Introduction
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.
Body
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.
Conclusion
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.
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Sunday, May 18, 2008
Time to Conserve Energy
1.0 INTRODUCTION
Malaysia, a country once ranked 24th in terms of world oil reserves and 13th for world gas reserves is suffering together with the world after price increases in oil and gas. Isn’t that ridiculous? According to Fong, C. 2006, ‘Cremations may cost more now’, The Star Online, 21st April, diesel prices have increased from RM0.90/L in October to the current RM1.98. Besides, there was just a recent increase in petrol prices by 30 cents, from RM1.61/L to the current RM1.91.
The article I have chosen, entitled ‘Time to conserve energy’, The Star Online, 30th March 2006, describes the increase in petroleum prices as well as energy prices. It talks about the response of consumers towards this price increase and how it affects the economy. This article mentions that the Malaysian government did the right thing by raising the prices of petroleum products, but could have improved the way the price increase was handled. It also says that the conservation and efficiency of energy, particularly petroleum, should be the new way of life for consumers. Besides, it also talks about the cause and effects of the price increase in petroleum.
2.0 ANALYSIS
2.1 Demand & Supply
In the main article, ‘Time to conserve energy’, The Star Online, 30th March 2006, it is stated that the price of petrol has to be increased worldwide because the price mechanism in a free market economy must be allowed to function efficiently. If not, our scarce/limited resources would not be allocated efficiently.
Price mechanism is a system whereby prices of goods and services and prices of the factors of production are determined through the market forces of demand and supply. In the goods market of petroleum, if demand for petrol is greater than the supply of petrol, the price of petrol will increase and vice versa. Quantity demand is defined as the amount of the good that buyers are willing and able to purchase.
A movement along the demand curve is caused by changes in the price of the good itself ceteris paribus, all other factors remaining constant. The recent 30 cent increase in petrol will result in an increase in price from the previous RM1.61, to the current RM1.91/L. Thus, causing an upward movement (contraction) along the demand curve – quantity demanded would decrease.
This is in accordance with the Law of Demand that states that other things being equal, the quantity demanded of a good falls when the price of the good rises.
A shift in the demand curve, or change in demand is caused by other factors and not by price. For example, a change in income, changes in tastes and preferences, increase in population etc. One of the factors is the change in the price of other goods, e.g. substitute/ complementary goods. In this article, we can use the example of cars as a complementary good for petrol. Complements can be defined as goods that are demanded together to fulfill one’s satisfaction.
According to Nathan, D.M. 2006, ‘National Automotive Police arrives’, The Star Online, 25th March, the National Automotive Policy had unveiled a reduction in car prices. Even though the quantity demand for petrol is said to decrease due to the increase in the price of petrol, we can also imply that the demand for petrol may not decrease as much as it is supposed to because there is also a decrease in the price of cars after the implementation of the National Automotive Policy (NAP). Consumers are more prone to buying cars after the reduction in prices, and thus, there may be a slight increase in the demand for petrol because cars and petrol are complements. We can also link this concept to joint demand, when there is an increase in the demand for good X, which in this case we can say is cars, the demand for good Y, petrol, will also increase.
Subsidies can be defined as grants or payments by the government to the producer to reduce the costs of production in order to encourage production and consumption of a good. When the government withdrew their subsidies for petrol by 30cents/L, the price increased from RM1.61 to RM1.91 per litre. Thus, in accordance with the Law of Demand, also resulting in a decrease in demand for petrol.
2.2 Elasticity
Price Elasticity of Demand
Price elasticity of demand is defined as the degree of the responsiveness of quantity demanded to changes in price, ceteris paribus. In the short-term, we can imply that petrol has elastic demand, that is people are responding to the increase in price of petrol - there may be a slight decrease in the demand for petrol following the increase in price. Consumers may try to consume less following the increase in petrol prices. For example, opt for carpooling, public transport, or even walking instead of driving.
However, in the long-term, petrol is said to have inelastic demand as people slowly adjust to the increase in price. They know that the price of petrol will remain at the higher price and thus, have no choice but to attend to it. In addition, petrol currently has no close substitutes, so even though price increases, those who have cars do not have a choice but to purchase petrol at the higher price.
On the other hand, if, for example, in the future, substitutes for petrol are found, just like how bio-fuel was found as a substitute for diesel, demand will change back to elastic because there is the availability of competition, thus, consumers have choices.
In this case, the government may be using this concept/ significance of elasticity of demand to increase their revenue. In our current situation, the government has withdrawn portions of their subsidies for petrol. They know that the demand for petrol is inelastic. According to the article, ‘March inflation at 4.8%’, The Star Online, 20th April 2006, the price of petrol has increased by 23%. Now, for example if the quantity demanded for petrol decreased by 10%, government revenue would have increased by 13% (23%-10%).
Cross Elasticity of Demand
Cross elasticity of demand is defined as the degree of responsiveness of one good to a change in the price of another good. In this case, the increase in the price of petrol may decrease the quantity demanded for cars even though the price of cars has reduced after NAP. There is a negative relationship between the price of petrol and the quantity demand for cars (complementary goods), thus, is a negative cross elasticity.
