"The Impact of Rising Fuel Prices": October 2008

MARA UNIVERSITY OF TECHNOLOGY

THE IMPACT OF RISING FUEL PRICE TOWARDS MIDDLE INCOME GROUP

PREPARED FOR:

ASSOCIATE PROFESSOR
SA'ABAN HJ SALIM

BEL 422 LECTURER

MARA UNIVERSITY OF TECHNOLOGY

BY:

ROSYINA BINTI MUHAMAD ALI 2007281712

ROSSADAH BINTI YAHAYA 2007281514

HALIMAH BINTI ABDUL HAYES 2007281666

NOR AMALINA BINTI BAKRI 2007281518

BBAF (5D)

BACHELOR OF BUSINESS ADMINISTRATION (HONS) FINANCE

15^TH OCTOBER 2008

FACULTY OF BUSINESS MANAGEMENT

MARA UNIVERSITY OF TECHNOLOGY

75300 MELAKA

Declaration of Original Work

We declared that the work contained in this research report is totally original and our own except those only identifies and recognized.

Signature of Group Members

………………………
Rosyina binti Muhamad Ali

2007281712

………………………

Rossadah binti Yahaya

2007281514

………………………

Halimah binti Abdul Hayes

2007281666

………………………
Nor Amalina binti Bakri
2007281518

Abstract

When the government announces another fuel hike in Malaysia's retail petrol and diesel prices on Wednesday June 4, 2008, it brings major impacts towards Malaysia economies. Prime Minister Datuk Seri Abdullah Ahmad Badawi had declared that the new price for petrol is RM2.70 a liter. The price goes up by 78sen from the current RM1.92, a hike of 40%. Other than that, the price of diesel also has been announced that would be increased by RM1 to RM2.85. The highest magnitude on the changes of oil price had received many reactions from the society. The increasing of fuel price actually was caused by the global crisis but government still received negative response from the announcement.

Statistic of oil price hike, absolutely this year is the highest increasing amount which the last few years the oil prices normally increase only by 30sen on average. The increasing of fuel price gave the large impact to many industries such as automobile, transportation, and machinery in many factoring industries. Furthermore, the fuel hike also give major impacts to the middle income group such as the increasing of food and beverages, electricity tariff, petrol and diesel price. Due to that, in depth study need to be done in order to overcome the impacts from the increasing of fuel price especially to the middle income group.

Researcher has used secondary data or previous study for this research which include government publication of economic indicators, statistical and articles from websites and newspapers. All primary data were processed and analyzed using Statistical Package for Social Science (SPSS Version 11.0). In conclusion, to study the impacts of rising fuel price towards middle income groups in Melaka Central, researcher has analyze from the findings and found that the fuel price hike gave major burden to the middle income groups. On the top of that, from the interpretation of data, the entire research objective was successfully achieved.

Dedicated to…

Our beloved…

Parents, Mom & Dad…

Our siblings…

Our Grandparents…

For giving us infinite love, care and blessing

For being our inspirations

Friends and lecturers…

"Thanks you for your encouragement and advice"

Thank you from the bottom of our hearts…

Acknowledgement

First and for most, our gratitude goes to ALLAH the Al-Mighty for bestowing us the strength and patience to complete this report.

We would like to express our sincere gratitude to our lecturer, Associate Professor Sa'aban bin Hj. Salim for his invaluable guidance and support and encouragement during the course of study. His technical expertise and his patience during the learning process are greatly appreciated.

We also dedicate this to our lovely parents and sibling for their materials, financial and spiritual support in order to accomplish this report. Without their blessing, we cannot study in here and done this report appropriately.

We are proudly grateful to all lecturers and staff of MARA University of Technology and our beloved classmate for supporting and encouraging us to finish this report writing.

Finally we wish to thank to everyone who participated in making of this report whether directly or indirectly

Thank you.

Table of contents

Contents: Page

Abstract……………………………………………………………………………….. i

Dedication…………………………………………………………………………….. ii

Acknowledgement…………………………………………………………………… iii

Table of Contents……………………………………………………………............ iv

List of Figures………………………………………………………………………... vi

List of Tables………………………………………………………………………… viii

List of Abbreviation………………………………………………………………….. ix

Introduction……………………………………………………………………. 1
1. Background of the Study………………………………………………. 1
2. Statement of the Problem…………………………………………….. 5
3. Purpose of the Study…………………………………………………... 5
4. Objective of the Study…………………………………………………. 5
5. Research Question…………………………………………………….. 6
6. Significant of the Study………………………………………………… 6
7. Scope of the Study…………………………………………………….. 6
Literature Review…………………………………………………………….. 7
1. Fuel Price………………………………………………………………. 7
2. Middle Income Group…………………………………………………. 11
3. Government Subsidies………………………………………………... 13
4. Distribution of Rebate…………………………………………………. 16
5. NGV……………………………………………………………………… 17
6. The Impact of Rising Fuel Price……………………………………… 19

Methodology………………………………………………………………….. 22
1. Introduction……………………………………………………………… 22
2. Research Instruments…………………………………………………. 22
3. Respondents of the Study…………………………………………….. 22
4. Research Procedures…………………………………………………. 23
5. Analysis of Data………………………………………………………... 23
Findings and Discussion……………………………………………………. 24
Conclusion……………………………………………………………………. 44
Recommendations……………………………………………………………    47
6.1 Recommendations Based on Findings………………………………...    47
6.2 Recommendations for Future Research………………………………    49
Bibliography…………………………………………………………………… 50
Appendixes……………………………………………………………………. 51
1. Questionnaire…………………………………………………………… 52
2. Related Articles…………………………………………………………. 57

List of Figures

Figure: Page

Figure 1.1 : Increasing in Oil Price 2004 – 2008……………………………………… 3

Figure 2.1 : OPEC share of world crude oil reserve (2007)…………………………. 9

Figure 2.2 : Monthly Average Price (US dollar)………………………………………. 9

Figure 2.3 : Daily Basket Price (US dollar)…………………………………………….. 9

Figure 2.4 : Weekly Average Price (US dollar)………………………………………… 9

Figure2.5 : Yearly Average Price (US dollar)…………………………………………. 9

Figure 2.6 : CPI Sub Component: Transport Index…………………………………… 10

Figure 2.7 : Fuel Price Adjustments vs. Subsidy Savings……………………………. 14

Figure 2.8 : LNG Storage Tank Located in the Trunk………………………………… 18

Figure 2.9 : Oil Price, 1994 - March 2008………………………………………….. 20

Figure 2.10 : Oil Price, 2006 - 2008………………………………………………….. 20

Figure 4.1 : Gender……………………………………………………………………….. 24

Figure 4.2 : Respondents' Status……………………………………………………….. 25

Figure 4.3 : Respondents' Age………………………………………………………….. 26

Figure 4.4 : Respondents' Occupation…………………………………………………. 27

Figure 4.5 : Respondent Income………………………………………………………… 28

Figure 4.6 : Cost of Living per Month…………………………………………………… 29

Figure 4.7 : Respondents Vehicle's Possession………………………………………. 30

Figure 4.8 : Respondents' Types of Vehicle…………………………………………… 31

Figure 4.9 : Amount Vehicle per Household…………………………………………… 32

Figure 4.10 : Cost of Fuel per Month…………………………………………………….. 33

Figure 4.11 : The Rising Fuel Price Burden Respondents…………………………….. 34

Figure 4.12 : Rises of Fuel Price Limit Respondents' Activities………………………. 35

Figure 4.13 : The Existence of NGV Reduce Fuel Cost per Month…………………… 36

Figure 4.14 : Government Subsidies Reduce Burden of Fuel Price………………….. 37

Figure 4.15 : Distribution Rebate Help Reduce Burden of Rising Fuel Price………… 38

Figure 4.16 : Consumer Goods Too Dependent on Fuel Price………………………... 39

Figure 4.17 : Retailer Take Advantage of Rising Fuel Price…………………………… 40

Figure 4.18 : The Price of Consumer Goods Increase Too High……………………… 41

Figure 4.19 : The Impacts of Declining Fuel Price in the Current Situation…………... 42

Figure 4.20 : Action Taken by Government……………………………………………… 43

List of Tables

Table: Page

Table 1.1 : Malaysia's Oil Gross Price (RON 97)…………………………………… 4

Table 2.1 : Monthly Gross household Income, 1995 and 1999 (%)………………. 12

Table 4.1 : Respondents' Occupation………………………………………………… 27

Table 4.2 : Cost of Living per Month………………………………………………….. 29

Table 4.3 : Cost of Fuel per Month……………………………………………………. 33

Table 4.4 : The Existence of NGV Reduce Fuel Cost per Month………………….. 36

Table 4.5 : Distribution Rebate Help Reduce Burden of Rising Fuel Price……….. 38

Table 4.6 : Consumer Goods Too Dependent on Fuel Price………………………. 39

Table 4.7 : The Price of Consumer Goods Increase Too High…………………….. 41

List of Abbreviations

SPSS Statistical Package for Social Science
OPEC Organization of Petroleum Exporting Countries
UAE United Arab Emirates
CPI Consumer Price Index
MIER Malaysian Institute of Economic Research
NGV Natural Gas Vehicle
CNG Compressed Natural Gas
LNG Liquefied Natural Gas
GDP Gross Domestic Product
MARC Malaysia Rating Corporation
RON Research Octane Number
mmBtu One Thousand Thousand British Thermal Unit
mmscfd Million of Standard Cubit Feet

Introduction

Background of study

Recently, the volatility of fuel price fluctuates aggressively because of the global issues likes rumors on the limited fuel in United State. Minister Datuk Seri Abdullah Ahmad Badawi said that Malaysia will face the greatest challenge in the economy as a result of the rising global fuel prices. Further, rising fuel prices and uncertainty caused by external factors make it difficult for any nation to fully shield its citizens from hardship. There will be some measurable impact on the broad sectors of the economy (transportation and logistic industry, food retailers, petty traders, auto, construction, consumer, media, property and toll operators).

