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The aim of this research is to think about the effect of the macroeconomic factor on oil price in Malaysia. It is to research what kind of relationship does each factor has with the oil price and will the progressions of every factor performance influence the oil price.

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1.1 Background of the Studies

In Malaysia, oil price is set by the administration through government endowment. In spite of the way that Malaysia is exporting oil, the nation additionally imports oil from other place. In Malaysia, oil price is set by the legislature through government subsidy. In spite of the way that Malaysia is export oil, the nation additionally imports oil from different nations. The overflow of exporting an incentive over the bringing in esteem makes Malaysia a net oil trading nation. In spite of these actualities, the repercussions from price increment on the world market couldn’t be stayed away from overflow to the nearby market and powers the Malaysian government to gradually change the residential oil price. The execution of the oil price increment in the neighbourhood advertises has activated blended reactions from the general population, especially family units and specialty units. This is on the grounds that, being a noteworthy vitality asset to Malaysia’s enterprises, the expansion in oil price is probably going to push the general value level, and antagonistically influence the economy. Specifically, to the family unit, higher oil price straightforwardly implies taking a greater percent of their salary for gas costs.

Theoretically, an expansion in oil price makes the cost of generation increment. Therefore, total supply movements to one side, implying that preparations fall. A large portion of the examinations discovered that a climb in oil price caused expansion; diminish in yield, higher joblessness rate and others. The world petroleum price has dependably been diminishing from 1990 to 2007. In 2008, the world oil cost achieved right around 100% change. This change raised many issues across the world particularly in creating nations, for example, China and India. These two nations were generally influenced on the grounds that they were the biggest oil utilization nations on the planet. The world petroleum value began to diminish subsequent to being at the largest amount of 114.6US dollar. At the point when the world encountered a decline in petroleum value, it really facilitated the weight of many individuals’ particularly destitute individuals. Oil is the primary product to create our economy. (Offiong et al.2016)

Furthermore Inflation rates are a general increment in price and a fall in the acquiring estimation of cash. In addition, the inflation that outcomes from higher oil price will decrease the money related esteem and antagonistically influence their consumptions and interest for merchandise and enterprises. On the makers’ side, a higher oil price is related with higher input price. Generation at higher cost won’t just purpose lessening in amount of yield created yet additionally push the cost of yield sold in the market to be higher. The occasion of oil price increment and the publics’ response to it has brought up an imperative issue of the effect of oil price on the economy. (Jalil et al. 2009)

Moreover Interest rate is also a rate which is paid or charged for the utilization of cash. An interest rate typically communicated as a yearly level of a chief. It is ascertained by isolating the measure of key. Interest rate regularly changes because of inflation and furthermore on account of the Central bank Board Strategies. In surveying the ascent in product costs, low interest rate are much of the time recorded as a potential causal factor alongside a large number of different conceivable outcomes, including changing worldwide request designs, especially solid development in developing business sector economies, supply disturbances, developments in the estimation of the dollar, and the expanding size and changing speculator organization of product futures markets. The hypothesis connecting low interest rate to higher commodity prices is well created. As illustrated in Frankel (2008), all else break even with, a decrease in the interest rate is decay in the cost of holding item inventories and thusly should support price by expanding interest for inventories. Frankel likewise guesses that lower loan fees dishearten item extraction by diminishing the benefit of adapting undeveloped product assets on the piece of makers, giving a further upward force to price.At same time, Total national output (Gross domestic product) is the aggregate estimation of the merchandise and enterprises delivered by the general population of a country amid a year excluding the estimation of salary earned in foreign nations. Based on new Economic Transformation Programs (ETP) have stated that, the effect of high oil price on Malaysia’s general financial execution would likewise rely upon the introduction of the Malaysian economy to oil, and the degree of the overflow impact of the expansion in costs on different items and administrations. At the primary look as an oil exporting nation, high oil price would profit the Malaysian economy as the positive additions from higher oil price would counterbalance any negative effect on the economy.



This research aims to investigate the relationship between dependent variable (oil price) and independent variables (inflation rate, real interest rate, and GDP). Moreover, this research is based on the Malaysia perspective to find out the impact of macroeconomic factor on oil price. To give complete learning to the future research to find our more about on exchange rate, Malaysian crude oil export, crude oil price, crude oil future price, and unemployment rate towards the oil price shock. Besides that, it can use this study for policy implication in regulation of oil price.


1.2 Research Question

1.      What is the effect of macroeconomic factor toward oil price?

2.      What is the relationship between macroeconomic factor and oil price?

1.3 Objectives

1.      To study the effect of macroeconomic factor on oil price in Malaysia.

2.      To study the relationship between macroeconomic factor and oil price in Malaysia.

1.4 Hypotheses

1.      There is an effect of macroeconomic factor on oil price.

2.      There is a significant relationship between macroeconomic factor and oil prices.






1.5 Problem Statement

The impact of oil price on the macroeconomic factors has been the subject of many investigations. The majority of these investigations are worried about the created economies while few have as of late indicated worry with the creating nation.

