Table of Contents

Coursework Cover Sheet ...................................................................................................................

Coursework Question.........................................................................................................................

Assignment marking scheme .............................................................................................................

Table Of Content..............................................................................................................................1

1.0 Introduction .......................................................................................................................... 2 - 3

2.0 Implication .......................................................................................................................... 4- 11

3.0 Conclusion ..............................................................................................................................12

4.0 References ................................................................................................................................13

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1.0 INTRODUCTION

Fuel, oil or in some countries called gas is undeniable as important commodities and

resources for many sectors in the world especially in transportation, providing energy and

industries Petroleum is crude oil in its natural state which contains a variety of hydrocarbons,

liquid organic and other inorganic compounds .Malaysia is known for being an important

producer of petroleum. It has the 23rd largest crude oil reserves in the globe. Among many oil

companies found in Malaysia such as Caltex and Shell, Petronas is the only major oil company

that is owned by the government. In year 2008, Petronas contributed RM67.6 billion to the

government, which was also 44% of the government's revenue (Kok, 2009). This shows that the

petroleum industry is a significant contributor to Malaysia's income.

MALAYSIA CRUDE OIL PRODUCTION

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 The increase in fuel prices by 0.25 per cent to RON 95, RON 97, RON 97 and diesel

featured in an article in February 2015. It states that 95 RON and diesel will be sold at RM 1.95

per liter for the month of March 2015 and RON 97 priced at RM2.25 as international crude oil

prices have raised. In February 2015, the price was determined based on the exchange rate and

the price of the average cost of crude oil and is said by the Minister of Domestic Trade,

Cooperatives and Consumerism Minister Datuk Seri Hasan Malek. And forceful action was

taken against oil companies if they do not comply with the new price. The economic concept of

market structure can be used to illustrate this article. Since December 2014, the fuel subsidy

system were abolished by the Government of Malaysia after global oil prices have fallen to less

than $ 60 per barrel that can be used to describe the market balance. Start from there, a managed

float method is used to set the retail price of fuel in Malaysia. In June, global oil prices have

fallen because of overproduction. It also gives credence to the oversupply of oil will lead to a

decline in prices in the short term.

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2.0 IMPLICATION

2.1 CONSUMERS

Price of fuel (RM)

Diagram 1: Demand Curve for fuel

In response to price changes lead to changes in supply and demand are known as

inelastic. Figure 1 shows inelastic demand curve of a country fuel. When increase in fuel prices

from P1 to P2, quantity demanded will decline from Q1 to Q2. To treat inelastic demand, price

elasticity of demand will be smaller than 1. The requested quantity has changed slightly

compared with the price changes. As we can see in the diagram, the price change is greater than

the change in the quantity demanded in the demand curve cannot be changed. Example are

increased prices by 20% would lead to a 5% contraction in demand. Using the 20% percentage

changes in fuel prices and 5% as a change in the quantity demanded of the fuel. Apart from that,

the total revenue would increase if there is an increase in price. This will happen despite the fall

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in quantity demanded. Therefore, when Malaysia raised the price of RON 97 from RM 2.00 to

RM 2.25 and RON 95 and diesel from RM 1.70 to RM 1.95, the government will increase

revenue.

Users need to spend extra money on their monthly travel expenses due to higher fuel

prices and it will be a direct impact on consumers. Car users will experience a great impression,

and they represent a significant share of consumers. Increase in petrol price will increase the

transportation cost, increase in transportation cost will increase in price of goods, and this

increase in price of goods would gradually force the people to loosen their pockets even more,

and so on like this, the chain will further propagate. This is because, Malaysia has a large

population of people own a car. No increase in salary and it's because of rising oil prices. Wages

and GDP growth will fall behind if oil prices were to rise. One way to solve this problem by

reducing discretionary spending in the long term by its users.

