, sending land prices up 'he cost of shipping goods of all


.


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types rises, since oil is used in nearly all methods of transports 'he cost of materials that are

made from oil, such as asphalt and chemical products, also rises

In addition the arising in oil price also affected to a person, a person is re$uired to pay

more for oil, food, and delivered goods of all sorts, less will !e left over for discretionary

spending 7uying a new home is one such type of discretionary expenditure

;ith higher unemployment rates, governments are faced with paying more

unemployment !enefits and making more stimulus payments If there have !een many de!t

defaults !ecause of more unemployment or !ecause of falling home prices, the government

may also need to !ail out !anks &t the same time, taxes collected from citizens are lower,

!ecause of lower employment & major reason for today@s de!t pro!lems of the governments

of large oil importers, such as 3%, +apan, and much of )urope, is high oil prices )

Eovernments are also affected !y the high cost of replacing infrastructure that was

!uilt when oil prices were much lower For example, the cost of replacing asphalt roads is

much higher %o is the cost of replacing !ridges and !uried underground pipelines 'he only

way these costs can !e reduced is !y doing lessAgoing !ack to gravel roads

1.3 RESEARCH OBJECTIVE

'he o!jective of this study, I want to know the relationship !etween oil price and

exchange rate, hoping that I could gained knowledge throughout my study on this research

'he o!jective of this study is to o!serve the relationship !etween the oil price .in Malaysian

Ringgit, RM1 and exchange rate volatility in .RM per


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Furthermore, this study will !e use monthly from +anuary -- to 2ecem!er -0 , all the

data will !e used to see more accurate result since oil price is much fluctuated

1.4 RESEARCH QUESTION

*an exchange rate affects oil price

;hich exchange rate have more impact on oil price

Is exchange rate correlated to oil price

1.5 RESEARCH HYPOTHESIS

# o / )xchange rate will not affect oil price

# 0 / )xchange rate do affects oil price

# o / )xchange rate M5R43%2 have less impact on oil price

# / )xchange rate M5R43%2 have more impact on oil price

# o / )xchange rate is not correlated to oil price

# > / )xchange rate is correlated to oil price

1. SIGNIFICANT OF STUDY

'he !enefit that can !e assume to contri!ute to the society is the relationship !etween

oil price and exchange rate as !oth of these varia!le had an effect to the rise of oil price

!ecause of drop in dollar ;hen more studies have !een made the society can use this

research to !oost their knowledge a!out the relationship !etween oil price and exchange rate



9/39

that causing the rise in oil price In addition, it can give them !etter understanding a!out the

rise of oil price that has caused the increased to the price of goods

'he !enefit to the researcher, this research will provide !etter understanding and !oost

their knowledge to other researchers to make another research in the future especially to those

who wants to analyze the effect of oil price to the exchange rate

In addition, this research may contri!ute to other investors to investigate that the spike

of oil price that causing loses to them so they can make a plan !efore it happens %trategic

planning are re$uired !efore making any investment

'he !enefit that can !e assume to contri!ute to the new knowledge is the relationship

!etween oil price and exchange rates volatility &s these two varia!le played an important

role 'his research main purpose is to o!serve the relationship !etween the oil price .in

Malaysian Ringgit, RM1 and exchange rate volatility in .RM per


10/39

1.! ORGANISATION OF THE STUDY

'his study paper is categorized into five chapters, consisting Introduction .*hapter 01,

Biterature Review .*hapter 1, 2ata Methodology .*hapter >1, Results .*hapter ?1, and

*onclusion and Recommendation .*hapter 61 Introduction .*hapter 01 explains the synopsis

of overall study It also explains the significance of the study Biterature Review .*hapter 1

reviews a!out the relevant literature and theoretical framework )vidence from references are

provided as support to this study 2ata and Methodology .*hapter >1 discusses the setup and

design of study 'hen, the method of data collection is mentioned thus descri!ing the

methodology used to examine the data In results .*hapter ?1, finding are yielded and

analyzed Findings attained are then interpreted into results Bastly, conclusion and

recommendations .*hapter 61 will conclude the overall result constructed from this study

thus providing relevant recommendation for further research purposes



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CHAPTER 2

LITERATURE REVIEW

%ince oil prices and exchange rates !oth have experienced long swings after the

!reakdown of 7retton ;oods, the link !etween !oth varia!les has attached considera!le

interest from researchers & popular finding of the empirical literature is that real exchange

rates and real oil prices are cointegrated over the recent floating period In this vein, shocks

on real oil prices have !een identified as a possi!le explanation for nonAstationarity of real

exchange rates, *haudhuri and 2aniel, .0==:1 "ther studies have provided evidence that a

depreciation of the dollar triggers an increase in the price of oil, 5ousefi and ;irjanto,

. --?1

In a recent study, Re!oredo . -0 1 analyzes oil price and exchange rate coA

movements for different currencies and finds that an increase in oil prices and depreciations

against the dollar are weakly associated with two ways of causalities for different currencies

#e points out that such a relationship seems to !e stronger for oilAexporting countries

compared to oilAimporting countries *onsidering that different volatility and degree of coA