On the top of that, rising fuel price will give wider implication towards middle income groups. According to Ainshah, O., Salmi, R & Osman, CB (2006) income can be divided into three categories which are high income (more than RM 3500), middle income (range between RM 1500 to RM 3500) and lower income (less than RM 1500). They faced burden with the higher cost of living and also faced higher price of necessity product. Normally, the impacts of rising fuel prices will burden the lower income group. However, in the current situation of rising fuel prices, not only lower income group suffer the implication but the middle income group surprisingly suffer the burden also.

1.1.1 Fact on Price of Oil before and after Price Hike Crisis

Prime Minister Datuk Seri Abdullah Ahmad Badawi on Wednesday June 4, 2008 in Kuala Lumpur had declared that the new price for petrol is RM2.70 a liter. The price goes up by 78sen from the current RM1.92, a hike of 40%. Other than that, the price of diesel also has been announced that would be increased by RM1 to RM2.85. The highest magnitude on the changes of oil price had received many reactions from our society. Even though the increasing actually was caused by the global crisis but some of them think that it is still not relevant for government to raise the price too high because petrol is one of the subsidized items.

As we known from the statistic of oil price hike, absolutely this year is the highest increasing amount which the last few years the oil prices normally increase only by 30sen on average. Moreover, the Prime Minister also announced about the increasing of electricity rate by 18% for homes and 26% for business users. This phenomena which called as an economic forces that we need to confront not only among household even in the industries where firms need to develop strategies to avoid or minimize the impact of this threats. Impact of this oil price hike will affect increasing in other things prices. That is what really happened by today where some of parties have taken advantages to raise their price to the consumers. However, after comparing with the current global market price periodically, on Monday August 25, 2008 Datuk Seri Abdullah Ahmad Badawi has announced that government had decided to reduce the petrol price to RM2.55 to RM2.40 per liter and diesel price become RM2.50 per liter.

Figure 1.1: Increasing in Oil Price 2004-2008

Malaysia's Oil Gross Price (RON 97)
Date	New Prices	Percentage	Global Price	Percentage
	RM/liter	Changes (%)	AS$/Barrel	Changes (%)
Before 1990	0.89	-	18.33 (1989)	-
1990	1.10	25	24.49	33.6
1^st October 2000	1.20	9	24.68	0.8
20^th October 2001	1.30	8.3	25.90	4.9
1^st May 2002	1.32	1.5	30.86	19.2
31st October 2002	1.33	1	24.53	5.3
1^st March 2003	1.35	1.5	31.54	28.6
1^st May 2004	1.37	1.5	40.28	27.7
1^st October 2004	1.42	3.6	53.13	91.8
5^th May 2005	1.52	7	56.26	5.9
31^st July 2005	1.62	6.6	58.70	4.3
28^th February 2006	1.92	18.5	61.64	5
5^th June 2008	2.70	41	121.00	96.3
23^rd August 2008	2.55	(5.6)	114.60	(5.3)

Table 1.1: Malaysia's Oil Gross Price (RON 97)

Statement of the problem

The global fuel price has been increasing in quite a big number nowadays. This increasing of global fuel prices will give wider impacts towards the other country and every country will suffer the burden. The price of pump price of fuel has raised to a point that threatens the livelihood of most the Malaysian surprisingly to the middle income group.

Given the situation, increasing of fuel prices will lead to the inflation and that means a higher cost of living to the Malaysian. It involves literally everything from teh-tarik, roti-canai, mee-mamak, children's bus-fare, electricity tariff and others. Unfortunately, the group most affected by the fuel and power increase is the middle class because of higher cost of living and without salaries increase to the worker.

Purposes of the study

Given the uprising global fuel prices nowadays, every nation will facing with the extreme impacts to the economy. Malaysia also faced with the current situation and people are facing with higher cost of living. Apart from that, the middle income groups are faced with great hardship as the price of necessities product had drastically rising.

In response to this possible national concern, we would like to investigate the issue further. The purpose of our study described in this research report was to assess the current public knowledge on the impacts from rising fuel price towards middle income group and to explore the broader action taken from the government and individual prospect to overcome this situation.

Objectives of the study

The objectives of this study are:

To identify the impact of rising fuel price towards middle income group
To describe the action that can be taken by the middle income group to faced the burden
To investigate the problems that will occur from the rising fuel price to the middle income group.

Research Questions

What are the impacts of the rising fuel price towards middle income group?
What are the action taken to faces the increasing the fuel price?
What are the problems that occur because of the rising fuel price?

Significance of the study

Recently, the volatility of fuel price fluctuates aggressively and gives wider implications towards middle income groups. This current situation has a possibility to be reoccurring again in the future. Even though, this current problem arise now but the implication of this situation can be reuse in the future. With the information at hand, the findings of the study are very important to the people especially middle income people in order to be more prepared with the strategic action to face this situation if it happens again.

Scope of the study

Our scope of study involves the participation of 50 respondents in Melaka Central. The respondents who are gain income range between RM1500 to RM3500 per month which randomly selected by the research team themselves. The data collected via questionnaire was distributed from end of August to 7 September this year. We also used SPSS system to analyze the data that been collected from our distributed questionnaires.

Literature Review

Introduction

According to Uma Sekaran (2007) Literature Survey is the documentation of a comprehensive review of published or unpublished work from secondary sources of data in the areas of specified interest to the researcher. The purpose of literature review is to ensure that no important variable that in the past been found repeatedly to have had an impact on the problem is ignored. This report was highlighted the rising of fuel price towards middle income group.

2.1 Fuel Price

2.1.1 Definition of fuel.

Business dictionary (2007) defined the fuel oil as residual refinery
product burned for the generation of heat, and having a flash point above 40°C (104°F). Residential use fuel oils are classified as Number 1, 2, or 3, and industrial ones are classified as Number 4, 5, or 6 according to their specific gravity (higher the number, higher the sp. gravity). Number 5 and 6 are used mainly for powering ships and are also called bunker oils.

2.1.2 Trend of Fuel Oil Price

The increasing in price of fuel oil will definitely affected much or less in the price of other goods and services in the market. The fuel oil price cycle responding to change in demand and supply from OPEC and non-OPEC. OPEC was formed in 1960. The first 6 founding members of OPEC was Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. In the year 2007, Libya, Nigeria, Qatar, Indonesia, Ecuador, Angola, Algeria and UAE become OPEC members. Malaysia is one of the countries who had been supply the petroleum which were not members of OPEC.

Figure 2.1: OPEC share of world crude oil reserve(2007)

OPEC had been targeted that the fuel oil price at the range of US$22 to US$28 per barrels. The price remains at the targeted until in May 2004, the price of fuel oil price keeps on increasing until US$40 per barrels. It continues the upward trend and the price rose to US$ 87.05 per barrels in December 2007. Furthermore, the fuel oil price drastically increasing to US$105.16 in April 2008 and continues increasing until reached the peak price in the July 2008 with the price was US$131.22. The fuel oil price start move to downward trend in August 2008 with the price was US$112.41 and price of US$97.04 in September 2008. The average for the fuel oil price in the year 2007 was US$69.08 but the fuel oil price drastically increasing to 108.48 for the average for the fuel oil price in the year 2008.

Figure2.2:Monthly Average Price(US dollar) Figure2.3:Daily Basket Price(US dollar)

Figure2.4:Weekly Average Price (US dollar) Figure2.5:Yearly Average Price (US dollar)

Figure 2.6: CPI sub component: Transport Index

With such increase in fuel prices, we no longer see a 3-plus percent rate of inflation in the country. If history is any guide, transport costs were likely to escalated starting from June. Back in 2006 when petrol prices were jacked up by 18%, transport index shot up by 9.3% within a month. This time around, it is even harder to see the silver lining when it comes to inflation outlook as the increase in CPI is also magnified by the rising food prices. In the first five months of the year, the index for food and non-alcoholic beverages already climbed by 5.4% due to supply constraint. Similarly, one should not underestimate the impact of an increase in the index of restaurant and hotel, which in 2006, climbed by 7.1% as trickle-down effect from high cost of food items rippled through the economy.

2.2 Middle Income Group

2.2.1 Definition of middle income group

Longman Dictionary of Contemporary English (1995) defined an income as the money that you earn from your work or that you receive from investment. Based on www.klcityhall.com (2008), there was 44% of households in Kuala Lumpur are from the middle income group whose monthly household income is RM 1,500 to RM 3,500. According to Ainshah, O., Salmi, R & Osman, CB (2006) income can be divided into three categories which are high income (more than RM 3500), middle income (range between RM 1500 to RM 3500) and lower income (less than RM 1500).

2.2.2 Income Distribution

The overall income distribution among households in Malaysia improved during the Seventh Plan period. The proportion of lower-income households, defined as those earning less than RM1, 500 per month, decreased from 54.4 per cent in 1995 to 43.8 per cent in 1999, as shown in Table 3-3. The size of middle-income households, defined as those earning between RM1, 500 and RM3, 500, increased from 32.3 per cent in 1995 to 37 per cent in 1999, bringing Malaysia closer to creating a bigger middle-income class.