Malaysia, a country once ranked 24th in terms of world oil reserves and 13th for world gas reserves is suffering together with the world after price increases in oil and gas. Isn’t that ridiculous? According to Fong, C. 2006, ‘Cremations may cost more now’, The Star Online, 21st April, diesel prices have increased from RM0.90/L in October to the current RM1.98. Besides, there was just a recent increase in petrol prices by 30 cents, from RM1.61/L to the current RM1.91.
The article I have chosen, entitled ‘Time to conserve energy’, The Star Online, 30th March 2006, describes the increase in petroleum prices as well as energy prices. It talks about the response of consumers towards this price increase and how it affects the economy. This article mentions that the Malaysian government did the right thing by raising the prices of petroleum products, but could have improved the way the price increase was handled. It also says that the conservation and efficiency of energy, particularly petroleum, should be the new way of life for consumers. Besides, it also talks about the cause and effects of the price increase in petroleum.
2.0 ANALYSIS
2.1 Demand & Supply
In the main article, ‘Time to conserve energy’, The Star Online, 30th March 2006, it is stated that the price of petrol has to be increased worldwide because the price mechanism in a free market economy must be allowed to function efficiently. If not, our scarce/limited resources would not be allocated efficiently.
Price mechanism is a system whereby prices of goods and services and prices of the factors of production are determined through the market forces of demand and supply. In the goods market of petroleum, if demand for petrol is greater than the supply of petrol, the price of petrol will increase and vice versa. Quantity demand is defined as the amount of the good that buyers are willing and able to purchase.
A movement along the demand curve is caused by changes in the price of the good itself ceteris paribus, all other factors remaining constant. The recent 30 cent increase in petrol will result in an increase in price from the previous RM1.61, to the current RM1.91/L. Thus, causing an upward movement (contraction) along the demand curve – quantity demanded would decrease.
This is in accordance with the Law of Demand that states that other things being equal, the quantity demanded of a good falls when the price of the good rises.
A shift in the demand curve, or change in demand is caused by other factors and not by price. For example, a change in income, changes in tastes and preferences, increase in population etc. One of the factors is the change in the price of other goods, e.g. substitute/ complementary goods. In this article, we can use the example of cars as a complementary good for petrol. Complements can be defined as goods that are demanded together to fulfill one’s satisfaction.
According to Nathan, D.M. 2006, ‘National Automotive Police arrives’, The Star Online, 25th March, the National Automotive Policy had unveiled a reduction in car prices. Even though the quantity demand for petrol is said to decrease due to the increase in the price of petrol, we can also imply that the demand for petrol may not decrease as much as it is supposed to because there is also a decrease in the price of cars after the implementation of the National Automotive Policy (NAP). Consumers are more prone to buying cars after the reduction in prices, and thus, there may be a slight increase in the demand for petrol because cars and petrol are complements. We can also link this concept to joint demand, when there is an increase in the demand for good X, which in this case we can say is cars, the demand for good Y, petrol, will also increase.
Subsidies can be defined as grants or payments by the government to the producer to reduce the costs of production in order to encourage production and consumption of a good. When the government withdrew their subsidies for petrol by 30cents/L, the price increased from RM1.61 to RM1.91 per litre. Thus, in accordance with the Law of Demand, also resulting in a decrease in demand for petrol.
2.2 Elasticity
Price Elasticity of Demand
Price elasticity of demand is defined as the degree of the responsiveness of quantity demanded to changes in price, ceteris paribus. In the short-term, we can imply that petrol has elastic demand, that is people are responding to the increase in price of petrol - there may be a slight decrease in the demand for petrol following the increase in price. Consumers may try to consume less following the increase in petrol prices. For example, opt for carpooling, public transport, or even walking instead of driving.
However, in the long-term, petrol is said to have inelastic demand as people slowly adjust to the increase in price. They know that the price of petrol will remain at the higher price and thus, have no choice but to attend to it. In addition, petrol currently has no close substitutes, so even though price increases, those who have cars do not have a choice but to purchase petrol at the higher price.
On the other hand, if, for example, in the future, substitutes for petrol are found, just like how bio-fuel was found as a substitute for diesel, demand will change back to elastic because there is the availability of competition, thus, consumers have choices.
In this case, the government may be using this concept/ significance of elasticity of demand to increase their revenue. In our current situation, the government has withdrawn portions of their subsidies for petrol. They know that the demand for petrol is inelastic. According to the article, ‘March inflation at 4.8%’, The Star Online, 20th April 2006, the price of petrol has increased by 23%. Now, for example if the quantity demanded for petrol decreased by 10%, government revenue would have increased by 13% (23%-10%).
Cross Elasticity of Demand
Cross elasticity of demand is defined as the degree of responsiveness of one good to a change in the price of another good. In this case, the increase in the price of petrol may decrease the quantity demanded for cars even though the price of cars has reduced after NAP. There is a negative relationship between the price of petrol and the quantity demand for cars (complementary goods), thus, is a negative cross elasticity.
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