10


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movements !etween oil prices and exchange rates in the dollar can !e identified, it seems

important to allow for structural changes when analyzing the corresponding longArun

relationships, 7reitenfellner and *respo *uaresma, . --:1

Grugman, .0=:-1, Eolu!, .0=:>1 focuses on the !alance of payments, hence on the

trada!le sector and international portfolio choices & rise in oil prices is viewed as a wealth

transfer from oil importing countries to oilAexporting ones 'he impact on exchange rates

then depends on the distri!ution of oil imports across oil importing countries and on portfolio

preferences of !oth oilAimporting countries .whose wealth declines1 and oilAexporting ones

.whose wealth increases1 Grugman adds some dynamics in the model !y assuming that

"()* will progressively use their accumulated wealth to import more goods from industrial

countries #ence in the long run the real exchange rate will depend on the geographic

distri!ution of "()* imports, !ut no longer on "()* portfolio choices &ssuming that oilA

exporting countries have a strong preference for dollarAdenominated assets !ut not for 3%

goods, an oil price hike will lead the dollar to appreciate in the short run !ut not in the long

run

Following the study on the determination of the relationship !etween oil prices and

the 3% dollar, *oudert, . --:1 highlighted the importance of the 3% dollar as a reserve

currency and currency of choice for payment of oil transaction 'his implies that the rate of

exchange of the dollar to domestic currencies would affect the demand for oil 'hey posited

that dollar depreciation reduces the oil price in a domestic currency with floating exchange

rate, while the effect is neutral

In countries that are pegged to the 3% 2ollar 'hey concluded that the dollar

depreciation has a priori positive impact on oil demand and oil price "n the supply side, a

depreciation in the dollar would cause a decline in supply as the movement in the dollar


11


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would affect the cost of production that are priced in dollar through the rate of exchange of

the domestic currency to the dollar "n the impact of oil price on the dollar effective

exchange rate, they stated that a surge in oil prices tend to !oost producer countries wealth

and demand for dollar assets In addition, !ased on the !ehavioural e$uili!rium exchange

rate, oil prices influence termsAofAtrade, net foreign assets and, implicitly, impact on the

exchange rate *oudert, . --:1 found that the relationship !etween the two varia!les were

unclear and seem to depend on the period investigated In addition, the oil price varia!le

tends to lead the exchange rate varia!le, thus, the causality runs from the oil price to the

exchange rate 'hey concluded that speculation on oil price would lead to a speculation on

the dollar

'he de!ate on the influence of oil prices on the real exchange rate motivated Rautava

. --?1 to examine the relationship that exists !etween oil prices and real exchange rate in

Russia 'he study employed vector autoregressive .H&R1 modeling and cointegration

techni$ues to examine the impact of international oil prices and the real exchange rate on the

Russian economy and its fiscal policy 'he findings from the study indicate that the Russian

economy was influenced significantly !y fluctuations in oil prices and the real exchange rate

through !oth longArun e$uili!rium conditions and shortArun direct impacts #owever, !ecause

of growth trends in the Russian economy which improved in the recent times, the role of oil

prices have greatly reduced Rautava . --?1

*haudhuri and 2aniel find very similar results as &mano and van orden, *haudhuri

and 2aniel also use cointegration causality tests 'hey find that cointegration exists !etween

oil prices and exchange rates and that variation in the 3 % dollar real exchange rate are

caused !y variations in the real price of oil .*haudhuri and 2aniel, 0==:1


12


14/39

%everal other papers arrive at the same conclusion !ut use different models For

example, &kram investigates whether a nonAlinear relationship exists !etween oil prices and

the orwegian exchange rate 'he author finds that fluctuations in oil prices do significantly

affect the orwegian exchange rate in a negative nonAlinear way, especially when oil prices

are !elow 0?3%2 &kra also uses an e$uili!rium corrections model that controls for other

factors that determine the orwegian exchange rate .&kram, --?1

CHAPTER 3

DATA AND METHODOLOGY


13

SD456R

E7CHA89E RATE

:*8DEPE8DE8T;AR*A

56R4 SD

E7CHA89E RATE

:*8DEPE8DE8T;AR*A

CR DE O*= PR*CE *8 R*899*T5A=A6S*A

:DEPE8DE8T ;AR*A


15/39

For this research, all the resources used is a secondary data which is important in

order to complete this research 'he secondary data was o!tained from the relia!le sources

which is from the previous journal that are related in my study, historical data on crude oil

price, historical data on exchange rate in Ringgit Malaysia

'he relationship !etween oil price in 3% dollar and exchange rate in Ringgit Malaysia

is the topic for this paper In this study will !e focus on three varia!le, the varia!le that exists

for this topic is the oil price in Ringgit Malaysia, exchange rate 3%24M5R and exchange rate

M5R43%2 'he oil price in Ringgit Malaysia is the dependent varia!le in this research

meanwhile the rest of the varia!le is the independent varia!le

"il price in Ringgit Malaysia is the dependent varia!le !ecause to determine the

causes if the independent varia!le affect dependent varia!le 'he independent varia!le has no

affect if there is changing in dependent varia!le 'he oil price in Ringgit Malaysia were used

as a measure in this experiment while independent varia!le will give the answer or respond to

the dependent varia!le

'he varia!les that used are the world crude oil price index .in Malaysian Ringgit,

RM1 which is can !e o!tained from .indexmundi com1 and exchange rate .RM per


16/39

more than 0- years of oil price 'he price of oil are using 3% dollar in the world market as a

price of oil is per !arrel

&nother sources is needed to complete this study is exchange rates 'he historical of

exchange rates were o!tained from "anda com which provide for more than 0- years of

trend 'he exchange rate will !e used to determine if there is any relationship !etween oil

price and exchange rate in the spike oil price

F"#$%&' ("# C"##)&'*+",

;here J and 5 are the varia!les

'his is a measure related to R 2

# measures the strength and direction of the linear relationship !etween two varia!les/

# - 1 / the two varia!les are perfectly positively correlated

# - 0 1 / the two varia!les are perfectly negatively correlated

# - / the two varia!les are totally correlated

F"#$%&' ("# R 2

K )rro 'erm

K Independent Haria!le


1.