2.2.3 Distribution of households.

Income Class (RM)	1995	1999
499 and below	10.6	6.0
500 – 999	23.9	19.0
1,000 - 1,499	19.9	18.8
1,500 - 1,999	13.1	13.9
2,000 - 2,499	8.9	10.1
2,500 - 2,999	6.1	7.3
3,000 - 3,499	4.2	5.7
3,500 - 3,999	2.8	3.9
4,000 - 4,999	3.8	5.5
5,000 and above	6.7	9.8
Total	100.0	100.0
Mean income (RM)	2,020	2,472
Median income (RM)	1,377	1,704
Gini Coefficient	0.4560	0.4432

Table 2.1: Monthly gross household income, 1995 and 1999 (%)

2.3 Government Subsidies

2.3.1 Definition of subsidy

Your dictionary (1995) defined subsidy as
a grant of money from one government to another, as for military aid or a government grant to a private enterprise considered of benefit to the public or historical in England, money granted by parliament to the king. Longman dictionary of contemporary English (1995) defines subsidy as money paid by government or organization to make price lower, reduces the cost of producing goods.

Elaine Ang (2008) describe that with the end of the era of cheap oil, many experts see Malaysia's current oil and gas subsidies as unsustainable and inefficient. A high subsidy level is not efficient from a welfare perspective because those who can afford to pay for higher fuel prices were also benefiting from the subsidy that is aimed at alleviating the burden faced by the low-income groups. A review of the fuel subsidy seems imminent as the Government and Petronas have said fuel and gas subsidies now cost a combined RM40bil a year. During the 2000 to 2003 period, average pump prices rose 4.6% annually while petroleum consumption increased 5.2% a year. Therefore, economists believe there was a strong case to gradually reduce and ultimately remove the subsidy altogether, and align domestic prices closer to world prices.

A review of the fuel subsidy seems imminent as the Government and national oil company Petroliam Nasional Bhd (Petronas) have said fuel and gas subsidies now cost a combined total of RM40bil a year due to the surge in crude oil and natural gas price globally. To note, subsidies account for 14% of the Government's total operating expenditure in 2005 from the average 2% to 3% in the 1990s, before coming down to 10% last year as a result of a string of fuel price adjustments in recent years.

The Malaysian Institute of Economic Research expects fuel price to increase 30 to 50 sen per litre this year. "Subsidies are good politics but bad economics. The Government will need to strike a balance in terms of fuel subsidy. If the subsidy was cut too much, inflation will go through the roof and the people will suffer.

Figure 2.7: Fuel Price Adjustments vs Subsidy Savings

2.3.2 Streamlined diesel subsidy.

For approved transportation companies, vessel owners and fishermen.

Diesel – RM1.43 per litre (previously RM1 per litre for fishermen and RM1.20 per litre for vessel owners)
RM200 per month for every owner and employee of Malaysian-owned vessels registered with the Fisheries Department
10sen per kilo incentive for every kilogram of fish caught by registered vessels
10sen per litre for every litre of diesel used by river transportation operators according to approved quota

2.3.3 Gas subsidies restructure

For Peninsular Malaysia.

For power producers – from RM6.40 per mmBtu to RM14.31 per mmBtu
For industrial users (consuming less than 2mmscfd) – from RM9.40 per mmBtu to RM24.54 per mmBtu
For industrial users (consuming above 2mmscfd) – from RM11.32 per mmBtu to RM32.56 per mmBtu

Jed Yoong (2008) clarifies that driven by skyrocketing fuel prices that the government can no longer afford, fuel subsidies that would have cost RM56 billion this year, about half of the government's revenue. The government announced Wednesday evening that petrol prices would rise by 78 sen (US24¢) at midnight, a 41 percent jump from RM1.92 per liter to RM2.70. That means those spending RM2, 000 per month to fill the tanks of their BMWs will now be paying RM2, 820. Regardless of income levels, it is likely most Malaysians will feel the pinch. To soften the blow and possibly to fend off civil unrest, the government is also passing out cash handouts to owners of motorcycles and cars below a certain engine size – thus replacing subsidies with cash.

2.4 Distribution of Rebate

2.4.1 Definition of rebate

Business dictionary.com (2007) defined rebate as return of a portion of a purchase price by a seller to a buyer, usually on purchase of a specified quantity, or value, of goods within a specified period. Investor words (1997) defined rebate as a partial refund following a purchase. Longman dictionary of contemporary English (1995) defined rebate as an amount of money that was paid back to you when you have paid too much tax, rent.

2.4.2 Cash rebates

The star online (2008), clarified that government would had to fork out RM5bil to pay to owners of cars and motorcycles eligible for rebates introduced under the restructuring of subsidy package. Government will give rebates for the following:

RM625 per year
For private vehicle with engine capacity of 2000cc and below, including private pickup trucks and jeeps with engine capacity of 2500cc and below.
RM150 per year
For each private motorcycle with engine capacity of 250cc and below
RM200 reduction on road tax
For private petrol and diesel vehicles with engine capacity above 2000cc
RM50 reduction on road tax
For private motorcycles with engine capacity above 250cc

2.5 NGV

2.5.1 Definition of NGV

According to NGV Network Malaysia (2008), Natural Gas can be defined as a mixture of hydrocarbons found in the ground independently or together with crude oil. Its composition varied (depending on where it is found), but its main component was "Methane"(CH4}. The rest of the gas was made up of varying amounts of other gases like ethane, propane, butane, and heavier hydrocarbons, plus Carbon Dioxide, Nitrogen, water and traces of other substances. Natural gas was a by-product of decaying vegetable matter in underground strata. Natural gas was the cleanest burning fossil fuel which can help improved the quality of air and water, especially when used in highly polluted places. A Natural Gas Vehicle or NGV was an alternative fuel vehicle that uses compressed natural gas (CNG) or, less commonly, liquefied natural gas (LNG) as a clean alternative to other automobile fuels.

According to Wikepedia (2008), the free encyclopedia, CNG was typically stored in steel or composite containers at high pressure (3000 to 4000 lbf/in2, or 205 to 275 bar). These containers were not typically temperature controlled, but were allowed to stay at local ambient temperature. LNG storage pressures were typically at or just above the local atmospheric pressure (0 to 30 lbf/in², or 0 to 2.1 bars). LNG was stored at temperatures as low as -260°F (-162°C). At these temperature and pressure conditions, natural gas was in a liquid state. Storage temperatures may vary due to varying composition and storage pressure. LNG was far denser than even the highly compressed state of CNG. As a consequence of the low temperatures, vacuum insulated storage tanks were used to hold LNG. These tanks were often referred to as Dewar's to credit the early cryogenic scientist Sir James Dewar.

Figure 2.8:LNG storage tank located in the trunk

NGV operate similarly to traditional vehicles, but they used natural gas as fuel. Natural gas can power existing cars and trucks by converting the engines to a bi-fuel capability. To convert vehicles to natural gas requires installing a tank, fuel pressure regulators, and fuel lines. The operational cost of vehicles running on CNG, as compared to those running on other fuels, was significantly low. At the prevailing price of fuel, operational cost of CNG vehicles was 68% lower than petrol and 36% lower than diesel. The price of NGV gas was RM 0.68 per litre.

In Malaysia, currently all NGV STATIONS were operated by Petronas under their wholly owned subsidiary Petronas NGV Sdn Bhd. There are currently 39 stations in Malaysia serving CNG (compressed Natural Gas) for 15,000 plus NGV cars.

2.6 The impact of rising fuel price

Petroleum prices had risen sharply since early 2005. At the same time the average amount of imports of energy-related petroleum products had fallen slightly. The combination of sharply rising prices and a slightly lower level of imports of energy- related petroleum products translate into an escalating cost for those imports. This rising cost added an estimated $70 billion to the nation's trade deficit in 2005 and could add another $60 to $70 billion in 2006, depending on the course of energy import prices over the remainder of 2006.

According to data published by the Census Bureau of the Department of Commerce, the prices of petroleum products over the past year had risen considerably faster than the change in demand for those products. As a result, the price increases of imported energy related petroleum products worsened the U.S. trade deficit in 2005 and likely will do so again in 2006. An energy-related petroleum product was a term used by the Census Bureau that includes crude oil, petroleum preparations, and liquefied propane and butane gas. Crude oil comprised the largest share by far within this broad category of energy-related imports. The increase in the trade deficit was expected to have a slightly negative impact on U.S. gross domestic product (GDP) and could place further downward pressure on the dollar against a broad range of other currencies. To the extent that the additions to the merchandise trade deficit are returned to the U.S. economy as payment for additional U.S.

Figure 2.9: oil price, 1994-march 2008

Figure 2.10: oil price, 2006-2008

An oil-price spike could create a recession comparable to those that followed the 1973 and 1979 energy crises or a potentially worse situation such as a global oil crash. Increased petroleum prices are however reflected in a vast number of products derived from petroleum, as well as those transported using petroleum fuels.

According to Dr. Ibrahim ibn Abdul Aziz Al Muhanna(2004) in article Oil Price Hike, reasons and impacts that the main challenge facing the Kingdom was non-dependence on one commodity despite of its importance and price as a single source of national economy with all its dimensions (state budget, balance of payments and gross domestic product), particularly when this commodity was liable to great fluctuation not only in its prices but also in its production. The importance of the Kingdom's efforts is to stabilize international oil market not only in terms of prices but also in terms of balancing demand and supply. It also works to ensure adequate supply and establish close cooperation with oil producing and consuming countries.

According to MARC (2007) the impacts of the rising fuel prices were higher costs of goods and services will lead to a reduction in discretionary spending as consumers adjust to lower real income. Higher transport-related costs may also hit construction industry and temper its growth momentum, going forward. Beside that, it's also impacts on lower consumer spending. Reduction in spending will hit the headline growth of the economy. Shrinking consumer spending will adversely affect businesses' bottom lines and reduce investment plans. Private consumption accounted for 51.1% of GDP last year and was currently the major pillar for the domestic economy. Moderation in loan growth Banks may tighten lending standards following a rapid increase in personal loan growth. Banks may also try to curb personal loans as household debt as a percentage of GDP has climbed to almost 60%.

