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Sunday, May 18, 2008

Special meeting on diesel quotas as crisis worsens

Malaysia, as an oil producing country and the people in the country need to suffer for the shortage of diesel, isn’t it ridiculous or reasonable? The article “Special meeting on diesel quotas as crisis worsens" expressed that at the year between 2002 and 2005, the demand of Diesel for industries was decreased from 7 billion liters to 4 billion liters. At the same time, the demand for the Diesel at the petrol station had moved out from 2.1 billion liters to 5.5 billion liters. Subsequently, where are those Diesel gone?

At the moment, this report is about the analysis of the diesel shortage in Malaysia due to some reasonable causes based on the article “The Diesel shortage – Solution in the Pipeline” from New Straits Times dated 27th of April 2005. The article reported that the both the quota and subsidy systems should be stop immediately because all these systems cannot solve the problems. Besides that, some figures about the demand of the diesel for the previous year until now will be introduced. Finally, some recommendations or solutions will be suggested to solve the particular problem. According to the article, there are two reasons present to the shortage of diesel in Malaysia.

Reasons 1: The quota system that established since January 2005

The first reason that leads to the shortage of Diesel is the quota system that had been established by the government since January 2005. The government imposed the quota system because they suspect that there were some unscrupulous people get supply from the petrol stations and resell it for others with higher price.

Basically, quota defines as quantitative limits placed on the importation of specified goods. On the other hand, price elasticity defines as the impact of quantity demanded of a good to a chance in the price of the good. According to the graph (figure 1), quota system had been established, so producers will produce less and the supply curve will shift leftward. In this case, the price of the Diesel will increase too which show in the graph from P1 to P2. When the price increase from P1 to P2, the impact of the quantity demanded is only a small amount. Hereby, the fuel in the world market can be defined as inelastic demand because although the price increases in a quite big amount, but the respond of the quantity demanded is too small which is inelastic.

When the government enforced the quota system, the amount of Diesel that all users could buy is limited. In this case, what would happen to the big companies that they need the diesel to operate their business and daily life? They could not buy so much Diesel at a time. Without Diesel, they had been forced to stop their business. Consequently, the whole country’s economy will plunge into crisis.

Fuel is one of the basic and necessary costs for most of the transportations. Even though the government increased the price of Diesel and established the quota system on it, it would not reduce the demand of Diesel in the market. In this case, there will be long queues at the petrol station everyday. Therefore, the country will end result with the shortage of Diesel.

Reason 2: Subsidy system
The second reasons that established by the government was subsidized price of Diesel. Subsidy defines as a grant paid by government to an enterprise that benefits the buyers and sellers.

From the government perspective, they think that subsidized price of Diesel will avoid the shortage of Diesel. As the information, there was a different in price of Diesel for commercial and industry users which were RM0.88 and RM1.70 respectively. In this case, the shortage of Diesel became more serious when smugglers use lorry to smuggling the resources from petrol stations with the price RM0.88/litre and resell it for industry users with the price RM1.70/litre. Furthermore, this article “Set ‘three-quarter-tank’ ruling”introduced that the Diesel price in Thailand was RM2. So, smugglers will use this chance to earn profits. In this situation, the country had faced a big problem because the government money is being stolen. According to Darshni, Karim and Augustin, government had spent RM100 million in subsidized diesel every month. As a result, subsidy system is not suitable to overcome the problem because if the government preserved to use this system, the country’s economy will become precarious.

Government imposed this system to control the illegal sale of government subsidized fuel for industry use. Unfortunately, illegal sale of diesel did not cut down but the shortage is being getting worst. This condition had created a big problem for many sectors such as lorry, public transport, school bus and even fishing industries. All the problems included, lorry could not operations, school bus could not fetched students from home and school, employees could not use public transport as their transportation, and also fishermen could not go out to the sea. All this will happen just because there was no substitute for Diesel, and yet everyone who needs it to run their business and daily life could not get sufficient supply. For instance, the article “Twenty trawlers grounded at tuna port”asserts that many boats could not go out to the sea because they could only buy 1000 liters per boat instead of 3000 liters per boat beforehand.

Hence, government should think rationally to solve this most significant problem in our country. This report had made some suggestions of solving this problem. Firstly, government should abolish the quota system. Reviewing to the fishing industry, government should sell the Diesel directly to the fisherman, not middle man. It is to avoid the middle man set the margin pricing too high and it will burdening the fisherman. Secondly, government should set the price gap for Diesel between commercial users and industrial users almost the equal to deter smuggling and black market trading. Just for an example, government can increase the Diesel price for commercial users to RM1.10 and decreased the Diesel price of industrial users to RM1.40. According to the graph (figure 2), government still gain the same amount of total revenue as before. However, with this pricing strategy, it can reduce the profits of the smugglers. As the number of smugglers decreased, the problem of artificial shortage will be controlled too.

Total Revenue = RM(1.70+0.80) × 50,000
= RM125,000 Total Revenue = RM(1.40+1.10) × 50,000
= RM125,000

Figure 2: Total revenue for Diesel market.

As a conclusion, government plays a very important role when there is a strong market power lead to market failure. In this situation, government must be of assistance to allocate the resources efficiency. Additionally, the government decision is very imperative because a good stand would give the whole country economy welfare. Inversely, an unfavorable stand would lead to crisis or market failure.