17/39

K &verage

C")((+ +),* "( ) ), ),* '#+'6&)

J K independent 5 K dependent

CHAPTER 4

RESULTS

ANALYSIS 7L)'8* S9%'#)8:

'he method of least s$uares is a standard approach to the approximate solution

of overde"er'ined s s"e's LBeast s$uaresL means that the overall solution minimizes

the sum of the s$uares of the errors made in the results of every single e$uation

Dependen" ;aria#le? O*=@PR*CE@R5

;aria#le Coe cien" S"d) Error "BS"a"is"ic Pro#)

56R@ SD .-33) /3 31 )32 1 )01/ 0)0000C B11-0)1 / 1) .03 B12)3 -11 0)0000

RBs $ared 0)/ 01/0 5ean dependen" var -1 ) 0.1Ad $s"ed RBs $ared 0)/ / S)D) dependen" var 1. )2.10S)E) of re(ression ) -// A,ai,e info cri"erion 11) 2 -

S$' s $ared resid 102 3 .) Schwar cri"erion 11) 3.2=o( li,elihood B ) / . HannanBF$inn cri"er) 11) - .GBs"a"is"ic 2 ). 0 D$r#inB a"son s"a" 0)1- / /


1/
http://en.wikipedia.org/wiki/Overdetermined_systemhttp://en.wikipedia.org/wiki/Overdetermined_system


18/39

Pro#:GBs"a"is"ic> 0)000000

M" )& E9%'*+",

"il (rice RM K A00?- 0=8- 6?>> =8>-M5R43%2 =0 ==6-e t

% ) .>0= > =91

tAstatistics C09 -08:NNND

R K - 8=- O 8= - P &djusted R K - 8:9:

'he explanatory varia!le accounted for a!out 8= - percent of the variation oil price model

)stimations reveal that the explanatory varia!le, namely the M5R43%2 .J1 was the

important explanatory varia!le with statistically significance at Q - -0 level in the oil price

model 'herefore, a 0 unit increase in the M5R43%2 .J1, on average, has the positive

relationship effect of increasing oil price .51 !y 6?>> =8>- units with statistically

significance at the Q - -0 level

DESCRIPTIVE ANALYSIS

O*=@PR*CE@R5 56R@ SD 5ean -1 ) 0.1 0)2 0/. 5edian -3.)/1 0)2 1100 5a+i'$' 10)021 0)33-/00 5ini'$' 13/).0 3 0)2/2.00 S"d) Dev) 1. )2.10 0)02-3- S,ewness 0)0/-20 0).23../ I$r"osis 2)1 /-0 1) / .2

Jar $eB


19/39

*orrelation will !e computed using )views software *orrelation, r measures the strength and

direction of the linear relationship !etween two varia!les

O*=@PR*CE@R5 56R@ SD

O*=@PR*CE@R5 1)000000 0) 30 .56R@ SD 0) 30 . 1)000000

&fter running the data using )Hiews, correlation of oil price .RM1 to exchange rate

.M5R43%21 is - :>-: &ccording to Euild@s Ford@s Rule of 'hum!, value - :>-: lies

!etween - 9- till - =- indicating a high correlation

ANALYSIS 7L)'8* S9%'#)8:

'he method of least s$uares is a standard approach to the approximate solution

of overde"er'ined s s"e's LBeast s$uaresL means that the overall solution minimizes

the sum of the s$uares of the errors made in the results of every single e$uation

Dependen" ;aria#le? 6@O*=@PR*CE@R5

;aria#le Coe cien" S"d) Error "BS"a"is"ic Pro#)

SD@56R B-/3)/ 20 2.) 1 B1 ) . 32 0)0000C 20-0)0-/ 0).3..2 22).3310 0)0000

RBs $ared 0) 12 0 5ean dependen" var -1 ) 0.1Ad $s"ed RBs $ared 0) 10- S)D) dependen" var 1. )2.10S)E) of re(ression .)/ ./0 A,ai,e info cri"erion 11) .-2S$' s $ared resid .--/2) Schwar cri"erion 11) /=o( li,elihood B 3) 2/ HannanBF$inn cri"er) 11) 203GBs"a"is"ic 322).01- D$r#inB a"son s"a" 0)1. //2Pro#:GBs"a"is"ic> 0)000000

M" )& E9%'*+",


1
http://en.wikipedia.org/wiki/Overdetermined_systemhttp://en.wikipedia.org/wiki/Overdetermined_system


20/39

"il (rice RM K -?- -?8 ?8> 8: -3%24M5R =- 6>66e t

tAstatistics CA09 =6:>NNND

R K - 90 9 O 90 9P &djusted R K - 90-6

'he explanatory varia!le accounted for a!out 90 9 percent of the variation oil price model