3.0 Research Methodology

3.1 Introduction

This section will be discusses the methodology of the research. The main purpose of the research is to identify the impact of rising fuel price towards middle income group among people in Melaka Central. To assess and evaluate the impact of rising fuel price toward middle income groups, the respondents whose work with the range income between RM1500 to RM3500 in Melaka Central was been chosen. Data for the research were collected through questionnaire.

3.2 Research Instruments

This research utilized both quantitative and qualitative research methodology. The instruments that had been use to collect the data was questionnaire. A set of questionnaire containing 20 questions was developed. Different question types, such as rating-Likert Scale, yes-no, open ended and multiple choices were used in the questionnaire. The different sections of questionnaire were: i) demographic information, ii) financial information, iii) impact of rising fuel price, iv) and comments. The questionnaire was piloted to a group of 10 respondents to assess its validity before it was distributed.

Respondents of the Study

The respondents of the study were people in Melaka Central with different job background and range income between RM1500 to RM3500. In 1 September 2008, a total of 50 questionnaires had been distributed to the respondents around Melaka Central. All of the respondents had returned back the questionnaires. Of these numbers, 66% of the respondents were male while the rest 34% were female.

Research Procedures

Before the actual data collection period, a pilot study was conducted to assess the validity of the research instruments. A total of 10 respondents were involved in the pilot study chosen at random at various place around Melaka Central.

During the actual study, the questionnaires had been distributed at various locations such as the entrance of Melaka Central, several cafeterias and several shops. Respondents were approached with an initial question of whether they are within middle income group of people and own transportation.

Analysis of Data

To analyze the data, a total three variables were taken into consideration namely group of income level, own transportation and affected by rising fuel price. Data had been entered into computer using SPSS software which comprises several types of analysis that can be use to analyze the data. The results were presented through frequency counts and other descriptive statistics. The descriptive statistic had been used to determine the value of minimum and maximum of the data. Then, the data had been processed by using Frequency table in order to response to the first objective.

Findings

4.1 Gender

Figure 4.1: Gender

Figure 4.1 shows the respondents' gender in percentage that had been distributed at Melaka Central. More than 66% of the respondents whose had been contributed for this questionnaire were male while the rest were female which just contributed by 34% of 50 respondents.

4.2 Respondents' Status

Figure 4.2: Respondents' Status

From the above Figure 4.2, this showed that the married people were contributed more in answered the questionnaire on the title of The Impact of Rising Fuel Price toward Middle Income Group with 54% of the respondents. This had been followed with single people who responded by 42% from the whole 50 respondents while separate people just contributed 4% in answered this questionnaire.

Age

1.00= 20 – 29 years old

2.00= 30 – 39 years old

3.00= 40 – 49 years old

4.00= 50 and above

4.3 Respondents' Age

Figure 4.3: Respondents' Age

This Figure 4.3 showed four groups of age which were 20 to 29 years old, 30 to 39 years old, 40 to 49 years old and above 50 years old. The highest age group that participate in answered this questionnaire were 20 to 29 years old with 38% and had been followed by the respondents with ages of 30 to 39 years old with 28% from the whole 50 respondents. The respondents with age of 40 to 49 years old had been in the third place with 22% meanwhile, the lowest age group was the respondents with age above 50 years old with only 4% that contributed to answer this questionnaire.

4.4 Respondents' Occupation

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Government's sector/Sektor Kerajaan	15	30.0	30.0	30.0
	Private's Sector/Sektor Swasta	23	46.0	46.0	76.0
	Businessman/peniaga	12	24.0	24.0	100.0
	Total	50	100.0	100.0

Table 4.1:
Respondents' Occupation

Figure 4.4: Respondents' Occupation

Table 4.1 showed exactly the number and percentage of respondents' occupation while Figure 4.4 showed percentage of the occupation of respondents who had been participated with this questionnaire. The respondents who worked in private sector be the highest among the two occupations with 46% and then followed by the respondents who worked in government sector with 30%. Meanwhile, the respondents worked as businessman was showed the lowest percentage with only 24%.

4.5 Income

Figure 4.5: Respondent Income

The above Figure 4.5 showed the income per month that had been gained by each of the respondents. This show that all the respondents for this questionnaire were from the middle income groups that between RM 1501 to RM 3500 of income per month. 80% of the respondents had gained RM 1501 to RM 2500 of income per month while the balance which was 20% of the respondents had gained RM 2501 to RM 3500 for every month.

4.6 Cost of Living per Month

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Below RM 300	3	6.0	6.0	6.0
	RM 301 - RM 600	9	18.0	18.0	24.0
	RM 601 - RM 900	17	34.0	34.0	58.0
	Above 900	21	42.0	42.0	100.0
	Total	50	100.0	100.0

Table 4.2: Cost of Living per Month

Figure 4.6: Cost of Living per Month

This Figure 4.6 showed four group of cost of living per month which was below RM 300, RM 301 to RM 600, RM 601 to RM 900 and above RM 900. The highest cost of living of the respondents that participate in answering this questionnaire were above RM 900 that show 42% and were been followed by RM 601 to RM 900 with 34%. The RM 301 to RM 600 group with 18% and the rest owned by below RM 300 with 6%. So, the overall cost of living has increasing time to time.

4.7 Respondents Vehicle's Possession

Figure 4.7: Respondents Vehicle's Possession

Almost 94% of the respondents that had been answered this questionnaire had their own vehicles likes motorcycle, motorcar, lorry and also van. Just 6% of the respondents were not having their own vehicles but members of their family will own at least one vehicle.

4.8 Respondents' Type of Vehicles

Figure 4.8: Respondents' Types of Vehicle

From the Figure 4.8 above, it's showed that most of the respondents at least had a car which was 59.57% and followed by respondents that had both motorcycle and motorcar with 23.4%. The third place will be owned by the respondents that only had motorcycle with 10.64%. Just 4.26% of the respondents had motorcycle, motorcar and van. The respondents that owned motorcycle, motorcar and lorry only 2.13% from the 50 respondents that answered questionnaire.

4.9 Amount Vehicle per Household

Figure 4.9: Amount Vehicle per Household

From the Figure 4.9 above, it's showed that 40% from 50 respondents had owned two vehicles per household, and followed by respondents that only had one vehicle at home with 36%. Meanwhile, the respondents that owned three vehicles contributed 20% and a small percentage of respondents that owned four vehicles with 4%.

4.10 Cost of Fuel

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Below RM 100	1	2.0	2.0	2.0
	RM 101 - RM 300	17	34.0	34.0	36.0
	RM 301 - RM 500	19	38.0	38.0	74.0
	Above RM 500	13	26.0	26.0	100.0
	Total	50	100.0	100.0

Table 4.3: Cost of Fuel per Month

Figure 4.10: Cost of Fuel per Month

Costs of fuel per month were divided into four groups and the results answered with the respondents were showed in the Figure 4.10. The highest cost of the respondents spends for the fuel is RM 301 to RM 500 with 38%, followed by RM 101 to RM 300 with 34%. Meanwhile, 26% of the 50 respondents spend more than RM 500 and the small percentage of the respondents spend less than RM 100 with 2%.

The Rising Fuel Price Burden Respondents

Figure 4.11: The Rising Fuel Price Burden Respondents

This Figure 4.11 showed that most of the respondents were felt burden with the rising of the fuel price with 96% meanwhile only 4% of respondents did not felt burden with the increasing of fuel price. The respondent should be increasing their cost of living according to the rising of fuel price.

4.12 Rises of Fuel Prices Limits Respondents' Activities

Figure 4.12: Rises of Fuel Price Limit Respondents' Activities

The above Figure 4.12 showed that the feeling of the respondents according to the rises of fuel that limits respondents activities. Most of the respondents strongly agree that the rises of fuel price will limit their activities that were 40%. The second higher is agree that was 38%. Than followed by the respondents disagree at 14% and the lowest was strongly disagree at 8%

The Existence of NGV Reduce Fuel Cost per Month.

			Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Strongly disagree/Sangat tidak bersetuju	6		12.0	12.0	12.0
	Disagree/tidak bersetuju	14		28.0	28.0	40.0
	Agree/Setuju	23		46.0	46.0	86.0
	Strongly agree/Sangat bersetuju	7		14.0	14.0	100.0
	Total	50		100.0	100.0

Table 4.4: The Existence of NGV Reduce Fuel Cost per Month

Figure 4.13: The Existence of NGV Reduce Fuel Cost per Month

The Figure 4.13 above showed that most of the respondents agree that the existence of NGV can reduce the cost of fuel per month. With NGV respondents can reduce the used of fuel when make a journey to other places. The strongly agree was 14% meanwhile the agree was 46%. Beside that the respondents disagree was 12% strongly agree and 28% disagree.

4.14 Government Subsidies Reduce Burden of Fuel Price

Figure 4.14: Government Subsidies Reduce Burden of Fuel Price

The Figure 4.14 above showed that the government subsidies reduce burden of fuel price. The result from this graph was described that the most respondents was agree that the government subsidies will reduce the cost of fuel price. This is the way how government helps Malaysian to reduce their cost. The portion was 88% of respondents agree and 12% was disagreeing.

