I refer to the news article dated 16 May, 2017 regarding the statement issued by Dennis Tan, Petroleum Dealers Association of Malaysia (PDAM) Sarawak representative, about the crisis facing by petrol station operators due to weekly swing in fuel prices.
My attempt here is to clear up some of the misconception ideas in his statement and bring sound economic analysis to bear on the real issue at hand.
First, let’s start with the notion of weekly fuel price changes.
The minister in charge had made it clear that the government was determining the fuel price so it would be reflected of the market price.
This means the government is imposing price ceiling on all grades of fuel at petrol stations throughout the country.
If the fuel price is fixed at the market clearing price as determined by Automatic Pricing Mechanism (APM) every week, but then the market clearing price is the same price that will be achieved without having any ceiling price, so why is anyone bothering to price ceiling?
As I defend market prices, I must, as well, defend the dynamic and interplay between supply and demand.
Specifically the purposeful exchange between sellers and buyers at petrol stations.
If the value of the fuels increases (the price we pay) the supply of the product will be increased and its price will fall, bringing the fuels accessible and affordable to the consumers.
Of course, not all operators can afford to invest additional capital such as expanding storage for larger fuel volumes for example.
My point is some operators; usually the most efficient and one that is in a position from existing capacity able to set its price and other petrol station operators tend to match its price.
There are no final and permanent fuel prices, only provisional resting point for the price.
Think about it this way. Suppose several operators selling fuels so cheap during a particular period of time and location, shortages will develop as consumers buy more and this overbidding process of consumption will force them to raise the price again to the market price. Otherwise they will go bust!
Suppose several operators selling fuels so high and earning high profits during a particular period of time and location, existing or incoming operators have strong incentives to devise ways to capture for themselves some of those profits by bringing more supplies to the market which will help to lower the fuel prices.
Whatever difficulties of adjusting to the effect above, the operators should take note this; a petrol station may have been constructed in the past which would not have been built if one had better forecast the present situation right?
Secondly, in order to pursuit of this aim and realize this potential, Dennis should revise the current methods and thinking of doing business employed by the operators.
The task for entrepreneurs including petrol station operators is always to use the supply of capital goods, labor and inventories available in the best possible way for profit maximisation in future.
Therefore he should demand a total control over fuel stock (volumes) level, margins, wages, fuel prices, capital utilisation and other sales opportunities from the oil companies and government, not raising commission money!
Why? Because it is only the appraisal by them for urgent need of cash money today as compared with cash money than can be received at a later day.
Will this solve the real issue facing by them? Definitely not.
If Dennis suggests some operators may go bankrupt due to full deregulation i.e. market prices, then I think it will be irrelevant.
Why? Because at the moment the price ceiling policy is driving operators (supply) off the market!
The policy itself discourages others to enter and re-enter the business. That’s even worse!
At least with market prices or full deregulation, we will always have operators to supply fuels what consumers wish to consume at particular price.
MEDECCI LINEIL
