SIR SUKIMAN BIN ISHAK

MICROECONOMICS - ECMB223

Part 2 : Critical Review

2.0 Microeconomics Concept - Supply and Demand

Supply is defined as the quantity of a product or service that will be offered for sale at a
given price in a given market and a given period of time assuming other things remain the
same while Demand is the quantity of various goods that people are willing and able to buy
at a particular time and at a given range of prices.

Nowadays, prices of properties, services and educations in Malaysia has been

skyrocketed for the last 10 years due to the economic and technological advances
controlling the virtual market in Malaysia. The relationship between supply and demand,
though, is thought to exist in all markets not just in oil and gas field. While other things such
as slowly decreases in price, petroleum prices keep on increasing, and the implementation
of the Goods and Services Tax (GST) has caused the prices has skyrocketed far more than
usual. Last year saw us that we has been faced some of the natural disasters such as
flooded in Kelantan which has caused some of the prices of the essential things increased
significantly for a short period.

Although natural disasters in some other places didnt affected the prices of at other
places in other states, but with the unstable global economic situations, the people still has
been preparing and been cautious about prices of essential things. This included petroleum
prices which cant be fixed and depended on global economics and mostly on United States
of America (USA) economic itself. While some high earned people can bragged about how
cheap our petroleum prices compared to other countries like Thailand and Singapore, it is
still a burden to the low earned people as our the average rate of income Malaysians is far
below than Singaporeans.
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SIR SUKIMAN BIN ISHAK

MICROECONOMICS - ECMB223

Petroleum is a crude oil in its natural state that Malaysia is known as 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.

Last year, the Budget of 2016 has been released by the government that saw us
plenty of benefits in order to reduce the burden of the people. The Budget also included the
subsidies of the petroleum prices that at first the prices of petroleum per barrel can be up to
48$ Dollar and suddenly has been decreased to 37$ Dollar per barrel. Although the prices
has been significantly decreased, the government stated that the government does not
intend to make any revisions to the Budget 2016 to the present , despite the occurrence of a
drop in global crude oil prices, said Deputy Finance Minister, Datuk Johari Abdul Ghani. He
also added that, Its impact on government revenues are still adequate and we did not see
any need to make a budget revision that now." he told reporters after presenting the monthly
draws, weekly and local SSP Bank Simpanan Nasional. As the petroleum prices has been
decreased, it should be cleared that global prices of petroleum should be too, thus it can
reduced the burden of the people and increase the demand of it.

The demand and supply of petroleum in Malaysia is influenced by several factors

which in the case of demand of petroleum, one of the factors is the number of cars sold
Malaysia itself. According to data shown in Malaysian Automotive Association, the total
number of cars sold in year 2000 was 343,173; while in year 2011, the number of sales
increased almost double the amount in 2000 as it increased to 600,123 (Malaysian

SIR SUKIMAN BIN ISHAK

MICROECONOMICS - ECMB223

Automotive Association, 2008). According to the International Energy Statistics, the

consumption of petroleum globally (thousand barrels/day) in year 2000 is 141.677, whereas
the consumption in year 2010 rose to 208 (U.S. Energy Information Administration, 2013).
This shows a direct relationship between the number of cars sold and the demand for
petroleum. The increase in public transportation affects the demand for petrol. When more
people use public transport, total number of vehicles used for transport decreases, petrol
consumption also decreases. Moreover, the sales of hybrid cars can influence the demand
for petroleum. In 2012, sales of hybrid cars have risen from 8,334 units to 15,355 units (Star
Motoring, 2013). As hybrid cars are less demanding in petrol consumption, the demand for
petrol will decrease slightly. Lastly, consumer's income affect the demand of petrol because
the higher the income, the greater the petrol consumption because they can afford to spend.

A subsidy is the sum of money given intended to help a particular industry or a

product reduce its price and to spawn the industry. A fuel subsidy is the amount of money,
which is the difference between the selling price of fuel and its cost price, paid by the
government. By doing so, the government could ensure that fuel is sold at a decreased price
and this will reduce the burden bared by the people (Sam, 2012). There are many
advantages to fuel subsidy. One of them is that fuel subsidy can reduce the monetary
burden inflicted upon the poor. The poorer citizens who are also consumers can get petrol at
a lower price. Another benefit is that the citizens could enjoy low price of petrol even though
the international market price for petrol has risen.

Apart from that, fuel subsidy has its disadvantages as well. Fuel subsidy can in turn
become a liability on the government budgets. If fuel subsidy occupies the major section of
the budget pie, this means that the government would have fewer budgets to spend on other
projects that will benefit the country. Examples of such projects include education and

SIR SUKIMAN BIN ISHAK

MICROECONOMICS - ECMB223

health. It also promotes over-consumption (Hickey, 2012). When price of petrol becomes low
for a long period of time, the people will have no incentive to practice moderation in
consuming petrol because they can get it cheaply. Furthermore, all people from various
financial standing receive the benefits of fuel subsidy. The problem is that this strategy is not
economically efficient because the rich who could afford to use more petrol would benefit
more from the subsidy as compared to the poor who could only consume limited amount of
petrol (Aris, 2012). Finally, long term fuel subsidy will only encourage the people to become
overly dependent on artificially cheap petrol (Kok, 2012).

From what we as a group has gathered from this article, it is cleared that with
demand moving accordingly every time, oil prices will continue to be set mostly by the
market despite external players best efforts. In conclusion, number of cars, sales in
hybrid cars, public transportation and consumers' income affects the demand of petroleum,
whereas cost of crude oil, government policy and depleting resources affects the supply of
petroleum. Fuel subsidy has pros and cons as explained in the essay. As petroleum is an
essential commodity to Malaysia, we must implement strategies to conserve and save this
natural resource.

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SIR SUKIMAN BIN ISHAK

MICROECONOMICS - ECMB223

An increase in supply of Petroleum Price