Distribution of Rebate Help Reduce Burden of Rising Fuel Prices

FrequencyPercentValid PercentCumulative PercentValidStrongly disagree/Sangat tidak bersetuju12.02.02.0 Disagree/tidak bersetuju1122.022.024.0 Agree/Setuju2754.054.078.0 Strongly agree/Sangat bersetuju1122.022.0100.0 Total50100.0100.0

Table 4.5: Distribution Rebate Help Reduce Burden of Rising Fuel Price

Figure 4.15: Distribution Rebate Help Reduce Burden of Rising Fuel Price

The Figure 4.15 showed that the distribution of rebate can help reduce burden of rising fuel prices. Most respondents agree that the rebate can help reduce burden of rising fuel prices that is 54% agree and 22% strongly disagree. Meanwhile there were 24% respondents that disagree that the rebate can reduce the burden of rising fuel price.

Consumer Goods Too Dependent on Fuel Price

		Frequency	Percent	Valid Percent	Cumulative Percent
Valid	Disagree/tidak bersetuju	6	12.0	12.0	12.0
Valid	Agree/Setuju	21	42.0	42.0	54.0
	Strongly agree/Sangat bersetuju	23	46.0	46.0	54.0	100.0
	Total	50	100.0	100.0		100.0

Table 4.6: Consumer Goods Too Dependent on Fuel Price

Figure 4.16: Consumer Goods Too Dependent on Fuel Price

Figure 4.16 showed that most of the respondents which 46.00% strongly agree and 42.00% just agree that consumer goods price too dependent on the fuel price. Meanwhile, about 12.00% of the respondents disagree and about none was strongly disagreeing.

4.17 Retailer Takes Advantage from Rising Fuel Price

Figure 4.17: Retailer Takes Advantage from Rising Fuel Price

From the Figure 4.17 above, it's showed that most of the respondents which 58.00% strongly agree that most of the retailer takes advantage from the rising fuel price by increasing the price of the goods. Meanwhile, 30.00% of the respondents agreed that the retailer take advantage from the fuel hike. However, at least 10.00% of the respondents disagree and about 2.00% strongly disagreed that most of the retailer take advantage from the price hike.

4.18 The Price of Consumer Goods Increase Too High

FrequencyPercentValid PercentCumulative PercentValidDisagree/tidak bersetuju48.08.08.0 Agree/Setuju1836.036.044.0 Strongly agree/Sangat bersetuju2856.056.0100.0 Total50100.0100.0

Table 4.7: The Price of Consumer Goods Increase Too High

Figure 4.18: The Price of Consumer Goods Increase Too High

Figure 4.18 show that most of the respondents satisfy with price of consumer goods increase too high if compared to the fuel price hike. About 56.0% strongly agree and 36.0% agree with statements. Meanwhile, only 8.0% were disagreed that price of consumer goods increase too high if compared to the fuel price hike and none was strongly disagree with this statement.

4.19 The Impacts of Declining Fuel Price in the Current Situation

Figure 4.19: The Impacts of Declining Fuel Price in the Current Situation

The Figure 4.19 showed the impacts of declining fuel price to the respondents. Most of the respondents which were 28.00% disagree that the downturn of fuel price trend nowadays will give impacts to them because the reducing of fuel price is not going to reflect the current price of consumer goods. However, 26.00% of the respondents were agreed that the declining of fuel price will reduce their expenses on fuel usages and will reduce other burden they faced. Meanwhile, about 24.00% agreed that they will gain benefit from the downturn trend such as they can increase their savings. Furthermore, about 12.00% of respondents said that they still faced the burden even though fuel price was decreasing. Lastly, 10.00% of the respondents had given no comment about the statement.

4.20 Action Taken by Government

Figure 4.20: Action Taken by Government

The above chart clarifies that 24.00% of the respondents propose that government should reduce or stabilize the price of consumer's good in order to reduce the burden on society. 20.00% out of 50 respondents propose that government must increase the subsidies and 16.00% recommed that government should increase the investment on fuel energy. Meanwhile, about 12.00% of them suggest that government should reduce the mega or big project and the other 12.00% clarifies that government must do research and development of fuel energy such as the introdution of NGV and biodiesel usage as a fuel alternative. Futhermore, 10.00% of the respondents described that government should give more concerned with the society problem and about 6.00% of them had given no comment on the statement.

5.0 Conclusions

This study investigated the impacts of rising fuel price towards middle income group in Melaka Central. Primary data were collected by randomly distributing questionnaires to 50 respondents. As mentioned earlier in the introduction, the purpose of this study was to assess the current public knowledge on the impacts from rising fuel price towards middle income group and to explore the broader action taken from the government and individual prospect to overcome this situation.

The following conclusions can be drawn based on the findings of the study:

This study showed that the male were more interested to answer the questionnaire because in daily life male more sensitive about this issue on the impact or rising fuel price.
The married people were more understandable than single people because they have more liability in their life.
The more old of the respondents, the less attractive the respondents to answer the questionnaire.
The private sector provide more opportunity for the respondents to gain more income per month and also can gain others benefits compared to others occupations.
The level of education among the society be in the range of average compared to others society in others country.
This study has shown that the cost of living highest due the increasing of the inflation rate that contributes the price of consumer goods increase to high and boost spending per month.
The results of this study support the ideas that the price of the vehicles is available and the loan offered by the bank is 100% bank loan financing. Nowadays, the vehicles had been some sort of necessities to everybody and also the public transportation system was not effective.

The results of this study support the ideas that cars give more convenience to consumers compared with the motorcycle's consumers in term of safety.
The findings of this study show that most of Malacca's peoples have more than one vehicle due to the increasing in standard of living.
The results of the investigation show that the cost of fuel per month highest due the drastically increasing of fuel price.
The rising fuel price burdens the respondents that lead the other price of consumer product increase and inflation in food price, consumer goods and transportation is inevitable like. These factors contributed to the increases in cost of living.
The respondents agree that rises of fuel price limits the activities like going to holiday because people must spend more money to make any journey that leads to increases of spending.
NGV is a good alternative to reduce the cost of fuel because the price of 1 liter NGV cheaper than 1 liter of fuel.
People too dependent towards the fuel oil subsidies from government and less efforts to handle this problem.
Government also must give rebate to the people in order to reduce the cost of fuel spending per household. People always hope for the money from government.
Current consumer goods price affected by the volatility of fuel price that cause the consumer goods increase is too high compare to the household income per month.
The cost that retailer used to buy the goods was high due to the inflation rate that contributed to rise price of goods.

Bargaining power of customer in Malaysia is weak and government not imposes strict rules and regulation in setting the consumer price of goods.
The government's alternative was successfully implemented to reduce the burden of fuel hike among middle income group.

Imposing of subsidy will help in reducing the burden of fuel price hike to the society. Saving and investment is one of the ways to overcome the financial crisis of the society.

The results of this study indicate that rising of fuel price bring the implication and can burden the middle income group that earning income between RM 1500 to RM 3500 per month. However, these findings were only true for Melaka Central Society and cannot be generalized to other society around Malaysia. The same study needs to be conducted with respondents from others society around Malaysia to see if there are any similarities of the implication on rising fuel price towards middle income group.

Most of the respondents agreed that increasing in fuel price will give major impact to them because of higher cost of living due to the increasing in consumer price of product, food prices and transportation. It also limits their activities because of higher consumer spending. On top of that, the respondents justified actions that can be taken in order to overcome with installation of NGV, increase subsidies and rebate and also the government shall restrict the rules and regulations towards retailer so that the retailer cannot take advantages on rising fuel price.

6.0 Recommendations

6.1 Recommendations Based on Findings

Based on the findings and conclusions of the study, here are several recommendations to be considered:

The future researchers should to make the questionnaire that can attract female and upgrade the questionnaire with more multiple choice, yes-no or listing questions to make them easy to answer the question and also try to educate female to be more sensitive on this issue.
Other researchers should try to persuade single people in answering with interesting questionnaire and be friendly towards the respondents in order to increase participations from the single people.
The older people should concern more towards the rising fuel price through mass media likes newspapers, magazine, television and radio.
The government sector ought to provide more gratuities and privileges and also increase the government servants' income per month.
The government and society shall be cooperate together to increase the level of consciousness among Malaysian in order to raise the level of education through motivations, campaign and distribution of information in mass media.
Government should increase the goods or foods subsidy in order to reduce the price of consumer goods and at the same time can reduce the inflation rate.
The financial institutions or bank should implement loan with 80% or 90% bank financing and the rest is paid out by the consumer's own in order to reduce the number of people that has unable to use vehicle. Besides that, the public transportation system shall be upgrade and be more efficient.
The motorcycle's manufacturer creates a news motorcycle or renovates the present motorcycles that can give same convenience to consumers with the reasonable price.
The society should use their income to make investments as a guarantee if the rising fuel price happens in the future.
People should increase their income by doing a part time job or using the NGV to reduce cost of fuel. Meanwhile, government must play huge part to educate people how to spend fuel usage such as car pooling programmed or using public transport.
To reduce the burden government can increase the distribution subsidies and rebate to the public. The government should revoke the business license of traders found to have been repeatedly increasing the price of goods.
People can go for holiday with a package and promotion because with this it will less the cost for make the activities and at the same time increase the tourism sector.
Government must increase the NGV station so many people can use NGV to reduce cost of fuel. Beside that, the organizations that involved directly or indirectly need to do R&D to reduce the price to installation of NGV.
Government must give subsidies to the right person that needs the subsidies such as to the fisherman. Government can reduce the subsidies to make people more independent to face the rising fuel price.
Government must make investigation before give the rebate to a right person who's really need the rebate such as to middle and lower income.
Government and employers should revise back the salaries for the employees so that employee's salaries can cover the current spending behaviors that currently higher than their income.
Government should reduce taxes on imported raw materials in producing the goods and retailers can avoid buying of consumer goods from the middleman. Besides that, government can increase the subsidy on food in order to reduce the inflation rate.
Customer must be confidence and must have strong bargaining power in order to have power to control the consumer prices. Government should impose more strict rules and regulation in setting consumer price of goods.
The government shall plan more alternative strategies in order to overcome the fuel hike.
Society should increase their savings and make many investments so that they can cover any unexpected costs that may rise in the future.

