Record high oil prices are a double-edged sword for Malaysia, boosting its oil earnings but potentially also damaging the global economy and so its major export markets, analysts said.

Crude oil futures in New York slid slid US$2.37 to US$39.96 Wednesday, a day after surging to a record of US$42.33 a barrel after a weekend attack in Saudi Arabia heightened fears about potential terrorist disruptions to energy supplies.

The drop followed comments from Saudi officials pledging to boost supply and bring down prices.

"Any price spike in global crude oil markets would have a double-edged impact on Malaysia," Azrul Azwar, senior economist with MIDF Berhad told AFP.

"As a net oil exporter, it would appear that Malaysia would benefit from high oil prices, especially in the form of higher export proceeds," he said.

However, the danger was higher oil prices could stoke inflation in the major consuming countries, which also happen to be Malaysia's main export markets, sparking higher interest rates as they try to head off the problem.

"An ill-timed rate-hike could have a dampening impact on the global recovery and Malaysia would not be insulated from a downturn on a global scale even if high oil prices seem favourable for our export earnings," he said.

Malaysia is the second largest oil producer in Southeast Asia after Indonesia, with 2003 output up five percent to 625,800 barrels per day.

Key markets India, Australia, Thailand, China and the United States took about 65 percent of last year's oil shipments, which rose 35 percent to RM15.7 billion (US$4.13 billion), roughly equal to four percent of total exports last year, according to central bank figures.

Major oil markets

Malaysia has progressively diversified away from its richly endowed raw material base to emerge as a major manufacturer base for many goods.

In April, for example, it had its 78th consecutive monthly trade surplus, at US$1.57 billion as exports rose 23.2 percent from a year earlier on strong demand for electrical and electronic products, optical and scientific goods, textiles and clothing, processed food, as well as rubber products and palm oil.

The major markets were the Association of Southeast Asian Nations, the United States, the European Union, Japan, China and Hong Kong, which combined took 79 percent of Malaysia's total exports for the month.

Saifuddin Morad, economist with Mayban Securities warned that "it could be a threat to Malaysia if prices touched the 45 to 50 dollar level and are sustained for three to four months.

"That would hurt the United States and therefore hurt Malaysian exports of electrical and electronic products," he said.

Despite the concerns, both analysts said they thought the worst could be avoided, with the Organisation of Petroleum Exporting Countries likely to raise output and so curb prices. - AFP