Brunei & the Oil Price [News Reel]

[If you haven’t already read the introduction to the News Reel, please click here! And then here for a background primer on the Brunei context.]

Support is a fascinating thing. It’s a funny thing.

Without the support of a ladder (or a strong pair of shoulders), you wouldn’t be able to reach up to the ceiling to change a light bulb. Or reach the top of the shelf to grab the best snacks.

But the inherent problem of the ladder (or a strong pair of shoulders), is that the more these things help you and give you height – and the further away from the ground you are – the greater and more dangerous your risk is of falling.

Lol I love abusing clipart. Why does he have toilet paper!?

And yet, there’s no question about it. Ladders are good. People supporting other people? That’s good. We live in a crowded world, and man is a social creature who can’t always get by on his own.

Through ladders, and cooperation, and mutual support, and relationships, and teamwork – we built the pyramids, moved mountains, advanced technology, pushed the boundaries of innovation.

Ladders are good.

Support is good.

As long as you manage the imminent risk of potentially falling.

  • Brunei is an oil-exporting economy heavily supported by oil and gas.
  • The Brunei government is severely dependent on the revenue (or income or salary) that oil and gas provides.
  • Bruneians are dangerously dependent on the Brunei government to provide their basic needs for free.

Unfortunately the picture looks a lot more like this:

Picture3

Why is the pyramid tebalik or upside-down? Because almost 400,000 Bruneians (The People) are being supported – in many, many ways – by The Government (about 50,000 civil servants, but this includes everything from clerks and keranis all the way up to the Ministers and top leadership figures themselves).

The Government (and hence, indirectly, the People) is, in turn, supported by pretty much one main source of income  crude oil and gas (LNG) sales – which to this day continues to make up 95% of the Brunei government’s wallet.

Let me digress for a second.

What are the three main factors that determine how much money goes into your wallet, if you’re involved in business/entrepreneurship/bejual-jual/sales?

Let’s say you bake muffins – and you sell them. That’s your livelihood; that’s how you make money.

How much money you make can be stripped down to three factors:

  1. The cost of making one muffin (production cost)
  2. The selling price of one muffin (price)
  3. How many muffins you make (volume)

Let’s ignore point 1 and 3, and just talk about price. Let’s assume it costs nothing to make a muffin (production cost is zero), and let’s assume you make 100 muffins a day, every day (constant volume).

If the muffin price is $1 a muffin, you make $100 a day.

If the muffin price goes up to $1.20 a muffin, whee! $120 a day!!

What happens if the muffin price drops to 30 cents.

You used to make $100-120 a day; now that the muffin price has crashed….

That’s only $30 a day.

 

Uh oh.

 

While you used to make approximately $3,000 a month ($100 x 30 days), your monthly income has suddenly plummeted to $900 a month. But oh my goodness, you have dependents, a wife and kid you support, your child is enrolled in a private school; fees are $1000 a month – $900 isn’t going to cover that! And we need to eat – groceries average at about $200 a month! And dining out?! My Astro bill! Prima! My car loan! WHAT ARE YOU TO DO?!

Picture4

 

But we’re not here to talk about personal finance just yet.

(Or are we?)

I’ll get to the point: oil and muffins work the same way. The oil market is volatile and unpredictable, and even if you assume production cost (of extracting oil out of the ground and getting it to the customer) and volume (how much are you sucking out of the ground to sell) remain constant – the price of oil can make all of the difference. A drop in price means a drop in income. $3000 from muffins could become $900 the next month.

The price of oil has dropped about 70% since the middle of 2014. 

What used to be a safe average of USD 100 per barrel (and could go all the way up to $115, $120) is now leveling off at USD 30 per barrel, and it’s expected to stay that way for a long time.

What does this mean?

Picture2
Digital art is clearly not one of my strong points

Not that I’m trying to cause complete panic and alarm.

But it is alarming.

And what was once said to be “no cause for alarm” a year ago (see Reel below) is now being described as very alarming indeed:

Is Brunei affected by the low oil price?

How is the Brunei economy coping?

How are our Middle Eastern oil-exporting friends doing?

Like I explained (and attempted to illustrate) earlier on, practically the entire country is propped up and supported by the oil and gas industry. And while this single brick has held steadfast and allowed us to live comfortable, even luxurious lives, the dark, ominous shadow looming on the horizon is always there to haunt us — what happens when the oil runs out?

And now people are realizing that they’ve been asking the wrong question this whole time. The biggest problem isn’t solely “if the oil runs out”; in fact, the reality oil-exporting countries are facing right now is taking an even more tragic turn:

What if the oil that we produce just isn’t worth that much anymore?

 

Next up on the News Reel – Are Bruneians able to financially support themselves?

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