Malacca Straits bypass -- Good for Malaysia and oil prices

May 30, 2007

More than 15% of the world's oil is shipped through the Malacca Straits. A Malaysian company, Trans-Peninsula Petroleum (TPP), has announced it will build a new $7 billion pipeline that will divert about 20% of this oil from the vulnerable Straits. About 50,000 ships pass through the Malacca Straits each year.

This will create more safety for oil, since the Straits of Malacca are very narrow, hence susceptible to piracy and potential terrorist attacks. It will also improve Malaysia’s economy at the expense of Singapore’s, a longtime rival. Singapore is also a major refining center for all of Southeast Asia. Malaysia’s pipeline plan will create rival refineries at the pipeline’s transit points.

TPP partners include Saudi Arabian, Indonesian and other Malaysian companies. The 193 mile pipeline would go from Kedah on Malaysia’s northwest coast to Kelantan on the eastern coast, where it would be shipped to China, Japan and South Korea. The pipeline is scheduled to be completed by 2014.

What the Malacca Straits bypass means:
The Malacca Straits are bordered and patrolled by Indonesia, Malaysia and Singapore. The area is known for rampant piracy, which has subsided since a patrol crackdown in 2005. However, both Indonesia and Malaysia are primarily Muslim, and the Jemaah Islamiyah (JI), the Southeast Asian wing of al-Qaeda, is based in Malaysia. This has raised concerns about possible terrorist attacks. A loaded super-tanker would make as good a weapon as a commercial airplane did on 9/11. Concerns about terrorism have increased support for the expensive and difficult bypass.

In addition, Malaysia's economy has become sophisticated and stable enough to foster such an investment. Malaysia’s GDP has grown about 5.4% per year since the 1997 Asian Financial Crisis. The economy is well-diversified, based on exports of consumer electronics, manufacturing and oil to Japan, China and the U.S. The currency was allowed to float in 2005, and appreciated 6% against the dollar in 2006, which as hurt its competitiveness against China. As a result, Malaysia began discussions with the U.S. to begin a Free Trade Agreement, although not much progress has been made in the last year.

Action steps:
This action is good for your emerging market or Southeast Asian funds, and your commodities funds. My general rule of thumb is to have 1/3 of my total net worth in international funds, and 1/3 of that should be in emerging markets. Similarly, I generally have 1/3 of my net worth in hard assets, including commodities funds, REIT's and the equity in my home. Check with your financial planner before making any changes to your asset allocation.

For more information about the asset allocation model that allowed me to retire at age 50, see "Retirement Planning 101."

Source: International Herald Tribune, “Malaysian oil pipeline would by pass sea path,” 5/28/07; BBC News, “Malaysian oil plan gets partners,” 5/29/07; Asia Times online, “Strait of Fire”, 8/4/04

Related articles:

Singapore at 8% growth, 11/28/06

ASEAN economic summit, 5/16/07

Profit from increased U.S. free trade with Malaysia, 3/11/06

Indonesia repays IMF loan early, 10/25/06

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