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Global Advanced Research Journal of Management and Business Studies (ISSN: 2315-5086) Vol. 6(1) pp.001-009 January 2017
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Full Length Research Paper
Decrease In Domestic Petroelum Prices On Malaysian
Industries- Input Output Price Model
Norlaila Abdullah Chik1, Mohd Yusof Saari2, Chakrin Utit3
1
School of Government, College of Law, Government and International Studies, Universiti Utara Malaysia
06010 Sintok, Kedah, Malaysia. Email: [email protected]
2
Institute of Agricultural and Food Policy Studies, Universiti Putra Malaysia, 43400 Serdang, Selangor
Malaysia. Email: [email protected]
3I
nstitute of Agricultural and Food Policy Studies, Universiti Putra Malaysia, 43400 Serdang, Selangor
Malaysia. Email: [email protected]
Accepted 27 January 2017
This paper examines the impact of the decrease of petroleum product prices on sectoral cost of
production in Malaysia. By using the Leontief price modelling technique, a scenario for the price changes
on sectoral costs of production were simulated. The simulation results indicated that a five percent
decrease in petroleum prices will affect all economic sectors. The cost of production for certain sectors,
such as air transport, fishing, land transport, cement, lime and plaster, as well as communications are
estimated to experience the lowest of production costs. Based on this scenario, the government has to
encourage producers or sellers to reduce their prices of goods and services.
Keywords: petroleum products, Leontief price modelling, simulation, sectors.
INTRODUCTION
Crude oil prices decreased rapidly since mid-2014, which
attracted public attention not only in Malaysia, but also all
over the world. Globally, it has a positive effect on
countries’ oil importers and otherwise has negative
effects to the oil-exporting countries. According to a
World Bank estimation, the world economy will grow by
0.5 percent from 30 percent revenue decline in crude oil
prices (World Bank, 2015). The decrease in crude oil
prices will also reduce the prices of petroleum products,
such as petrol, LPG, diesel, gasoline, etc. In Malaysia,
the sectors that consume the highest petroleum products
are transportation, manufacturing, and commercial
sectors, which as a group absorb nearly one-half of the
total production. The transportation sector was the largest
petroleum products consumer, utilising 74.8 percent of
the total petroleum products demand in 2013. The main
transportation that contributed to the rise in petroleum
products demand was land, water and air transportation.
In Malaysia, the government controls prices and
subsidies for domestic petroleum products under the
automatic pricing mechanism (APM). The series of
increases and decreases in the price of petrol is in line
002 Glo. Adv. Res. J. Manage. Bus. Stud.
3
2.5
RM/liter
2
RON 95
1.5
RON 97
1
Diesel
0.5
1-Oct-15
1-Sep-15
1-Aug-15
1-Jul-15
1-Jun-15
1-May-15
1-Apr-15
1-Mac-15
1-Feb-15
1-Jan-15
1-Dec-14
19-Oct-14
2-Oct-14
9-Sep-14
3-5 Sept-13
1-4 Dec-10
16-Jul-10
1-Sep-09
0
Source: Malaysiakini, September 2015
Figure 1: The retail price of petrol and diesel at a petrol station in Malaysia.
th
with fluctuations in crude oil prices in 2008. On 5 June
2008, the government raised the petrol and diesel prices
rapidly from 78 cents per litre to RM2.70 per litre (an
increase of 40%), while the price of diesel was increased
from RM1 to RM2.58—from RM1.58. The government
announced a reduction in petrol prices that is in line with
nd
the decline of world crude oil prices on 22 August 2008.
This announcement caused the price of petrol and diesel
rd
to decline between 8 and 22 cents from 23 August
th
2008. On the 24 September 2008, the government
announced a 10 cents decline in gasoline prices and
diesel. Following the world oil price continuing to decline,
the domestic prices were reduced by between 10 and 20
th
st
cents from 15 October 2008. Subsequently, on 1
November 2008, the price of petrol and diesel continued
to be reduced by 15 cents. The retail price of petrol
continues to decline on 18 November, 3 December and
th
16 December 2008. This suggests that the government
provided reducing sales tax (or an increasing of the
subsidies) on petroleum products. However, subsidies on
petroleum products did not grow at the same pace as the
world crude oil prices, which increased by 36.7% from
69.08 to 94.45 USD per barrel between 2007 and 2008
(OPEC, 2010). This led to the highest domestic petrol
price increase in Malaysian history, by as much as 20.7%
st
to RM2.16 per litre. However, starting 1 September
2009, RON 92 petrol sales were discontinued and
replaced with RON 95 at a price of RM 1.75 to RM 1.80
per litre. While the price of RON 97 and diesel rose to RM
st
2:05 and RM1.70, respectively. Starting 1 August 2010,
only vehicles registered in Malaysia are allowed to buy
RON95 petrol, while foreign vehicles (especially from
Singapore and Thailand) were only allowed to buy
RON97 or diesel at petrol stations in Malaysia.
Figure 1 shows the retail price of petrol and diesel at
st
st
petrol stations since 1 September 2009 until 1 October
2015. Recently, the decrease in petroleum products
prices by five percent (from RM2.05 to RM1.95 from
August to September 2015) was beneficial to many
sectors of the economy. Logically, the decline in
petroleum products prices will reduce production costs,
which is likely to encourage producers or sellers to
produce more products, while the same time—they might
reduce the price of goods and services. However, while
consumers will not be adding to the quantity of
consumption due to the falling in petroleum products
prices, they will have a surplus of money that can be
spent on other goods and services, which means their
disposable income will increase and total consumer
spending will also increase. However, some producers
and sellers are reluctant to reduce their price, but they
keep the price without considering the impact to
consumers. Based on this scenario, the government
should encourage producers or sellers to reduce the
price in order for consumers to not be burdened with a
high price of goods and services. The objective of this
paper is to examine the impact of the decrease in price of
petroleum products on the sectoral cost of production in
Malaysia.
This study employed the Input-Output Leontief Price
(LP) model to stimulate the price changes. The Leontief
Price (LP) model is known to be the first attempt to
Norlaila et al., 003
analyse price changes through a system of
interconnected, general equilibrium price equations
(Leontief, 1946) for the US economy. Moses (1974), Lee
et al. (1977), and Miller and Blair (1985) also applied this
model in their study. In addition, some advanced versions
of this model were implemented by Boratyński (2002) as
well as Tunali and Aydogus (2007). While Dietzenbacher
(1997) and De Mesnard (2007) compared between the
Leontief Price model with the Ghosh supply-driven model
in their study. Some studies applied the Leontief price
model to examine the direct and indirect effects on all of
the economy, such as Melvin (1979) for corporate income
taxes in the USA and Canada, while Boratyński (2002)
examined for indirect tax policies, and by Valadkhani and
Mitchell (2002) for inflation and household expenditures
effects due to petroleum price changes in Australia, as
well as by Tunali and Aydogus (2007) for energy price
increases on industrial prices and the general price level
in some European countries. Katrena (2005) combined
the traditional input-output price model with the factor
demand functions for intermediated inputs and labour,
and price equations from the Leontief cost function.
Additionally, Bazzazan and Batey (2003) applied the
Leontief price model in their study for both dynamic and
static versions to compare the result of eliminating energy
subsidies in Iran. A SAM was employed for price model
by Greenfield and Fell (1979), Permeh (2005) and Saari
(2014). Sharify and Sancho (2011) proposed a new
approach to measure the impact of a sector's price shock
on price indices based on table adjustments to trace the
effects of any initial price shock through an iteration
process. The following section describes an overview of
the model employed in this study, presents the data
source and results, and lastly—concluding remarks.
Price simulation
This study applied the mixed endogenous-exogenous
price model in a 124 x 124 matrix form (Input-Output
Table 2010) and split the exogenous expenditure
coefficients (vector a = m + l + c + t) into coefficients for
imported products (m), Labour (l), Capital (c) and taxes
(t), therefore, the solution for the price model is
represented by the following equation:
-1