The Incomes from other financial parts have been becoming speedier than the oil sector. Basically, government income streams have step by step been differentiating far from oil. The Higher fuel price sent the rate of inflation for March soaring to its highest level in almost nine years, with the consumer price index (CPI) rising 5.1%.

Based on Citi research said Bank Negara, which tends to look at demand-led inflation, is unlikely to raise interest rates following such high inflation, but core inflation is probably going to test or even rupture Bank Negara’s 2.5% solace edge in the coming months.(The Star 20 Apr 2017). However, Malaysia GDP is no longer sufficient to capture or represent the quality of life, social orders or countries. This is the place the train of financial aspects must advance and policymakers must notice. Therefore, the high rates of riches and pay imbalance everywhere throughout the world, and other non-financial issues. Hence, to discover what are the alternate factors that can affect the commodity sector performance, a study is conducted, that is to analyse the effect and relationship of macroeconomic factors toward oil price.










2.1 Oil Price Effect in Malaysia

The examination on oil price effect in Malaysia is recognized in cross-country sorts of examination in IMF (2000), Abeysinghe (2001), and Abeysinghe and Forbes (2001). IMF (2000) all in all, exhibits an investigation on the effect of oil price increment on worldwide economy. The investigation assumes that, the effect is observed to be more prominent for created nations than for creating nations as a gathering. In territorial examinations, the outcomes acquired differ generally, contingent upon the relative size of oil bringing in to trading nations. Oil shock are disclosed to prompt lower total request since the oil price increment redistributed salary between the nations that are net oil importer and exporters. The examination likewise assumes that the level of impact of oil price changes on oil-bringing in nations is observed to be unique in relation to those of oil-exporting what’s more, little open economies. The contributing elements for these distinctions are clarified by various oil power levels in local creation, sends out and imports, and level of receptiveness of an economy. What’s more, the examination moreover gives confirm that oil value changes have a tendency to be emphatically connected with the financial development of the oil-delivering nations. The examination additionally gives gauges of the first round effect of higher oil price on Gross domestic product development for some ASEAN nations, to be specific Indonesia (+0.5%), Malaysia (+0.2%), Philippines (- 0.5%), and Thailand (- 0.4%).

Abeysinghe and Forbes (2001) build up a basic VAR model to quantify how a stun to one nation can influence the Gross domestic product of different nations. It utilizes exchange linkages to evaluate the multiplier impacts of a stun as it is transmitted through other nations’ yield changes. This model is then used to look at the effect of stuns to eleven Asian nations, the U.S., and the OECD nations. The outcomes gotten demonstrate that the ASEAN nations, with moderately littler economies and are intensely reliant on oil, are considerably more powerless than the OECD economies at the point when looked with world oil costs changes. They additionally find that, the Assembled States economy has more control more than couple of factors, i.e. financing costs, which makes it down to earth to retain the negative effect of oil value stuns. Besides that, Abeysinghe (2001) limit the investigation of IMF (2000) on the effect of oil cost changes by concentrating on just 12 economies, which incorporates Indonesia, Malaysia, Singapore, Philippines, and Thailand. By utilizing information over the 1978-1998 periods, this investigation assesses the immediate and roundabout impacts of oil price on Gross domestic product development of these economies. Utilizing a decreased type of two-sided send out capacities and basic VAR models to connect up the Gross domestic product arrangement through an exchange grid as proposed by Abeysinghe and Forbes (2001), the examination exhibits that high oil costs influence these economies both straightforwardly and in a roundabout way (works through the system of an economy’s exchanging accomplices). The discoveries likewise suggested that, a stun to one nation is found to have a factually critical effect on different nations regardless of the possibility that they are generally minor respective exchanging accomplices. Thusly, net oil-exporters, for example, Indonesia and Malaysia are appeared to be not able keep away from the negative effects of high oil costs.

2.2 The Relationship between Oil Prices

Keeping in mind the end goal to examine the relationship between oil price and inflation, Hooker (2002) isolates his investigation period (1962-2000) into two sub-periods due to the auxiliary break happened toward the finish of 1980. He finds a significant effect of oil price on inflation in the primary time frame (1962-1980) yet not in the second one (1981-2000). In 2005, Trehan underpins Hooker’s discoveries by concentrate a similar subject and closing the comparative outcomes. Roger (2005) breaks down some European nations and finds a short-run tradeoff amongst Gross domestic product and expansion which featured the significance of oil price for the European district at any rate in the short-run. Moreover, Bermingham (2008) thinks about the little open economy of Ireland and finds the effect of expanding oil price on inflation. Jacquinot et al. (2009) concentrate on a similar point for the Euro zone and find that oil value changes is an essential factor for assessing expansion in the short-run despite the fact that this effect is considerably more unpredictable over the long haul. Furthermore, Castillo et al. (2010) moreover find that an expansion in oil value unpredictability may prompt a higher inflation level.




