Relationship Between Crude Oil and Industrial 4.0 in Malaysia

Crude oil is considered to be a non-renewable power source due to the fact that it was created when the remains of algae was heated under pressure by the earth over millions of years. The long-term process makes it very limited to find, as it is not as abundant as other fuel sources. The crude oil market is always in high demand among the investors and consumers. Therefore, people are always finding ways to secure the supply of crude oil, especially in countries that produce and export crude oil. The relationship between crude oil and the economic perspective beneath it is very close to one another.

Since a few decades ago, oil price has been increasing gradually. The world economy of oil supply is never stagnant due to a few factors. One of them includes the imbalance between the production of crude oil and the continuously rapid demand in the market itself. The world is experiencing over population, therefore it creates greater demand on the basic supplies (food, energy resource, etc). The growth rate of crude oil production is worryingly sliding downwards from time to time. Based on Kumhof and Muir (2012), the oil economy crisis is due to negative oil supply shock. Two important assumptions can be made from the statement; the trend growth rate of world oil output is reduced, and a conventional macroeconomic model, with oil entering the economy’s production and consumption technologies is adequate under conditions of increasing oil shortage.

To study more about the policy, risk analysis and scenario analysis, Global Integrated Monetary and Fiscal Model (GIMF), a multi-region dynamic general equilibrium model is used. However, after a research is done by Kumhof and Muir (2012), it is found that under the two assumptions, oil shortage is not a major constraint on global growth. Besides, it does not majorly contribute to the tremendous fall of the current oil economy imbalance. Growing Elasticity Scenario is seen to happen if the oil price is doubled or tripled from the permanent real price. The increased price will actually lead to smaller gap of effects on growth and current oil economy imbalance, which is contrast to the initial belief that it will destroy the balance in the economy.

The oil price changes from time to time, and the one who is responsible for it is the Organization of Petroleum-Exporting Countries (OPEC). It is an intergovernmental organization of 15 nations, in which are major oil-exporting nations. OPEC has a remarkable impact on the oil price. However, its ability to control the oil price is quite limited over the long term. This is due to the fact that all the involved countries have different inducement compared to OPEC as a whole. This statement can be further explained through a situation in which the oil price is set by OPEC but gains no satisfaction and acceptance from the OPEC countries. Therefore, they have the authority to cut the supply of oil to rise the oil price. However, it is not a smart step as they knew that by reducing the supply, they also need to reduce the revenues. The most ideal situation that they are trying to achieve is by increasing the oil price while increasing the revenues.

OPEC can also decide to increase or decrease the oil supply, depending on the approval from the OPEC countries. In the end, the one that controls the oil price is solely depending on the forces of supply and demand itself. Although OPEC has the authority to control the price, it is always in short term, and the price will only be affected temporarily. Usually in common cases, the price set by OPEC is an average of the oil prices from a few countries, which are Algeria, Indonesia, Nigeria, Saudi Arabia, Dubai, Venezuela and Mexico. This average price will be constantly monitored by OPEC to study the world oil market conditions. However, OPEC’s oil prices are usually lower than other countries because of the quality of the oil itself. OPEC countries produce oil that has higher content in sulphur, which will only lead to less quality of the gasoline produced. By setting the price lower, it will be able to satisfy the consumer’s satisfaction and needs as the price is in match with the quality of the oil.

Due to the fluctuations of crude oil prices, it is possible for investors to invest in crude oil futures as it can help to make or lose substantial amount of money in a short period of time. There are two types of oil contracts that can be purchased by the investors; futures contracts and spot contracts.

As stated by Fabozzi (2004), futures contract is an agreement between two parties, which are a buyer and a seller, wherein the buyer agrees to take delivery of something at a specified price at the end of the designated period of time and the seller agrees to make delivery of something at a specified price at the end of the designated period of time. In this case, it is specifically referring to buying and selling a certain number of barrels set amount of oil. Usually, they will liquidate their future holdings before they take the delivery. Although there are a multiple number of futures contracts that are opened at one time, mostly trading will only revolve around the nearest futures contract, which is also known as the most active contract. The price of the futures contract depends on the willingness of the buyers to pay for oil on a delivery date set at some point in the future. As the date is actually in the future instead of at the current time, the price cannot be guaranteed to hit the targeted price in the market. Usually, the price stated will only be the price that is anticipated and targeted by the purchaser of the oil.

Another type of contract is spot contracts. This type of contract differs from futures contract, as the exchange of financial instruments settles immediately. The price of the spot contract depends on the current market price for oil. Commodity contracts bought and sold on the spot markets take effective immediately, as it is an immediate process. The process only includes the exchange of money, followed by the acceptance delivery of the goods by the purchaser. In the case of oil, the demand for immediate delivery versus future delivery is small, due to no small part to the logistics of transporting oil to users. However, normally investors do not take delivery at all, thus spot contract is less applied compared to futures contract.

Industry 4.0 is referred to as production or manufacturing based industries digitalization transformation, driven by connected technologies. Industry 4.0 introduces what is referred to as “smart factory” in which cyber physical systems monitor real time physical progress of the factory and are able to make decentralized decisions. Other terminology includes Smart Manufacturing. It is a revolution that was initiated in Germany, and Malaysia is one of the countries that adapted the strategy to transform industrial technology to another level of redevelopment. The advancement of technologies like smart sensors, digital twins and threads, machine learning, AI, and cloud solutions to process it all are pillars of Industry 4.0. It cannot be denied that digitalization and industrial technologies will always come together at one pace.

Implementing this new system has the potential to disrupt the competitive landscape in the industry. Through Industry 4.0, oil and gas industries around Malaysia will be able to improve the quality and lowering the cost of oil drilling, generate higher recovery rates for lower cost in operations, higher rate margins and plant reliability in the refining space, and optimize distribution and marketing downstream. The companies can also expect more benefits around managing risk, cost and productivity.

However, while embracing the new digital technology in producing crude oil, it does not necessarily mean that all problems and difficulties in both offshore and onshore site can be slayed altogether with the usage of technologies. Sometimes, it could leave operators struggling to take advantage of the promise of digital transformation and all the new forms of data available while drowning in the hype and wondering if the benefits really do exist. Therefore, it is extremely crucial for the companies to thoroughly monitor and examine the type of digital technology before implementing it as a whole. For example, operations, maintenance, and process safety rely heavily on human input. As a result, operators struggle to achieve efficiency and appropriately manage performance.