P
 
 
 
 =
 
 
 

 
 

1
.
.
P
13
.
.
P
(1−a11)
.
.
.
.
.
.
.
. (1− a1313) .
.
.
.
− a131
.
.
 .

 − a12124 .
124
 m1

 .
 .

 m 13
 .

 .

 m 124
−1
− a1124 

.


.

− a13124 

.

.

(1−a124124)
.
.
− a113
.
+
l
.
.
.
.
.
l
+
.
.
− a12413
+
c
.
.
.
.
.
.
+
.
c
.
.
+
.
.
.
.
.
124
+
l
+
.
.
1
13
c

1

. 
. 

t 13 
. 

. 
t 124 
t
+
1
13
+
124
In both equations, the variable on the left side are
considered to be endogenous. The price of sectors (P1 to
P124) are determined by exogenous cost components.
For simulation purposes, a 5 percent decrease in
petroleum products price (P13 as exogenous variable) in
the country (September 2015 from RM2.05 to RM1.95)
was stimulated. The decrease in this price also affected
other sectors (assuming that other costs for other
variables remain unchanged).
Then, a rearranged matrix above matrix as follows
METHODOLOGY
P = (I-A’) a
Equation 1 is represented in matrix form:
(1)
The dual of this quantity model is a cost-push price
model. This model is useful in order to measure the
impact on prices shock throughout the economy
regarding new primary-input costs in one or more sectors
(Miller and Blair, 2009; Saari, 2014)
 P1 
 

 .  
 .  =

 
 c13 
 .  