Recommendations for Future Research

Since this study had only focused on Melaka Central's middle income respondents, it is recommended that further studies be carried out on middle income group from other places around Malaysia to see whether there are any similarities in the findings. Furthermore, further research could also explore the actions that shall be taken in order to face this problem. Lastly, although fuel is a necessity, it might be a good idea to investigate the effect of rising fuel price towards others range of income group so that the suitable action can be found according to certain range of income groups.

Bibliography:

7.1 Books

Sekaran. U, (2007). Research Methods for Business; A Skill Building Approach (4^th ed.). India: Wiley India Edition

7.1.2 Abdul Majid, N., & etc (2007). Academic Report Writing; From Research to

Presentation (2^nd Edition). Pearson Prentice Hall.

Longman Dictionary of Contemporary English, (1995) (3^rd ed.). Longman.

Related Research
7.2.1 Mohd Sawal, S.A., (2007). The Factor That Influence the Natural Gas Price in
United States. Bachelor of bus administration(hons) international business faculty
of bus mgt uitm Melaka
7.2.2 Che Bakar, O & etc (2006). Binge Eating and Lifestyle Factors in Relation to Obesity in Schizophrenia

Websites
1. Chips (2000). Fuel Prices to Rise – Definitely. Retrieved August 09, 2008 from http://www.autoworld.com.my
2. Wong, C.W (2008). Don't Forget the Middle Class!. Retrieved September 13, 2008, from http://www.newmalaysia.com
3. Fayz (2008). PETROL Subsidies Revised To Benefit The Middle Income Earners? Retrieved August 6, 2008 in Malaysian Life! from http://syokkahwin.com/blog
4. Census Bureau, Department of Commerce. Report FT900, U.S. International Trade in Goods and Services, December 12, 2006. Table 17. The report and supporting tables are available at [http://www.census.gov/foreign-trade/Press-Release/current_press_release/ftdpress.pdf].
5. Dr. Ibrahim ibn Abdul Aziz Al Muhanna
  (2004). Arab News: Oil Price Hike: Reasons And Impacts. Retrieved 2008, from
  http://www.arabnews.com
6. Business dictionary (2007). Accurate & Reliable Dictionary: Definition of fuel oil. Retrieved 2008 from http: www.businessditionary.com
7. OPEC (2008). Reference Price: OPEC Basket Price. Retrieved 2008 from http://www.opec.org/home/powerpoint/OPEC%20share.htm
8. MARC(2008). 2h 2008 Economic Outlook: Bumpy ride ahead. Retrieved July 2008 from http://www.marc.com.my
9. Yourdictionary.com (1995), Definition of Subsidy.
10. Longman dictionary of contemporary English (1995), Definition of Subsidy, Longman group Ltd 1978, 1995. http:// www.longman-elt.com/dictionaries
11. The star online (2008), Petrol price up by 78 sen - and will be reviewed monthly. http://thestar.com.my/news/story.asp?file=/2008/6/5/nation/21461533&sec=nation
12. Jed Yoong, (2008), Malaysia cuts fuel subsidy. Retrieved June 4, 2008, from http://asiasentinel.com/index.php?option=com_content&task=view&id=1239&Itemid=31
13. NGV Network Malaysia (2008), Definition of Natural Gas. Retrieved September 25, 2008, from http://www.ngv.net.my/aboutngv.htm
14. Wikepedia (2008), Compressed Natural Gas (CNG), from http://en.wikipedia.org/wiki/NGV
15. Kuala Lumpur City Hall (2008). KL City Plan 2020: Middle Income Group. Retrieved September 22, 2008, from http://www.klcityplan.com
16. http://www.themalaysianinsider.com/index.php/malaysia/7110-fuel-rebate-can-now-be-claimed-online
17. http://www.bharian.com.
18. http://www.car.com
19. http://www.klcityhall.com
20. http//www.statistic.gov.my
Newspaper Article
1. Ang, E. (2008, January 14). Experts Say Fuel Subsidy Unsustainable. The Star, p. Biz
2. M. Ali, S. (2008, June 30).
  Rising fuel price hurting logistics firms. New Straits Times

8.0 Appendixes

8.1 Questionnaire

We the Barchelor of Finance, are carrying the study on the "The Impacts of Fuel Prices to the Middle Income Group" for Bel 422 course. Kindly, please respond to our questionnaire by ticking or circling the answer and we thank you for your cooperation.

1. Gender / Jantina
Male / Lelaki
Female / Perempuan

2. Status
Married / Berkahwin
Single / Bujang
Separate / Bercerai

3. Age / Umur
20 – 29
30 – 39
40 – 49
50 and above

4. Occupation / Pekerjaan
Government's sector / sektor kerajaan
Private sector / sektor swasta
others, please state / lain-lain, sila nyatakan ________________________________

5. Income per month / Pendapatan untuk sebulan
Below RM 1500
RM 1501 - RM 2500
RM 2501 - RM 3500
Above RM 3500

6. Your cost of living per month / Perbelanjaan kehidupan anda sebulan
Below RM 300
RM 301 - RM 600
RM 601 - RM 900
Above RM 900

7. Do you own any vehicle? If No, proceed to question 9 / adakah anda memiliki kenderaan? Jika Tidak, teruskan ke soalan 9.

Yes / Ya
No / Tidak

8. Types of vehicle you have / Jenis-jenis kenderaan yang anda miliki

Motocycle
Motocar
Lorry

Other, please state / Lain-lain, sila nyatakan

__________________________________

9. How many vehicles per household / Jumlah kenderaan untuk satu rumah

One / satu
Two / dua
Three / tiga

Other, please state / Lain-lain, sila nyatakan

__________________________________

10. Cost of fuel per month / Kos penggunaan minyak sebulan

Below RM 100
RM 101 - RM 300
RM 301 - RM 500
Above RM 500

11. Rising of fuel price, will it burden you? / Kenaikan harga minyak, adakah membebankan anda?

Yes / Ya
No / Tidak

Indicate your feeling about the following items circle on the appropriate box / Nyatakan pendapat anda tentang perkara-perkara berikut dengan menandakan di kotak yang bersesuaian .

Strongly agree Agree Disagree Strongly disagree

( 4 ) ( 3 ) ( 2 ) ( 1 )

12. Rises of fuel price limits your activities /

Kenaikan harga minyak menghadkan aktiviti anda

13. The existence of NGV can reduce cost of fuel per month/

Kewujudan NGV dapat mengurangkan kos minyak dalam sebulan.

14. Government subsidies can help to reduce burden of fuel rising

price / Subsidi kerajaan dapat membantu mengurangkan beban semasa kenaikan harga minyak

15. Distribution of rebate can help reduce burden of rising fuel prices /

Pemberian rebate boleh membantu mengurangkan beban semasa

kenaikan harga minyak

16. Price of consumer goods too dependent on fuel price/

Harga barangan keperluan asas terlalu bergantung kepada

harga minyak

17. Retailer takes advantage from rising fuel price /

Peniaga mengambil kesempatan terhadap kenaikan harga minyak

18. Price of consumer goods increases to high /

Harga barangan keperluan asas meningkat dengan melampau

19. In your opinion, is declining of fuel price in the current situation will give impact to you? Why?

Pada pendapat anda, adakah penurunan harga minyak sekarang memberi kesan kepada anda? Kenapa?

_________________________________________________________________________________________________________________________________________________________________________________________________________

In your opinion, what the actions should government take to overcome the problem?
Pada pendapat anda, apakah tindakan yang perlu kerajaan ambil untuk mengatasi masalah kenaikan harga minyak?
_________________________________________________________________________________________________________________________________________________________________________________________________________

- The End -

8.2 Related Articles

8.2.1 Title : 2000s Energy Crisis

Author : Wikimedia Foundation, Inc

Sources : www.wikipedia.com

Years to Publication : 23 September, 2008

From Wikipedia, the free encyclopedia

(Redirected from Oil price increases since 2003)

Jump to: navigation, search

This article is about the causes and analysis of the relatively high oil prices of the 2000s. For discussion of the effects of the crisis, see Effects of 2000s energy crisis. For a chronology of oil prices during this time, see 2003 to 2008 world oil market chronology.

Further information: Energy crisis

Medium term crude oil prices, (not adjusted for inflation)

Short term crude oil prices, (not adjusted for inflation)

From the mid-1980s to September 2003, the inflation adjusted price of a barrel of crude oil on NYMEX was generally under $25/barrel. Then during 2003, the price rose above $30, reached $60 by August 11, 2005, and rose above $146 in June 2008. Commentators have attributed the price increases of this period to a confluence of factors, including reports from the United States Department of Energy and others showing a decline in petroleum reserves,^[1] worries over peak oil,^[2] Middle East tension, and oil price speculation.^[3] Some events have had short term effects on oil prices, such as North Korean missile launches,^[4] the crisis between Israel and Lebanon,^[5] tension between Iran and U.S.,^[6] and "a hundred factors."^[7]

At the start of September 2008, with prices having fallen back to $110, analyst Jan Rudolph said that "weakened economies" and record high prices had reduced demand worldwide. He pointed out that the oil market had changed fundamentally in 2008, and was not sensitive to price spikes from events such as Hurricane Gustav and the Russo-Georgian war.^[8] In response to falling prices, OPEC declared it was prepared to take action (such as coordinated reductions in supply) to maintain prices near $100.^[9]

Prices near $95–105 per barrel (2007 U.S. dollars) are equal to the previous all time inflation adjusted record of 1980.^[10] This had been clearly exceeded by the first quarter of 2008. In terms of the crude price, U.S. records suggest that equivalent prices were last seen in the 1860s.^[11] In terms of refined petroleum products, similar prices in real terms have not been seen since the 1920s.^[12] Outside the U.S., the history of both inflation and oil prices will be different, but after being adjusted for inflation, prices over $120/barrel are unprecedented since the very earliest days of commercial oil production. Sustained high prices contribute to fears of an economic recession similar to that of the early 1980s.^[13] In the United States, gasoline consumption dropped by 0.5% in the first two months of 2008 in response to higher prices,^[14] compared to a drop of 0.4% total in 2007.^[15]

Possible Causes

Oil price trend, 1861–2007, both nominal and adjusted to inflation.