)stimations reveal that the explanatory varia!le, namely the 3%24M5R .J1 was the

important explanatory varia!le with statistically significance at Q - -0 level in the oil price

model 'herefore, a 0 unit increase in the 3%24M5R .J1, on average, has the negative

relationship effect of increasing oil price .51 !y ?8> 8: - units with statistically significance

at the Q - -0 level

DESCRIPTIVE ANALYSIS

6@O*=@PR*CE@R5 SD@56R 5ean -1 ) 0.1 3)- -.0 5edian -3.)/1 3).3/-00 5a+i'$' 10)021 3) 0-200 5ini'$' 13/).0 3 2) 00 S"d) Dev) 1. )2.10 0)2 -/ S,ewness 0)0/-20 B0)3/. 2 I$r"osis 2)1 /-0 1)/0.32

Jar $eB


21/39

6@O*=@PR*CE@R5 1)000000 B0) --220SD@56R B0) --220 1)000000

&fter running the data using )Hiews, correlation of oil price .RM1 to exchange rate

.3%24M5R1 is - :?? &ccording to Euild@s Ford@s Rule of 'hum!, value - :?? lies

!etween - 9- till - =- indicating a high correlation

LINE GRAPH 7E;


22/39

'he exchange rate is one of the determinants of the economy for countries It caused

no confidence among investors 'he Malaysian government fixed the exchange rate in 0==:

'he exchange rate was no longer determined !y the demand and supply In that time, the

currency was at RM> :-43%


23/39

around RM> :- and dropped to RM> 08 in &pril --: &fter that, the exchange rate increased

to RM> 89 in March --= and decreased again to RM> -= in "cto!er -0- In &ugust -00,

the exchange rate was !elow RM> -- and the exchange rate rose to RM> 06 in 2ecem!er

-00

'he improving trend in the %ingaporean dollar and +apanese yen has continued 'he

3% dollar fell to its lowest mean of RM> 0 to a dollar in the second $uarter of --: !efore

recovering steadily to RM> 8 to a dollar in the first $uarter of --= and RM> 6 to a dollar

in the second $uarter &lthough the trends are comforta!le, it is important for the Finance

Ministry to watch out for any signs of volatility to prevent the recurrence of the desta!ilizing

effects of 0==9

LINE GRAPH 7O+& P#+ ):


22


24/39

'he graph shows the trend of oil price In Malaysia from -- to -0 'he figure

depicts the fluctuation of oil price happened in that period, it was recorded a drastic increase

from RM0 = to RM 9- in --: %tarted from 0 st ovem!er --:, the Malaysian

Eovernment decontrolled the petrol price due to a huge !urden of the cost to the government

;e could see the impact of the huge increase in petrol price on inflation in every goods and

services such as food and transportation & ational 7ank of Malaysia governor, 'an %ri 2r

Zeti &khtar &ziz said that 6P inflation was projected to happen due to the sharp rise in the

petrol price "n &ugust , --:, the government announced a decrease in fuel price !y : to

-P, started > &ugust --: "n %eptem!er ?, --:, the government alleviated a !urden of

Malaysian !y decreasing 0-P in accordance with a sharp decline in glo!al market %tarted


23


25/39

from "cto!er 06, the price was adjusted again to a lower level !y 0-P and -P change

%u!stantially, on 0 ovem!er, the price kept decreasing !y 06P and even on ovem!er 0:

and 2ecem!er --: In -00, the fluctuation of oil price kept occurring where the increase

happened for four times 'he increase is very o!vious from +anuary to Mei 3ntil now the

issue of oil price never seems to end

Prices #e(an "o recover in earl 1 ) *n April& OPEC red$ced prod$c"ion

# ano"her 1) 1 'illion #arrels) As $s$al no" all of "he $o"as were o#served&

#$" #e"ween earl 1 and "he 'iddle of 1 OPEC prod$c"ion dropped #

a#o$" "hree 'illion #arrels per da ) The c$"s were s$ cien" "o 'ove prices a#ove

2. per #arrel)

i"h 'ini'al 62I pro#le's and (rowin( )S) and world econo'ies& "he

price con"in$ed "o rise "hro$(ho$" 2000 "o a pos" 1 1 hi(h) *n 2000 #e"ween

April and Oc"o#er& "hree s$ccessive OPEC $o"a increases "o"alin( 3)2 'illion

#arrels per da were no" a#le "o s"e' "he price increase) Prices Knall s"ar"ed

down followin( ano"her $o"a increase of .00&000 e!ec"ive 8ove'#er 1& 2000)

R$ssian prod$c"ion increases do'ina"ed nonBOPEC prod$c"ion (row"h fro'

2000 "o 200 and was responsi#le for 'os" of "he nonBOPEC increase since "he

"$rn of "he cen"$r )

Once a(ain i" appeared "ha" OPEC oversho" "he 'ar,) *n 2001& a

wea,ened S econo' and increases in nonBOPEC prod$c"ion p$" downward

press$re on prices) *n response OPEC once a(ain en"ered in"o a series of

red$c"ions in 'e'#er $o"as c$""in( 3). 'illion #arrels # Sep"e'#er 1& 2001) *n

"he a#sence of "he Sep"e'#er 11& 2001 "erroris" a""ac,s& "his wo$ld have #een

s$ cien" "o 'odera"e or even reverse "he downward "rend)


2-


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*n "he wa,e of "he a""ac,& cr$de oil prices pl$''e"ed) Spo" prices for "he

)S) #ench'ar, es" Te+as *n"er'edia"e were down 3. percen" # "he 'iddle of

8ove'#er) nder nor'al circ$'s"ances a drop in price of "his 'a(ni"$de wo$ld

have res$l"ed in ano"her ro$nd of $o"a red$c"ions) 9iven "he poli"ical cli'a"e

OPEC dela ed addi"ional c$"s $n"il Jan$ar 2002) *" "hen red$ced i"s $o"a # 1).