 
 .  


 P 124  
 m1

 .
 .

 m 13
 .

 .

 m 124
(1 − a 11 )
.
.
.
0
.
.
.
− a 1124
.
.
.
.
.
.
− a 131
.
.
.
1
.
.
.
− a 13124
.
.
.


.
 − a 12124
+
l + c
.
0
.
.
.
+
.
.
.
.
1
+
.
.
l
.
.
+
l
13
1
.
.
+
.
.
.
.
124
+
.
.
t
13
.
.
c
124
−
.
.
+
(1 − a 124124




(1 − a 1313 ) P 13 

.

.

t 124 + a 12413 P 13 
t
1
+
a P
13
.
.
13









)
−1
004 Glo. Adv. Res. J. Manage. Bus. Stud.
Labour (l)
Capital ©
Taxes (t)
Total cost
Air Transport
0.250
0.058
0.094
0.017
0.418
1.00
0.95
-4.70
Fishing
0.145
0.073
0.297
0.012
0.526
1.00
0.97
-3.43
Land Transport
0.170
0.100
0.230
0.014
0.516
1.00
0.97
-3.15
Cement, Lime and Plaster
0.111
0.058
0.176
0.007
0.353
1.00
0.98
-2.46
Communications
0.204
0.217
0.170
0.008
0.600
1.00
0.98
-2.30
Forestry and Logging
0.084
0.045
0.267
0.031
0.427
1.00
0.98
-2.14
Water Transport
0.123
0.080
0.297
0.009
0.510
1.00
0.98
-1.91
Other Transport Services
0.198
0.093
0.125
0.010
0.425
1.00
0.98
-1.77
Rental and Leasing
Concrete & Other NonMetallic Mineral Products
Port and Airport
Operation Services
0.142
0.120
0.319
0.009
0.590
1.00
0.98
-1.64
0.161
0.051
0.072
0.005
0.290
1.00
0.99
-1.45
0.242
0.080
0.184
0.006
0.512
1.00
0.99
-1.42
Preservation of Seafood
Sawmilling and Planning
of Wood
0.076
0.076
0.101
0.002
0.254
1.00
0.99
-1.23
0.072
0.064
0.117
0.029
0.282
1.00
0.99
-1.17
Electricity and Gas
0.233
0.029
0.384
0.006
0.654
1.00
0.99
-1.17
Clay and Ceramic
0.286
0.079
0.139
0.006
0.510
1.00
0.99
-1.13
Civil Engineering
0.183
0.190
0.095
0.005
0.473
1.00
0.99
-1.10
Other Agriculture
Veneer Shts, Plywood,
Laminated & Particle
Board
0.076
0.122
0.474
0.014
0.686
1.00
0.99
-1.07
0.115
0.054
0.063
0.025
0.256
1.00
0.99
-1.02
Total price impacts
Baseli
ne
After
simulatio
n
% change
Imports (m)
Table 1: Leontief Price model (Decrease in cost of production)
Source: Computed from equation 2
Assume that the domestic price of petroleum products
price (P13) decreased by 5% (therefore, P13=0.95). The
results for this simulation are discussed in the next
section.
Data Source
The National Energy Centre of Malaysia 2010 publishes
the annual energy balance that covers petroleum
products consumption for production sectors, (such as
agriculture, residential, commercial, manufacturing,
transportation, etc.). The original I–O tables included 124
sectors in 2010.
RESULTS AND DISCUSSIONS
The results from this simulation are shown in Table 1. A 5
percent decrease of domestic petroleum products price
will affect all sectors. Firstly, there is a direct effect from a
decrease in the price paid by producers for the
consumption of petroleum products inputs. For the
producer, a decline in the prices of petroleum products
will reduce production costs, which are likely to
encourage them to increase an investment and produce
more output. Due to this scenario, the cost of production
strongly decreased 4.70 percent of Air transport, 3.43
percent of fishing, 3.15 percent of land transport, 2.46
percent of cement and 2.30 percent of communication
Norlaila et al., 005
High in price
QI
Low in price
Q3
Q2
Q4
Low in energy
intensity
High in energy
intensity
Source: Computations of Equation 1 and National Energy Balance.
Figure 2: The relationship between changes in price and energy intensity by sector.
compared to their baseline.
In recent years, air transportation racked up financial
losses and forced them to decrease their prices in order
to increase demand on air tickets. The latest factor, which
is the disappearance of MH370 and the downing of MH17
in 2014 affected customer’s confidence level towards
Malaysian air transportation and the termination of air
transportation’s employees. The price of marine capture
increased, however, the cost of production in the Fishery
sector decreased by 3.43%. Domestic marine capture
supply, especially fish is about 1.45 million mt per year
with almost 500.0000 mt of imported fishery products,
especially from Thailand in order to meet local demands.
Currently, Malaysia imports about 30% of its total marine
products consumption requirements.
The decrease in petroleum products price also gives a
strong impact to the cost of production of Land Transport,
such as buses, trains, taxis and other public transport.
However, recently the Land Public Transport Commission
(SPAD) announced an increase in public transport fare
with the reason being that public transport operators are
facing higher operational, maintenance and repair,
insurances and remuneration costs. Recently, the same
goes to the price of cement, which increased and based
on the results, showed that the cost of production of
cement, lime and plaster decreased by 2.46 percent. As