Detailed analysis of changes in oil price from 1970–2007. The graph is based on the nominal, not real, price of oil.

Demand

World crude oil demand grew an average of 1.76% per year from 1994 to 2006, with a high of 3.4% in 2003-2004. World demand for oil is projected to increase 37% over 2006 levels by 2030, according to the 2007 U.S. Energy Information Administration's (EIA) annual report.^[16] Demand is projected to reach 118 million barrels per day (18.8×10⁶ m³/d) from 2006's 86 million barrels (13.7×10⁶ m³), driven in large part by the transportation sector.^[17]^[18] A 2008 report from the International Energy Agency (IEA) predicted that although drops in petroleum demand due to high prices have been observed in developed countries and are expected to continue, a 3.7 percent rise in demand by 2013 is predicted in developing countries. This is projected to cause a net rise in global petroleum demand during that period.^[19]

The transportation sector is the largest energy sector, and the one that has seen the largest growth in demand in recent decades. This growth has largely come from new demand for personal-use vehicles powered by internal combustion engines.^[20] This sector also has the highest consumption rates, accounting for approximately 68.9% of the oil used in the United States in 2006,^[21] and 55% of oil use worldwide as documented in the Hirsch report. Cars and trucks are predicted to cause almost 75% of the increase in oil consumption by India and China between 2001 and 2025.^[22] In 2008, auto sales in China have been expected to grow by as much as 15-20 percent, resulting in part from economic growth rates of over 10 percent for 5 years in a row.^[23]

Demand growth is highest in the developing world,^[24] but the United States is the world's largest consumer of petroleum. Between 1995 and 2005, US consumption grew from 17.7 million barrels a day to 20.7 million barrels a day, a 3 million barrel a day increase. China, by comparison, increased consumption from 3.4 million barrels a day to 7 million barrels a day, an increase of 3.6 million barrels a day, in the same time frame.^[25] Per capita, annual consumption by people in the US is 24.85 barrels^[26], 1.79 barrels in China^[27], and .79 barrels in India.^[28]

As countries develop, industry, rapid urbanization and higher living standards drive up energy use, most often of oil. Thriving economies such as China and India are quickly becoming large oil consumers.^[29] China has seen oil consumption grow by 8% yearly since 2002, doubling from 1996-2006.^[24] In 2008, auto sales in China were expected to grow by as much as 15-20 percent, resulting in part from economic growth rates of over 10 percent for 5 years in a row.^[23] Although swift continued growth in China is often predicted, others predict that China's export dominated economy will not continue such growth trends due to wage and price inflation and reduced demand from the US.^[30] India's oil imports are expected to more than triple from 2005 levels by 2020, rising to 5 million barrels per day (790×10³ m³/d).^[31]

Another large factor on petroleum demand has been human population growth. Because world population grew faster than oil production, production per capita peaked in 1979 (preceded by a plateau during the period of 1973-1979).^[32] The world's population in 2030 is expected to be double that of 1980.^[33]

The role of fuel subsidies

State fuel subsidies have shielded consumers in many nations from the price rises, but many of these subsidies are being reduced or removed as the cost to governments of subsidization increases.

In June 2008, AFP reported that "China became the latest Asian nation to curb energy subsidies last week after hiking retail petrol and diesel prices as much as 18 percent... Elsewhere in Asia, Malaysia has hiked fuel prices by 41 percent and Indonesia by around 29 percent, while Taiwan and India have also raised their energy costs."^[34] In the same month, Reuters reported that

Countries like China and India, along with Gulf nations whose retail oil prices are kept below global prices, contributed 61 percent of the increase in global consumption of crude oil from 2000 to 2006, according to JPMorgan. Other than Japan, Hong Kong, Singapore and South Korea, most Asian nations subsidize domestic fuel prices. The more countries subsidize them, the less likely high oil prices will have any affect in reducing overall demand, forcing governments in weaker financial situations to surrender first and stop their subsidies. That is what happened over the past two weeks. Indonesia, Taiwan, Sri Lanka, Bangladesh, India, and Malaysia have either raised regulated fuel prices or pledged that they will.^[35]

The Economist reported: "Half of the world's population enjoys fuel subsidies. This estimate, from Morgan Stanley, implies that almost a quarter of the world's petrol is sold at less than the market price."^[36] U.S. Secretary of Energy Samuel Bodman stated that around 30 million barrels per day (4,800,000 m³/d) of oil consumption (over a third of the global total) is subsidized.^[34] But energy analyst Jeff Vail warned that cutting subsidies would do little to reduce global prices.^[37]

Supply

An important contributor to price increases has been the slow down in oil supply growth, which has continued since oil production surpassed new discoveries in 1980. The fact that global oil production will decline at some point, leading to lower supply is the main long-term fundamental cause of rising prices.^[38] This is because there is a limited amount of fossil fuel, and the remaining accessible supply is consumed more rapidly each year. Increasingly, remaining reserves become more technically difficult to extract and therefore more expensive. Eventually, reserves will only be economically feasible to extract at extremely high prices. It is thought by many, including energy economists such as Matthew Simmons, that prices could continue to rise indefinitely until a new market equilibrium is reached at which point supply satisfies worldwide demand.

Although there is contention about the exact timing and form of peak oil, there are now very few parties who do not acknowledge that the concept of a production peak is valid – though before oil prices increased in 2008 to energy crisis levels, some commentators argued that global warming awareness and new energy sources means that demand may fall before supply, making reserve depletion a non-issue.^[39]

In addition, turbulence in the Middle East (the world's largest oil-producing region) has led to decreased exports, especially civil unrest in Iraq after the 2003 U.S. invasion. Outside the Middle East, Venezuela has experienced strikes and political turbulence, and there is growing instability in West Africa.

Alternatively, lower production rates may be due to the fact that oil's historically high ratio of Energy Returned on Energy Invested continues a significant decline. The increased price of oil also makes other, non-conventional sources of oil attractive to businesses. The most prominent example of this are the massive reserves of the Canadian tar sands. They are a far less cost-efficient source of heavy, low-grade oil than conventional crude, but with oil trading above $60/bbl, the tar sands have become very attractive to exploration and production companies. Recent months have seen billions of dollars invested in the tar (bitumen) sands.

In view of tighter supplies worldwide, terrorist and insurgent groups have increasingly targeted oil and gas installations to maximize both mayhem and political gains^{[citation needed]}. Sometimes, such attacks are perpetrated by militias in regions where oil wealth has produced few tangible benefits for the local citizenry, as is the case in the Niger Delta. The terror factor adds an additional premium, including insurance costs, to the price of oil.^[40]

Even if total oil supply does not decline, increasing numbers of experts believe the easily accessible sources of light sweet crude are almost exhausted and in the future the world will depend on more expensive sources of heavy oil and renewable energy sources. Until the rises of 2008, CERA (a consulting company wholly owned by energy consultants IHS Energy)^[41] did not believe this would be such an immediate problem. However, in an interview with The Wall Street Journal, Daniel Yergin, best known for his quotes that the price of oil would soon return down to "normal", publicly amended the company's position on May 7, 2008, and now expects oil to reach $150 during 2008, due to tightness of supply^[42] This reversal of opinion is significant, as CERA, among other consultancies, provide price projections that are used by many official bodies to plan long term strategy in respect of energy mix and price, so the impact of a misprediction is far wider than might otherwise be expected. In contrast, some other organisations, such as the International Energy Agency (IEA), had already been much less optimistic in their assessments for some time.^[43]

While efforts are underway to increase supply, for example through a number of new mines in Canada's tar sands region which is estimated to contain as much "heavy" oil as all the world's reserves of "conventional" oil,^{[citation needed]} such efforts lag behind the increasing demand of recent years.^[44] Regulation and environmental efforts have also increased the shortage and price of oil.^{[citation needed]}

Other possible causes

Besides supply concerns, many other issues have also had some effect on oil prices. Labor strikes, hurricane threats to oil platforms, fires and terrorist threats at refineries, and other short-lived problems are not solely responsible for the higher prices. Such problems do push prices higher temporarily, but have not historically been fundamental to long-term price increases.^[clarify]

Possible financial causes

Financial speculation

Financial speculation occurs when investors purchase futures contracts to buy a commodity at a set price for future delivery. "Speculators are not buying any actual crude. ... When [the] contracts mature, they either settle them with a cash payment or sell them on to genuine consumers."^[45]

