The Black Gold Conundrum

 

 [This article was based on  "California Struggles With High Gas Prices" by Clifford

Krauss for New York Times published on October 5th 2012, the article can be found here ] .

        

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Last week, the price of fuel for car in Southern California has increased 20 cents to  $4.54 and $5.00 overnight for some places around the region according to NBC news that resulted from several mishaps at California refineries. Apparently it has shown sign of decrease in quantity demanded and for some drivers had choose not to purchase the inelastic product by the consumer as a sign of retaliation of the sudden spike in fuel price. Different from what took place in our country where the government allocated RM 18 billion in maintaining the fuel price to RM 1.90 per liter although the actual price for RON95 is RM 3.18 worldwide. If the price of fuel will continue to increase, it will contribute to negative impact towards our daily life as a consumer.

Fortunately enough the government decided to subsidize the oil for the citizen to cope with ever increasing price of oil. Truths to be told the price of oil will never goes down unless George W. Bush found out there’s tones of oil underneath Canadian soil. Its good that the government trying to cut the oil price by either using tax money or importing cheaper, lower quality crude oil for the consumption of the citizen. So we now know not only consumer but also the government also implementing the substitution effect.

Believe it or not, our life depends on the black gold. It is almost as essential to us like water to our body. For us who lives in this beautiful country of Malaysia, fuel is almost perfectly inelastic. Quantity demand for fuel will probably lesser due to the income effect. This is because we are developing country with average income workers. That being said gives fewer alternatives as a substitution effect. Even for developed country with more companies like Toyota and Honda producing hybrid and electric generated cars, it is still less visible on the tarmac such as United States due to the price tag of those types of car. Other than walking, carpool with colleague, taking public transportations or installing NGV in the car probably the best three deals there are on the table as substitution effect considering not many people willing to walk under the blistering sun. It will also affect the price of grain since the farmers may have to increase the price in order to keep the engine running for the machineries. Normal goods such as rice and sugar would increase in price due to the increase in factors of production since oil is one of determining factor for price. Inevitably less people demand for normal goods that is the law of demand. Let me show you what law of demand in graph so you will understand it better;

 This will result in people searching for inferior goods that cost half the price of normal goods. In terms of nutrition, it may provide less but surely keep tummy full. So more people going to the hypermarket store like Giant and Tesco. The situation probably different to premier supermarket such as Cold Storage, Village Grocer, Harrods and the list goes on. Not to forget people will reduce their appetite for imported goods and shift to local made product and this will also help the local market grow bigger. If the government still wants the consumer to purchase the imported product, they may have to reduce the tariff on imported goods and more lenient on taking other goods from other country so it will keep the consumer coming to the premier store.

Over the years we have seen some Airlines Corporation closed down and recently Comair permanently by Delta airlines in July. Same goes to our national airlines didn’t stand a chance and fuel caused loses of 25 percent out of RM 2.52 billion was reported in last march. Whether it is a low cost or premium, it will hit hard on this sector. If they increase in fuel surcharge inevitably the price of flights tickets will have less quantity demand. Fuel as factors of production in order for them to operates. Both parties’ consumers and airlines will have to share the burden by paying half of the fuel surcharge. For people starting their businesses, this may put limitation or major setback because they have to pay more for transportation. They may have to utilize other medium such as teleconference or Skype in order to solve this predicament.

This crisis will dent the automobile industry since it’s the compliment good for fuel. People will no longer favor on buying SUVs and High fuel consumption cars. Car industry may have to cut down on worker’s salary as a solution to the problem on a short run since fuel is the fixed variable in this situation. They also may need to cut down the prices of the car in order to attract consumers with tied pockets. 

Tourism industry in our country will increase in expenses cost, inevitably open the alternatives of going for a vacation around Malaysia since it will be better to travel to Thailand or Indonesia with the same amount that they have to pay In their own country because everything is about value for money today. Besides, they are going to need to fill up those passports pretty quickly before it expires. We got to make the most out of everything right? As for our travel and tourism industry situation, five stars resort, restaurant or affiliated company such as scuba diving lesson like Naui may have to gives discount in order to attract more customers. 50 percent of something is better than 100 percent of nothing right?

Such huge impacts that fuel price change basically everything from our options, our balance in the bank, our decision and even the way we see the world. It is something that we have to carefully manage in order to maintain stability in our economy so everyone can have a piece of the cake that getting smaller every day.