Fuel Prices

Suffering from slight econs withdrawal syndrome so why not apply the knowledge that I have acquired to a current economic issue?

Why the fuel price hike is not justified.

• Malaysia is a net exporter of oil . According to the CIA [1],

• Oil - production:	751,800 bbl/day (2005 est.)
  Oil - consumption:	501,000 bbl/day (2005 est.)
  Oil - exports:	611,200 bbl/day (2004)
  Oil - imports:	278,600 bbl/day (2004)

• Thus it is unfair to compare the prices of fuel with our neighbours Singapores and Thailand, which are oil importers. Since the demand for oil is inelastic, an increase in the price of oil increase will increase the value of net exports and, ceteris paribus lead to an increase in real GDP. Furthermore, Malaysia exports more expensive high grade low sulfur content oil and imports cheaper low grade crude oil.
• Regressive nature of price increase. The poor spend a larger percentage of their income on fuel costs. Thus, the burden on the poor will be greater than on the rich. There will be a redistribution of income from the poor to the rich. It could be argued that the poor could use public transport to help reduce their costs. However, public transport in Malaysia is far from satisfactory.
• Real price increase of oil may be exaggerated due to weakening of US dollar. Since Malaysia unpegged the Ringgit and allowed it to float, the Ringgit has strengthened against the dollar from RM3.80 to roughly RM3.30. This represents an appreciation of around 13%. Since the price of crude oil is denominated in USD, the appreciation of the ringgit against the dollar means that the real price increase in crude oil is less than the monetary increase. However, the magnitude of this difference is not enough to fully compensate for the increase in the monetary value of oil prices which is significantly higher.
• Ceteris paribus, an increase in the price of fuel will shift the aggregate supply curve to the left, causing stagflation. This is a period of negative growth and inflation. An increase in the price level due fuel price hikes could increase inflationary expectations. This is when people expect inflation to be higher in the future. Hysterisis may mean that inflation expectations may be very hard to control in the future. This could mean that inflation could spiral out of control. However, other factors may help dampen the shift in AS, such as technological improvements or increases in efficiency or productivity.
• Reviewing fuel prices every 3 months will incur menu costs and shoe leather costs. The increase in crude oil prices is likely due to a case of self-fulfilling speculation (this is when speculators think the price is going to increase in the future, so buy more, reducing supply and hiking up prices thus fulfilling the prophecy). This is unsustainable in the long run and crude oil prices are likely to fluctuate in the near future. Menu costs are incurred because every time fuel prices increase, business may print new menus and update their databases to raise prices to take into account the increase in costs. This may not seem like a lot but multiplied by the amount of firms in the country, it is likely to be a significant amount. Also, constant changing of fuel prices will cause white noise as traders take advantage of lack of price certainty to charge higher prices. Shoe leather costs occur because people will rush to petrol stations in anticipation of higher fuel prices. This will cause jams and represents an opportunity cost in the form of time wasted queuing up at petrol stations.

Of course, there are plenty of valid reasons why the fuel price increase may be justified but I'm a bit too lazy to go into that at the moment, another time lah :)

1^ CIA - The World Factbook (https://www.cia.gov/library/publications/the-world-factbook/geos/my.html)