'illion #arrels per da and was oined # several nonBOPEC prod$cers incl$din(

R$ssia which pro'ised co'#ined prod$c"ion c$"s of an addi"ional -/2&.00

#arrels) This had "he desired e!ec" wi"h oil prices 'ovin( in"o "he 2. ran(e #

5arch 2002) < 'id ear "he nonBOPEC 'e'#ers were res"orin( "heir prod$c"ion

c$"s #$" prices con"in$ed "o rise as )S) inven"ories reached a 20B ear low la"er

in "he ear)

< ear end overs$ppl was no" a pro#le') Pro#le's in ;ene $ela led "o a

s"ri,e a" PD;SA ca$sin( ;ene $elan prod$c"ion "o pl$''e") *n "he wa,e of "he

s"ri,e ;ene $ela was never a#le "o res"ore capaci" "o i"s previo$s level and is

s"ill a#o$" 00&000 #arrels per da #elow i"s pea, capaci" of 3). 'illion #arrels

per da ) OPEC increased $o"as # 2) 'illion #arrels per da in Jan$ar and

Ge#r$ar 2003

On 5arch 1 & 2003& $s" as so'e ;ene $elan prod$c"ion was #e(innin( "o

re"$rn& 'ili"ar ac"ion co''enced in *ra ) 5eanwhile& inven"ories re'ained low

in "he )S) and o"her OECD co$n"ries) i"h an i'provin( econo' )S) de'and

was increasin( and Asian de'and for cr$de oil was (rowin( a" a rapid pace)

The loss of prod$c"ion capaci" in *ra and ;ene $ela co'#ined wi"h

increased OPEC prod$c"ion "o 'ee" (rowin( in"erna"ional de'and led "o "he

erosion of e+cess oil prod$c"ion capaci" ) *n 'idB2002& "here were 'ore "han si+

'illion #arrels per da of e+cess prod$c"ion capaci" and # 'idB2003 "he e+cess

was #elow "wo 'illion) D$rin( '$ch of 200- and 200. "he spare capaci" "o


2.


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prod$ce oil was less "han a 'illion #arrels per da ) A 'illion #arrels per da is no"

eno$(h spare capaci" "o cover an in"err$p"ion of s$ppl fro' 'os" OPEC

prod$cers)

*n a world "ha" cons$'es 'ore "han 0 'illion #arrels per da of

pe"role$' prod$c"s "ha" added a si(niKcan" ris, pre'i$' "o cr$de oil price and

was lar(el responsi#le for prices in e+cess of -0B .0 per #arrel)

O"her 'a or fac"ors con"ri#$"in( "o hi(her prices incl$ded a wea, dollar

and "he rapid (row"h in Asian econo'ies and "heir pe"role$' cons$'p"ion) The200. h$rricanes and )S) reKner pro#le's associa"ed wi"h "he conversion fro'

5T


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Gollowin( an OPEC c$" of -)2 'illion #4d in Jan$ar 200 prices rose

s"eadil in "he s$ppor"ed # risin( de'and in Asia) *n la"e Ge#r$ar 2011& prices

$'ped as a conse $ence of "he loss of =i# an e+por"s in "he face of "he =i# an

civil war) Concern a#o$" addi"ional in"err$p"ions fro' $nres" in o"her 5iddle Eas"

and 8or"h African prod$cers con"in$es "o s$ppor" "he price while as of 5idB

Oc"o#er -00&000 #arrels per da of =i# an prod$c"ion was res"ored)


2


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CHAPTER 5

CONCLUSION AND RECOMMENDATION

5.1 CONCLUSION

*n concl$sion& "his research i'ple'en"ed is "o Knd o$" "he

rela"ionship #e"ween cr$de oil price and e+chan(e ra"e fro' Jan$ar 2002

$n"il Dece'#er 2012) The 5ala sia cr$de oil price nor'all has a

%$c"$a"ion fro' Jan$ar 200. $n"il Dece'#er 2011) However& "he cr$de

oil price has achieved a hi(her price in J$l 200 and dropped sharpl

d$rin( A$($s" 200 ) The e+chan(e ra"e also has a %$c"$a"ion fro' 'on"h

"o 'on"h s"ar"in( fro' Jan$ar 2002 "o Dece'#er 2012) Following the study

on the determination of the relationship !etween oil prices and the exchange rate

.3%24M5R1, we agree with *oudert, . --:1 highlighted the importance of the 3% dollar as a

reserve currency and currency of choice for payment of oil transaction 'his implies that the

rate of exchange of the dollar to domestic currencies would affect the demand for oil 'hey

posited that dollar depreciation reduces the oil price in a domestic currency with floating

exchange rate, while the effect is neutral From the analysis of the data, we found that

correlation !etween crude oil price and exchange rate for .3%24M5R1 and .M5R43%21 has

high correlation, since that !oth crude oil price and exchange rates are volatile Means that