a result, the cost of building would increase as well due to
cement being a raw material for building houses. Overall,
most of the sectors reduced their cost of production due
to the decrease in petroleum products price, however, the
price of goods and services increased. Consequently,
consumers are burdened by an increase in price of goods
and services, high cost of living, and hikes in toll,
especially those who stay in urban areas.
Figure 2 shows the relationship between changes in
price and energy intensity by sector. This figure is divided
006 Glo. Adv. Res. J. Manage. Bus. Stud.
into four quadrants - Q1, Q2, Q3, and Q4. Most sectors
are in Q3 and Q4, which means that the cost of
production of this sector are low, but certain sectors, such
as Air transportation consume high energy due to this
sector being in Q4. Based on Figure 2, the cost of
production of air transport decreased by 5 percent and
energy consumption for this sector only 0.8 percent of
total energy consumption. While the sectors lie in Q2, this
means that the cost of production of this sector increased
and consumes high energy in production. The sectors
that lie in Q2 are wholesale and retail trade, crude oil and
natural gas, and oils and fats that consume the largest
amount of energy. However, due to the effect of the
decrease in price of petroleum products—cost of
production for this sector increased by 2 percent as
shown (see Appendix). Wholesale and retail trade
recorded a productivity growth of 5.6 percent in 2011.
The growth was mainly supported by a strong expansion
in domestic consumption as well as a higher number of
tourist arrivals, which generated more retail spending,
especially during festival seasons and the year-end
holiday.
While the cost of production of oils and fats increases
by 0.7 percent, energy consumption for this sector
amounts to 6.2 percent of its total energy consumption.
Even though Malaysia is the second largest palm oil
producer in the world, the importation of soybean,
rapeseed oil and sunflower oil increased by 62.5 percent
from 2005 to 2011. This indicates that other oils other
than palm oils nevertheless are still gaining a significant
position in the local market due to growing consumer
demand arising from higher disposable income and taste
preferences. Differently, the cost of production of crude
oil and natural gas increases by 46 percent, while energy
consumption of this sector is 4.7 percent of total energy
consumption (see Figure 2). It shows that an increase in
the cost of production for that sector (crude oil and
natural gas) is due to exploration activities and
development involves a capital intensive sequence, even
if the reserves discovered today may take several years
to ensure timely development of resources. Most of the
sectors are decreased in their cost of production and
consume energy less than 4 percent of its total energy
consumption, such as agriculture, some manufacturing
and services sector.
CONCLUSIONS
The fluctuations of crude oil prices are a normal
phenomenon for the commodities, especially for rubber
and oil palm—but decrease in domestic petroleum
products prices, which give a high impact to all sectors in
the economy. This paper analysed the impact of the
decrease in domestic petroleum product prices on the
cost of production in Malaysian production activities. The
results indicated that most of sectors decrease in their
production cost, such as air transport, fishing, land
transport, cement, lime and plaster, as well as
communications. Based on the results, producers or
sellers should reduce their price of goods and services.
However, in reality, there were not many changes in the
price because most producers or sellers are reluctant to
reduce their price. The scenario is different when the
price of petroleum products increase, every producer or
seller are trying to increase their price without considering
the impact to the consumer. Starting from early 2015, the
government pulled back all subsidies given to people and
changed to another way of assistance, such as BRIM,
Book Boucher, etc. Based on this scenario, the
government should encourage producers or sellers to
reduce their price of goods and services because of
government imposed goods and services taxes (GST) to
all goods and services. An effective strategy is that the
government should reduce its dependency on petroleum
products’ sales tax and GST, and instead should focus
more on other sectors, such as agriculture sectors and
small medium enterprises (SME) to increase the
country’s export volume.
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