The progressions and instability in the relationship between oil price and consumer inflation have pulled in numerous examines the relationship between oil price and inflation. As per Blanchard and Gali (2007), the solid the relationship between oil price and consumer inflation in the 1970s can be clarified by two scenes, i.e. low development, high joblessness, and high inflation. Then again, the solid connection between oil price and inflation vanish since the mid-1980s as Gross domestic product and expansion stayed stable in spite of the fact that there were oil value blasts in 1990s. In other words, the impacts of oil value rises are comparable crosswise over scenes however different stuns that matched with oil value stun may contort the evaluation of the effects of oil price on inflation in the scenes. Furthermore, based on journal stated that, the lessening in the offer of oil utilization and underway (Blanchard and Gali, 2007). Different clarifications incorporate the adjustment in the oil price shock, for example, oil request bend is less flexible after some time (Peersman, 2009).A few analysts consider the nonlinear relationship in concentrate the relationship between oil price and macroeconomic (for example, Hamilton, 2003; Kilian and Vigfusson, 2011).

2.3 The Relationship between Macroeconomic Variables

As indicated by the journal, oil price is considered as an essential info factor in the assortment of econometric models. In addition, it has been dependably an appealing point since Hamilton (1983) who contends that oil value changes have the impressive effect in practically every U.S retreat after the Second World War In any case, there is no agreement in the writing on the causal connection between oil price and a few macroeconomic factors due to the said presumption contrasts. For example, Barsky and Kilian (2004) locate a unidirectional relationship from macroeconomic factors to oil price while the others like Kim and Willet (2000), Trehan (2005) and Ewing and Thompson (2007) trust that oil value influences the macroeconomic factors. Dark colored and Yucel (2002) plan to answer the topic of why oil value influences the monetary exercises. They feature their outcome into four general classifications; 1. Lessening in the supply of the information will bring about diminishing the yield. 2. Income transfer impact of oil merchant nation to the oil exporter one. 3. Real balance impact. 4. Monetary policy impact. Be that as it may, they propose that the best clarification is the supply reaction. A portion of the past investigations concentrating on the connection between oil price and whatever is left of the factors (inflation, Gross domestic product, and industrial production) are quickly talked about in whatever remains of this segment. The method have been used GARCH model to simultaneously estimate the mean and conditional variances between the series quarterly data for a time span of 1991 to 2005.

GDP (Gross domestic product) is another normal macroeconomic variable shows up in the writing when the effect of oil price is concerned. Jimenez-Rodriguez and Sanchez (2005) examine the relationship between oil price and Gross domestic product and locate a nonlinear one among them. They understand that this effect would be bigger in the event of expanding the oil price as opposed to diminishing it. Their outcome additionally proposes that an expansion in oil price will adversely influence the Gross domestic product for the oil bringing in nations aside from Japan; while it positively affects the oil exporter nations’ Gross domestic product. Moreover, Kim and Willet (2000) apply the board investigation on a similar theme for OECD nations and locate a solid negative connection amongst Gross domestic product and oil price. This study covers 1961-2000 period and uses annual data for GDP, oil price, inflation and industrial production  If there should arise an occurrence of North Korea, Glasure and Lee (1997) locate a similar connection between oil price and Gross domestic product. Method adopted in this study was based on the widely used Engle-Granger methodology (Granger and Newbold, 1974; Engle and Granger, 1981)












3.1 Research Framework









3.2 Participant / Scope

The area of this examination is in Malaysia and the information was gathered beginning from the year 2007 to the year 2016 for a long time on 10 yearly premises. The variable of macroeconomic components is GDP (Gross domestic product), inflation rate and interest rate while the dependent variable is oil price.

3.3 Techniques

A data examination is the route toward changing over regular data into profitable information. It will be performed using the SPSS 24.0 to coordinate the test. After the data was checked for blunders, an examination of outliners will will separate the data of macroeconomics by using entrancing bits of knowledge; relationship coefficient and various direct backslide. The SPSS programming will help which is the best genuine strategy to be used to test the hypothesis and deciphering the result. These will include:


·         Descriptive Statistic

Unmistakable examinations have been use to explore the data assembled and shortening and portraying the data. It uses to depict the central segments of the data and observations about the data assembled. Particular estimations, for instance, most extraordinary, minimum, suggests, standard deviation skewness, kurtosis and vacillation will get for between time scale self-governing and subordinate elements.

·         Correlation Coefficient

The relationship coefficient is a standout among the most unremarkable and most utilizable bits of knowledge. This system is to evaluate the relationship that begins from the self-governing elements to the dependent variable. There could make sure relationship two variables, which is addressed by 1.0 (notwithstanding 1), or a perfect negative association – 1.0(minus 1). If it zero, it infers the two components are not straightforwardly associated. For example 1.0 is sure official association, 0.9-0.7 is certain excited relationship, 0.6-0.4 positive medium association and 0.3-0.1 is certain feeble relationship. By the day’s end it withal can be 0 no relationship, 0.5 immediate, 1.0 authority association.

·         Multiple Linear Regression

This model was acclimated to take a gander at the solid time effects of a couple of self-governing variables towards the dependent factors that between times scaled. The degree and typical for the impact between free factors and the poor variables get to using various straight regressions. The look at measured for changed direct backslide is   this condition will use when the self-sufficient variable is more than 1. Various direct regression examination benefits in observing the measure of the distinction in the dependent variable is illustrated by an arrangement of prognosticators. This sort of examination is withal being used to take after the progressive that reason the destitute variable through way examination.

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