!oth varia!le have positive relationship Research $uestions are well answer, exchange rate

do affects oil price For stationary test, all varia!les .oil crude price, and exchange rate1 are

stationary at 6 percent significant level 'his finding will contri!ute to Malaysian government


2


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in making policies to strictly control the petrol price since that we know exchange rates do

affects the increase in crude oil price 'he increase in crude oil prices are not good for the

country especially for citizens as it can !e a !urden to the people who have low income

%ince that the increased of oil price also will lead to the increase in other goods and services

5.2 RECOMMENDATION

Eovernment should !e aware in the increase of oil prices since that it will lead to the

increase of other goods and services

%ince that exchange rates do have positive relationship to the increase in oil price, the

government should monitor the fluctuation of exchange rate from time to time


2


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REFERENCES

&liyu, % 3 R . --=1 S Impact of Oil Price Shock and Exchange Rate Volatility on EconomicGrowth in Nigeria: An Empirical In e!tigation"# Research +ournal of International

%tudies

7olaji 7 ", (h 2 and 7olaji E &, (h 2 $In e!tigation the Effect! of Increa!e in Oil Price!

on %an&fact&ring 'ompanie! in Nigeria"# Research +ournal of International %tudies

#arri &, alley B, and #udson 2 . --=1 $(he Relation!hip )etween Oil* Exchange Rate!*

and 'ommodity Price!" +ournal of &gricultural and &pllied )conomics, ?0, /6-0

60- %outhern &gricultural )conomics &ssociation

7eckmann + and *zudaj R . -0 1 $Oil Price and +#S ,ollar Exchange Rate! ,ynamic!"

3niversity of 2uis!urgA)ssen

7enessyATuere &, Mignon H and (enot & . --61 $'hina and the Relation!hip )etween the

Oil Price and the ,ollar"

)nglama &, (h 2, 2uke " ", "gunleye ' % and Fatima 3mar Isma@il $Oil Price! and

Exchange Rate! Volatility in Nigeria: An Empirical In e!tigation" *entral 7ank of

igeria, )conomic and Financial Review Holume ?:4>

+ennifer * 2awson, $Oil Price! on Exchange Rate!: A 'a!e St&dy of the ,ominican

Rep&)lic" 'he (ark (lace )conomist, Holume JIH

2r Mahani Zainal &!idin, (rof 2r Rajjah Rasiah, $(he Glo)al -inancial 'ri!i! and the

%alay!ian Economy: Impact and Re!pon!e!" !y Institute of %trategic and

International %tudies .I%I%1 Malaysian, Faculty of )conomics and &dministration,3niversity Malaya .3M1, *ommissioned !y the 3nited ations 2evelopment

(rogramme .3 2(1

Gathleen G, &i 2, 2avid M . -0 1, $An Econometric Analy!i! of Oil Price %o ement: (he

Role of Political E ent! and Economic New!* -inancial (rading* and %arket

-&ndamental!"

2ale " . --=1 $.hat i! the Relation!hip )etween Exchange Rate and Oil Price!"#


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APPENDI>

Figure 0/ 'he 'rend of )xchange Rate In Malaysia from -- to -0

Figure / 'he 'rend of "il (rice in Malaysia from -- to -0


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33/39

OIL PRICE


32


34/39

E>CHANGE RATE

RAW DATA

Da"e $sd4'r

' r4$sd

oil priceSD

oil priceR5

oil price SDchan(es

oil price 56Rchan(es

JanB02 3)2

0)2/30

3.) . 13/).1

Ge#B02

3)3

0)2/30

3 )- 1-2)2 -)23L -)23L

5arB02

3)/

0)2/30

--)3 1/ ). 1 )- L 1 )- L

AprB02 3)/

0)2/30

- ) - 1 1)30 )..L )..L

5a B02 3) / 0)2/3 0 - )2 1 3)0- 0) /L 0) /L


33


35/39

J$nB02 3) --

0)2/2 -.) 1 -).0 B-). L B-)/ L

J$lB02 3) . 0)2/2 - )32 1 3)-2 .)0 L .)11L

A$(B02 3) 1 0)2/2 .0)22 1 0)/ 3) 3L 3) /LSepB

023) 0)2/3

0.3)0. 201)- .)/-L .)/.L

Oc"B02 3) 0)2/30

.1)/- 1 /)12 B2)//L B2)//L

8ovB02

3)2

0)2/30

-/)- 1 /).3 B ) L B ) L

DecB02

3) 0)2/30

.2)2 1 ).1 12)-3L 12)-.L

JanB03 3)3

0)2/30

. )/- 21 ) 3 10)2 L 10)2 L

Ge#B03

3) //

0)2/2 /1)/ 233) /) L /) 2L

5arB03

3)3

0)2/31

./) 3 21.) 0 B ) -L B ) 3L

AprB03 3) /3

0)2/32

- ) . 1 1)2 B1.) L B1/)00L

5a B03

3) 2 0)2/3.

- ) . 1 .)2- 2)30L 2)1 L

J$nB03 3) 0)2/30

.2)2/ 1 ).2 /) L )1 L

J$lB03 3)

3

0)2/3

0

.3). 203).. 2).-L 2).3L

A$(B03

3) 0)2/30

..)/3 211)3- 3) 1L 3) 3L

SepB03

3) /2

0)2/32

.0)-2 1 1)-0 B )3 L B )-3L

Oc"B03 3) 02-

0)2/2 .-)-1 20/) ) 1L )0 L

8ovB03

3)1

0)2/31

.-)/1 20 )-1 0)3 L 0)2.L

DecB03

3) /.