Society will immediately be affected by the rise in fuel prices because consumer products

will be more costly and this leads to an increase of vice activities. The increase in prices of goods

and services and contribute to inflation in our economy is one of a cascading effect through the

increase in fuel prices. This is because basic necessities such as rice, flour, sugar and so on will

be in great demand and some warehouses will store or hoard the items to further increase the

price of the product. Moreover, in the newspapers today, reports of smuggling of these items

prove that this vice activity is on the rise. For example, the recent sugar price hike caused a furor

among the Malaysian society as it costs more fuel to travel to and from the supermarket and

when arriving, most places had run out of stock even though the government had allocated 2kg

of sugar to one person. Therefore, the fuel price increase had definitely caused more hardships to

society today.

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6
2.2 FIRMS

Price of fuel

Diagram 2.2: Supply Curve of Fuel

We assume that the initial price and the quantity supplied are at P1 and Q1. When the

price of gasoline increases, the supply curve will move up from P1 to P2 and the quantity

supplied will increase from Qs1 to Qs2. Instead, the quantity demanded will be affected by

higher gasoline prices as well. Quantity demanded will decrease, while there will be a movement

along the curve. This is due to their purchasing behavior had changed completely.

The negative relationship between price and quantity demanded petrol demonstrated through

the law of demand.

The overall business in Malaysia will experience increasing operating costs due course

material costs fuel. Factories, companies and businesses, particularly in connection with the

transportation industry. Face indirect effects such as causing higher operating costs.

SME business community particularly the increasing challenges and competition in the

marketplace business caused by a decline in the price of fuel and other utilities such as water and

electricity. Some discretionary sector can shut their doors are really small and others may

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dismiss workers for supply and demand back into balance. On holiday travel, consumers have

less money to spend on high oil prices in. In the case of commercial air lines. Therefore, it causes

a drop in the demand for tickets. At the same time, operating costs are higher ship fuel that

expensive due to an increase in the handling of the aircraft.

Cost-push inflation is inevitable. Higher fuel prices will eventually be passed on by

producers to average consumers like us. Employees may also start to bargain for higher pay

which can cause the cost-push inflation to worsen. A possible fall in price competitiveness. An

increase in the costs of production will have to be passed on in the form of higher price and it is

afraid that our goods will be even less price competitive after this. Global economies are yet to

fully recover and that means a weak export. If this is taken into account, Malaysian exports are

likely to fall further. Trade position will worsen in the business world, firms are fiercely fighting

with one another to survive. Higher costs, inability to reduce inefficiency and the need to suffer

from low profits and go bankrupt is a price that must be paid by uncompetitive firms. To some

extent, it is ‘good’ to have some firms out of the market especially in industries that have been

oversupplied with firms. At the end, only the genuinely competitive ones will stay.

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2.3 GOVERNMENT

Figure 2.3

Date RON 97 (RM) RON 95 (RM) Diesel (RM)

19 November 2014 2.55 2.30 2.20

1 December 2014 2.46 2.26 2.23

1 January 2015 2.11 1.91 1.93

1 February 2015 2.00 1.70 1.70

1 March 2015 2.25 1.95 1.95

Table 1: Table of Malaysia Fuel Price

Figure 2.3 shows that the Malaysian government ended subsidies for fuel, the supply

curve will shift to the left. Equilibrium price will increase from P1 to P2 but the balance quantity

will be reduced from Q1 to Q2. Based on the table above, although the removal of subsidies, oil

prices have declined instead. However, the Malaysian government has warned all operators of

gas stations and oil companies that the abolition of subsidies should not be used as a reason to

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raise the price of fuel. They are reminded to adhere to the prices set by the government or a

serious action would be taken against them. In other words, producers are allowed to set the price

of gasoline higher than the ceiling price. Producer and consumer surplus will shrink and lose

weight off will occur.

The financial implications of the government where Malaysia's economy has a huge

budget deficit and the real (annual debt outstanding) that the national debt has exceeded the

allowable target. The gap between tax expense and the public sector will fall due to rationalize

subsidies. most countries around the world have agreed to lower the price of their petrol pumps

in conjunction with the global oversupply, but the government has taken the opposite stance.

