How can prices of fuel increase in
the first place? Since the 20th century, the price of oil on stock exchanges
has fluctuated widely according to certain political and economic events. The
globalization of oil trading has exacerbated this trend even further by making
prices highly sensitive to financial current affairs such as conflicts
involving an oil-producing country, sudden rises in fuel demand, etc. Because
of this, prices of oil can often change unpredictably. There are two reasons
why the price of fuel per barrel rose sharply from US$96 on January 2, 2008 to US$144
on July 3, 2008. Firstly, higher demand and especially people from China.
Secondly, OPEC countries reduce production capacity to keep prices relatively
high. Thereafter, prices declined the economic slowdown and expectations of
drastically reduced demand. Average monthly prices per barrel fell from US$130
to US$40 between July and December 2008. From 2009, as producers reduced
production to maintain income levels, the barrel gradually rose to US$80. In
2010, the economic recovery saw the highest rise in demand since 2004, bringing
tension back to the oil market.
In this article, Domestic Trade,
Cooperatives and Consumerism Minister Datuk Seri Ismail Sabri Yaakob said that the
government was aware that the people currently had to cope with higher cost of
living. This is why the Malaysian government tried to help the people so that
they would not feel the burden paying all taxes. The Malaysian government is subsidizing
RM0.93 per litre of petrol, so that the price will be fixed at RM1.90 per
litre. I agree on the action made by the government because this is the best
way for the people because that still can cope with the price and so far there
were no complains and protests. The advantages of government subsidizing the
fuel are because it helps the sellers to reduce their cost of production and
encourage them to increase their outputs. For example, government can help the
producers by giving financial assistance such as loans and grants for business
setting up in areas of high unemployment. Besides that, it also helps the
people to lower down the cost of living of the people. For instance, by helping
people and give some money or food to who are in need and also build up low
cost houses for them to stay in.
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In the figure above, explains how fuel price can be
lowered by subsidizing. Firstly, the black dot (P1,Q) is where the original
price of fuel, when the government comes in and subsidies the price of fuel,
the supply shifts to the right from S to S1 because it helps the producers to
reduce their cost of production therefore, more quantities can be produced. When
more quantities are produced, the price is decreasing (orange dot). This is
because when cost of production is low and more quantities can be produced thus
the producers can sell at a lower price (P1,Q1). But before that, even though
the price falls but the marginal cost increases. Marginal cost increases
because producers of fuel need to search more fuel, which means that they need
to begin to use some resources that are less ideal for searching fuel. In other case, if there is no subsidies people
will burden more than before. It happens in China and Indonesia where Chinese
government already hiked the fuel prices by the biggest margin in three years
after the surge in global price. In Indonesia, the government is in the
planning process to increase the fuel prices. I don’t agree at all with the
decision made by these two countries. I don’t understand why they made that
decision, they know the outcome of it because more and more people with be
upset with it and also the producers
Consumers an producers will feel the burden equally because of the impact if there is no
oil subsidy. Most importantly what will happen to the people with low income?
They will suffer a lot on transportation and food especially because income is
fixed cost, so when the fuel price increases they will not afford to pay for
it. Therefore, it will cause a lot problem like what happened in Jakarta and
Makassar where thousands of protesters blocked streets, set fires and pelted
police with rocks. Next, when more people are not using transportation, less
fuel is used thus producers will make less profits or a loss. If this happens
in the long run, one or more fuel company will meet a shutdown point whether
they shut down temporarily or permanently. This is because they cannot cover
their fixed (salaries, building and etc.) and variable cost (labour and
resources). When less company are running in the economy, the economy in that
particular country will slows down and cannot compete with other global economy.
On the government side, they also will be burdened but this time if the
subsidies are doubled it double the burden of government example?
In my opinion, other options can be
highlighted so that all these problems can be solved immediately. Initially,
hybrid cars are one of the solutions where that type of cars are only used 50%
of fuel instead of normal cars which is 100%. Based on my experience, some of
my friends are using this type of car and they said this car can also save the
cost of living. It is not only solving the problem but it can cut the cost of
people’s living and also save the environment. Besides that, producers can come
out with new technology of cars by using water to run the car. This is because
fuel is non-renewable resources but water is renewable resources so with all
the modern technologies now and future it is possible to manufacture this type
of cars in the next generations.
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