0)2/32

./)1- 213)1- 2) 0L 2) /L

JanB0- 3) 0-2

0)2/2 . ) - 223)-/ -)/3L -) -L

Ge#B0-

3) 0)2/30

. )/. 222) / B0)1.L B0)2 L

5arB0-

3) - 0)2/33

/3)02 23 )1. )-.L )31L

AprB0- 3) 00 0)2/2 /3)1/ 2-0)0/ 0)22L 0)3 L

5a B0-

3) 0)2/30

0)3 2/ )32 11)-2L 11)3/L

J$nB0- 3) 0)2/31

//)/- 2.3)0 B.)30L B.)33L

J$lB0- 3)3

0)2/30

0) / 2/ )/0 /)- L /).3L


3-


36/39

A$(B0-

3) / 0)2/32

) 3 2 )2 11)0 L 11)01L

SepB0-

3)-

0)2/31

) 3 2 .)2. B1)-0L B1)3.L

Oc"B0- 3) 1 0)2/3 1 )3 331) 12)-1L 12)-1L8ovB

0-3)

20)2/3

1)/1 2 ). B10)0-L B10)03L

DecB0-

3)/

0)2/32

3)02 2 )30 B )11L B )13L

JanB0. 3) - 0)2/2.

0)3 30.)03 10)0 L 10)00L

Ge#B0.

3)/

0)2/30

3)2 31/)13 3).1L 3)/-L

5arB0.

3) 0)2/31

.)3 3/2)30 1-)/3L 1-)/1L

AprB0. 3)-

0)2/31

-) - 3/0)/2 B0)-.L B0)-/L

5a B0.

3)-

0)2/30

) 1 3-0) - B.).1L B.)- L

J$nB0. 3) 0)2/31

101)1 3 -)0 12) 0L 12)/ L

J$lB0. 3)3

0)2/3 10.) 1 -00)3/ -)./L -)2-L

A$(B0.

3) ..

0)2//0

11.) -3.) / ) 1L ) -L

SepB

0.

3) / 0)2/.

3

11.). -3.)- B0)3-L B0)0/L

Oc"B0. 3) / 0)2/.1

10 )02 -10) B.)/ L B.)/2L

8ovB0.

3) --

0)2/- 103)1 3 )-- B.)3/L B.)2-L

DecB0.

3) /3

0)2/-/

10.) 3 3 )/. 2). L 2)/2L

JanB0/ 3) 2/

0)2/.0

11 )1 -3/)/2 10)/.L )2.L

Ge#B0/

3) 21 0)2/ 112)0 -1 )1 B-)2 L B-)-/L

5arB0/

3) 0)2/ 11-)32 -22) 1) L 1)3 L

AprB0/ 3)/.3 0)2 2.

12 )/ -//)12 11)/2L 10)20L

5a B0/

3). - 0)2 . 12 ) . -/3)20 0) L B0)/3L

J$nB0/ 3)/--

0)2 21

12 )1. -/ )-1 B0).-L 0) 1L

J$lB0/ 3)/./ 0)2 1 13.) - )20 /)10L /)3 L

A$(B0/

3)/-2-

0)2 1.

13-) 1 - 1)03 B0) .L B1)2-L

SepB0/

3)/./ 0)2 1/

11/)/2 -2/)- B13)- L B13)1.L


3.


37/39

Oc"B0/ 3)//. 0)2 0 10 ) 3 ) B/) 2L B/).0L

8ovB0/

3)/32/

0)2 3/

10 )22 3 /) . 0)-0L B0).0L

DecB0/ 3).-2 0)2 0 . 11-).2 -0.)/3 -) .L 2)2-L JanB0 3)-

-0)2 -

2100).2 3.1) / B12)22L B13)2 L

Ge#B0

3)- -1

0)2 .1

10 )0 3 /)./ ).2L )0.L

5arB0

3)- 0)2 .2

113) . 3 .) - .)3-L .)1.L

AprB0 3)-221

0)2-

122)2 -1 )-. )-0L .)/ L

5a B0

3)3 .3

0)2 22

122).2 -1-) 0)20L B0) L

J$nB0 3)-3/ 0)2 01

12 )0 --0)1 -).-L /)13L

J$lB0 3)-31-

0)2 00

13 )12 - 3) - ) -L )/ L

A$(B0

3)- /2

0)2 / 131)/3 -. ). B-) 0L B3)-.L

SepB0

3)-/3.

0)22

1--)0. - ) 2 )--L )0-L

Oc"B0 3)3/- 0)2 .-

1.3) - .1 )// /) 0L 3) /L

8ovB

0

3)3-

1

0)2 1 1)3 . 3) 11)-0L 10) L

DecB0

3)32 0)2 1/ )0. .. )-2 B1) -L B2).3L

JanB0 3)2///

0)30.1

1 0)2. ../)1- 1)31L B0). L

Ge#B0

3)222 0)30.

1 .)3- ./-) . 2) L 1). L

5arB0

3)1 01

0)313 1 1)1 /0.) 1 ) L )23L

AprB0 3)1/13

0)31. 20-)2- /-.)// /) L /). L

5a B0

3)20- 0)310 230).2 3 ) 12) L 1-)-2L

J$nB0 3)2.1 0)30/.