Despite rising prices, our prices are not reflective of the true equilibrium price is higher. Other

countries may have to reduce their prices but it is worth it because they are in accordance with

the market mechanism. Governments are faced with paying more in unemployment benefits and

the payment of more stimuli, followed by the unemployment rate is higher. People impose a

lower tax because the job with low. One main reason (but not the only reason) to issue

government debt today major oil importers such as the US, Japan, and many in Europe, is prices.

High oil governments are also affected by the high cost of replacing infrastructure built when oil

prices were much lower. For example, the cost of replacing the asphalt road is much higher.

Similarly, the cost of replacing the bridges and underground pipelines buried.

Rising fuel prices, countries should also avoid general subsidies to the extent possible.

Although this could be difficult decision for the government due to cutting subsidies, it is good

policy to manage the price rising, since the country by cutting subsidies can invest more on

production. Furthermore, by increasing GDP, the price would be stabilized in a satisfied level.

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Moreover, since export restrictions are harmful, not helpful, as are or direct price controls,

therefore, helping by subsidies, definitely the production would be discouraged as well.

Slower economic growth. As the aggregate supply (AS) curve shifts backward, not only

the price level increase but we will also witness a fall in real GDP or real income. This is

associated with the slowing down of economic activities. If the impact is major, then in the short

run, Malaysian economy may experience a stagflation (stagnant growth and inflation).Such

move is also politically unpopular. This may cause the ruling government to further lose votes in

the coming election (possibility is remote as people ‘may have forgotten’ about that).

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3.0 CONCLUSION

Fuel classified as immutable. This is because there are a number of substitute fuels. In

addition, the fuel is also a need product to the public. For example, most cars need petrol.

Therefore, people who drive to work or school still need to pour petrol regardless of price. The

show cause why the petrol price increases have failed to significantly reduce gasoline demand,

making an improvement demand. Any cannot be changed in petrol prices will affect the

economy as a whole, for example; higher logistics costs and increase the price of goods sold.

Users should bear the burden of higher costs of goods, with the set inflation. With gasoline prices

continue to rise, consumers need to change their lifestyle, such as car-pooling and taking public

transportation. They also need to reduce unnecessary travel and leisure. Most countries need to

adopt Government intervention to control prices to curb inflation with subsidies. In my view, the

appropriate proposals will be electrical problems can be reduced so that the industry can continue

to fuel production and oil prices will drop to an average price. Moreover, if the government can

give subsidies would be a great benefit to people who need fuel for their daily needs. Thus, with

government intervention such as a subsidy, it can help them to buy fuel prices may be lower.

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4.0 REFERENCES

Globalpetrolprices, (2015). Malaysia gasoline prices, 08-Jun-2015 | GlobalPetrolPrices.com.

[online] Available at: http://www.globalpetrolprices.com/Malaysia/gasoline_prices/ [Accessed 9

Jun. 2015].

Shell, (2015). Shell at a glance. [online] Available at: http://www.shell.com.my/aboutshell/at-a-

glance.html [Accessed 9 Jun. 2015].

The Malaysian Insider, (2015). After three months of price drops, fuel up 25 sen tomorrow - The

Malaysian Insider.

http://www.themalaysianinsider.com/malaysia/article/fuel-prices-up-by-25-sen-at-midnight

[Accessed 9 Jun. 2015].

The Malaysian Insider, (2015). Petronas Dagangan eyes 35% consumer vehicle fuel market

share - The Malaysian Insider. [online] Available at:

http://www.themalaysianinsider.com/business/article/petronas-dagangan-eyes-35-consumer-

vehicle-fuel-market-share [Accessed 9 Jun. 2015].

http://www.ukessays.com/essays/economics/effects-of-war-on-fuel-market-equilibrium-

economics-essay.php#ixzz3ijpj99Jq

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