2- )01 03)20 )1.L ) 2L

J$lB0 3)2--.

0)300

2- )// 10)02 1)0 L 0) .L

A$(B0

3)320 0)300-

21.)3 1-) B13) /L B11) 3L

SepB0

3)-21

0)2 1 )0/ /-1)-. B13)12L B10)2 L

Oc"B0 3).10/

0)2 3.

13/)3- - )/- B2 )11L B2.)3 L

8ovB0

3). 0)2/

101)2- 3/2)22 B2.) -L B2-)32L


3/


38/39

DecB0

3).3- 0)2 10

) 1 2 -)/ B23)2-L B2-)1 L

JanB0 3).- 0)2 2). 2 3)1- /)2 L /) 2L

Ge#B0 3)/1- 0)2 .3 ) 3 2 -) . B-).-L B2) 0L5arB

03)//3 0)2 1

2) 322)02 11)- L 13)01L

AprB0 3)/0 0)2 //

-).. 3-1)22 ). L .) /L

5a B0

3).10 0)2 2/

10 )2 3 3)// 1.). L 12)--L

J$nB0 3).11.

0)2 3 12 ) -./)-/ 1 ) .L 1 ) L

J$lB0 3).31

0)2 12

121)/- -30)3 B/)-2L B.) 1L

A$(B0

3).01

0)2 3.

13-)/ - 2)/1 10) 2L ) 1L

SepB0

3)- 21

0)2 .1

12 )- -- )3. B-)/1L B.)3-L

Oc"B0 3)3 //

0)2 2 13 )21 - 2) - )3/L .) 0L

8ovB0

3)3 3.

0)2 -/

1-.) 2 - 3)3 -) .L -)3-L

DecB0

3)-00-

0)2 1 1-0) / - ) B3)-0L B2) 2L

JanB10 3)3/ 0)2 -

/

1--) . - )2 2) 0L 1) -L

Ge#B10

3)-0- 0)2 1 1-0)- - ) 2 B3)1-L B2)12L

5arB10

3)312 0)2.

1- ) - - 3)-2 /)0 L 3)2-L

AprB10 3)13

0)310.

1. )13 .0.) 1 /)1 L 2).3L

5a B10

3)2-2.

0)30/-

1-2)1. -/0) 2 B10)11L B ) L

J$nB10 3)2.1

0)30./

1-0)-. -. )/0 B1)20L B0) 2L

J$lB10 3)1 .2

0)310 13 ) / -- )20 B0)3.L B2)2 L

A$(B10

3)1-. 0)31/0

1-2). -- )3 1) /L 0)2/L

SepB10

3)0-

0)320 1-3)0 --3)32 0)3/L B1)13L

Oc"B10 3)0 0 0)321 1.3). - -)/ )33L )0 L

8ovB10

3)10.

0)3210

1. ) 1 - -)13 3)- L -)10L

DecB10

3)1203

0)31 1/ )33 .2 )3/ /)./L /) 3L

JanB11 3)0-/ 0)32.2

1 -)2 .30) 2) 2L 0).0L


3


39/39

Ge#B11

3)0-0 0)32 1 -)1 .. ) 3 .)/3L .)-3L

5arB11

3)03- 0)320

20-)-2 /20)21 11)0-L 10) L

AprB11 3)0111

0)331.

21 ) 2 /. ) )0-L /)2-L

5a B11

3)003

0)331.

203)/2 /12) . B/) .L B )00L

J$nB11 3)0201

0)322

1 )3. /02)0/ B2)10L B1) .L

J$lB11 2) 0)333-

203)23 /0 )/2 1) .L 0) 2L

A$(B11

2) 0)33-/

1 ). ./-).0 B/) /L B )10L

SepB11

3)0/3/

0)32/0

1 0)2 . 2) 1 0)-1L 3)2/L

Oc"B11 3)13 . 0)31 / 1 )-- . 1)/1 B0) /L 1)- L

8ovB11

3)1-. 0)310

1 ).1 /2-)- .)3-L .)./L

DecB11

3)1.-1

0)31. 1 /)31 /1 )1 B1)11L B0) .L

JanB12 3)11/

0)3202

201)32 /2 )/- 2)..L 1)3 L

Ge#B12

3)0212

0)3303

212)3 /-1)/- .)- L 2)23L

5arB12

3)033 0)321

222)03 / 3)-2 -).-L -) .L

AprB12 3)0..-

0)32/0

21-)3/ /.-) / B3)-.L B2) -L

5a B12

3)0 /-

0)3221

1 /)2 /0.) 0 B )-3L B ).1L

J$nB12 3)1./

0)3131

1 1)02 .-0)01 B12) L B10) /L

J$lB12 3)1.22

0)31-0

1 2)2 . -). /). L /)-0L

A$(B12

3)10 0)31 1 )-2 /1/)- ) .L )2 L

SepB

12

3)0 0

-

0)323 200)- /1.).. 1)0-L B0)1.L

Oc"B12 3)0-0.

0)32/0

1 .)0/ . 3)0 B2) 0L B3)/.L

8ovB12

3)0-2 0)32.3

1 0) 3 . 0) - B2)12L B2)0.L

DecB12

3)0-- 0)32/-

1 0) 1 . 0) B0)0/L 0)01L


Relationship between Oil Price and Exchange Rate.

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Transcript of Relationship between Oil Price and Exchange Rate.