Many prominent economists have argued that financial speculation is not a cause of rising oil prices, however several claims have been made implicating financial speculation as a major cause of the price increases. In May 2008 the transport chief for Germany's Social Democrats estimated that 25 percent of the rise to $135 a barrel had nothing to do with underlying supply and demand.^[46] Testimony was given to a U.S. Senate committee in May indicating that "demand shock" from "Institutional Investors" had increased by 848 million barrels (134,800,000 m³) over the last five years, similar to increases in demand from China (920 million barrels).^[47] The influence of Institutional Investors, such as sovereign-wealth funds, was also discussed in June 2008, when Lehman Brothers suggested that price increases were related to increases in exposure to commodities by such investors. It claimed that "for every $100 million in new inflows, the price of West Texas Intermediate, the U.S. benchmark, increased by 1.6%."^[48] Also in May 2008, an article in The Economist pointed out that oil futures transactions on the New York Mercantile Exchange (NYMEX), nearly mirrored the price of oil increases for a several year period, however the article conceded that the increased investment might be following rising prices, rather than causing them, and that the nickel commodity market had halved in value between May 2007 and May 2008 despite significant speculative interest.^[45] It also reminds readers "Investment can flood into the oil market without driving up prices because speculators are not buying any actual crude... no oil is hoarded or somehow kept off the market," and that prices of some commodities which are not openly traded have actually risen faster oil prices.^[45] In June 2008, OPEC's Secretary General Abdullah al-Badri stated that current world consumption of oil at 87 million bpd was far exceeded by the "paper market" for oil, which equals about 1.36 billion bpd, or more than 15 times the actual market demand.^[49]

In response to the possibility that financial speculators artificially inflated the oil market, the U.S. Congress began hearings in June 2008 to discover if actions to "tighten restrictions on pension funds, investment banks and other investors that they say are driving up fuel prices" were necessary.^[50]

An interagency task force on commodities markets was formed in the U.S. government to investigate the claims of speculators influence on the petroleum market concluded in July 2008 that "market fundamentals" such as supply and demand provide the best explanations for oil price increases, and that increased speculation was not statistically correlated with the increases. The report also noted that increased prices with an elastic supply would cause increases in petroleum inventories. As inventories have actually declined, the task force concluded market pressures are most likely to blame. Similarly, other commodities which are not subject to market speculation (such as coal, steel, and onions) have seen similar price increases over the same time period.^[51]

In June 2008 U.S. energy secretary
Samuel Bodman had said that insufficient oil production, not financial speculation, was driving rising crude prices. He said that oil production has not kept pace with growing demand. "In the absence of any additional crude supply, for every 1% of crude demand, we will expect a 20% increase in price in order to balance the market," Bodman said.^[52]^[53] This contradicts earlier statements by Iranian OPEC governor Mohammad-Ali Khatibi indicating that the oil market is saturated and that an increase in production announced by Saudi Arabia was "wrong". OPEC itself had also previously stated that the oil market was well supplied and that high prices were a result of speculation and a weak U.S. dollar.^[54]

Futures speculators related to major oil producers, such as Sultan Hassanal Bolkiah Muizzaddin of Brunei Shell Petroleum, Saudi Prince Alwaleed Bin Talal Alsaud and Russian Vagit Alekperov of LUKoil, may have artificially boosted prices by speculating in the oil futures market.^[55]

In September 2008, Masters Capital Management did an independent study of the oil market and did find that speculation did significantly impact the market. Over $60 Billion was invested during the first 6 months of the year, helping drive the price per barrel from $95 to $145 per barrel. Since that peak, $39 Billion has been withdrawn by speculators, with prices per barrel decreasing to just about $100 per barrel. ^[56]

Monetary inflation

Further information: Inflation

The Austrian School of economics holds that price inflation derives from monetary inflation, and its advocates, such as the Ludwig von Mises Institute and congressman Ron Paul, argue that loose monetary policy from the Federal Reserve and other central banks is a major contributor to the increase in oil prices, and the cause of both commodity speculation and dollar devaluation.^[57]^[58]

The price of oil is closely tied to the value of the U.S. dollar because oil is traded in dollars. This has led to concern among some economists that the principal earned from the sale of oil may lose value in the long run if the U.S. dollar loses real value.^{[citation needed]}

In discussing the effect of the changing value of the U.S. dollar on the real price of oil, however, it is important to include a calculation of effective exchange rates of the currencies in question, to separate the real and nominal values of those currencies. This method accounts for the amount that a dollar can buy (of electronics or food for example) compared to the amount another currency, such as a Euro or pound sterling, can purchase. While the U.S. dollar has lost nominal value to other major currencies from 2001 to 2007, its change in real value has not differed significantly from other currencies.^[59]

In addition, by comparing the price of oil in various currencies to the fluctuations in the exchange rates of those currencies it is clear that oil price is no more significantly correlated to the value of the dollar than to any other currency. This also holds true in a comparison of oil price to gold price.^[60] Similarly, since the early 1970s, the price of oil has been negatively correlated to the value of the dollar, suggesting that the price of oil has more of an effect on the value of the dollar than vice versa. As developed economies depend heavily on oil for transportation, petrochemical feedstock, and industrial agriculture, this correlation would affect most currency values.^[61]

Some analysts believe that as much as $25 of the June 2008 prices around $140 are due to dollar devaluation.^[62]

Forecasted prices and trends

According to informed observers, OPEC, meeting in early December, 2007, seemed to desire a high but stable price that would deliver substantial needed income to the oil producing states, but avoid prices so high that they would negatively impact the economies of the oil consuming nations. A range of 70–80 dollars a barrel was suggested by some analysts to be OPEC's goal.^[63]

Some analysts point out that major oil exporting countries are rapidly developing; and because they are using more oil domestically, less oil may be available on the international market. This effect, outlined in the export land economic model, could significantly reduce the oil available for trade and cause prices to continue to rise. Particularly significant are Indonesia (which is now a net importer of oil), Mexico and Iran (where demand is projected to exceed production in about 5 years), and Russia (whose domestic petroleum demand is growing rapidly).^[64]

In May 2008, T. Boone Pickens, the influential oil investor who believes the world's oil output is about to peak, warned oil prices would hit $150 a barrel by the end of the year. "Eighty-five million barrels of oil a day is all the world can produce, and the demand is 87 m," Mr Pickens said in an interview with CNBC. "It's just that simple."^[65]

In June 2008, Alexei Miller, head of Russian energy giant Gazprom, warned that the price of oil is likely to hit $250 a barrel sometime in 2009. Miller said that while speculation had played a role in oil prices, "this influence was not decisive."^[66] Bloomberg reported that, as of mid-June, "At least 3,008 options contracts have been purchased giving holders the right to buy oil at $250 a barrel in December".^[67]

Also in June 2008, Shukri Ghanem, head of Libya's National Oil Corporation, said: "I think it [the oil price] will go higher. That is a trend that will continue for some time. The easy, cheap oil is over, peak oil is looming."^[68]

On June 26, 2008, OPEC President Chakib Khelil said in an interview: "I forecast prices probably between $150-170 during this summer. That will perhaps ease towards the end of the year."^[69]
Iran's OPEC governor Mohammad-Ali Khatibi predicts that the price of oil would reach $150 a barrel by the end of this summer.^[70]

Near-term peak oil proponent Matthew Simmons predicts a rise to $300 a barrel or higher by 2013 as sweet crude petroleum becomes more scarce and major producers begin failing to meet demand.^[71]

At the start of September, analyst Jan Rudolph said that reduced demand due to the global economic slowdown had also reduced the sensitivity of the oil price to crises like Hurricane Gustav and the Russo-Georgian war.^[72] On September 2, as prices fell below $110 in some markets, OPEC was reportedly prepared to defend the $100 price level^[73] (i.e. through coordinated reductions in supply).

Effects

Main article: Effects of 2000s energy crisis

There is debate over what the effects of the 2000s energy crisis will be over the long term. Some speculate that an oil-price spike could create a recession comparable to those that followed the 1973 and 1979 energy crises or a potentially worse situation such as a global oil crash. Increased petroleum prices are however reflected in a vast number of products derived from petroleum, as well as those transported using petroleum fuels.^[74]

Political scientist George Friedman has postulated that if high prices for oil and food persist, they will define the fourth distinct geopolitical regime since the end of World War II, the previous three being the Cold War, the 1989-2001 period in which economic globalization was primary, and the post-9/11 war on terror.^[75]

Possible mitigations

Further information: Mitigation of peak oil

Attempts to mitigate the impacts of oil price increases include:

Increasing the supply of petroleum
Finding substitutes for petroleum
Decreasing the demand for petroleum
Attempting to reduce the impact of rising prices on petroleum consumers

In mainstream economic theory, a free market rations an increasingly scarce commodity by increasing its price. A higher price should stimulate producers to produce more, and consumers to consume less, while possibly shifting to substitutes. The first three mitigation strategies in the above list are, therefore, in keeping with mainstream economic theory, as government policies can affect the supply and demand for petroleum as well as the availability of substitutes. In contrast, the last type of strategy in the list (attempting to shield consumers from rising prices) would seem to work against classical economic theory, by encouraging consumers to overconsume the scarce quantity, thus making it even scarcer. To avoid creating outright shortages, attempts at price control may require some sort of rationing scheme.

Alternative propulsion

Alternative fuels

Main article: Biofuel

Economists say that the substitution effect will spur demand for alternate fossil fuels, such as coal or liquefied natural gas and for renewable energies, such as solar power, wind power, and advanced biofuels.

For example, China and India are currently heavily investing in natural gas and coal liquefaction facilities. Nigeria is working on burning natural gas to produce electricity instead of simply flaring the gas, where all non-emergency gas flaring will be forbidden after 2008.^[76]^[77] Outside the U.S., more than 50% of oil is consumed for stationary, non-transportation purposes such as electricity production where it is relatively easy to substitute natural gas for oil.^[78]

Ironically, oil companies including the supermajors have begun to fund research into alternative fuel. BP has invested half a billion dollars for research over the next several years. The motivations behind such moves are to acquire the patent rights as well as understanding the technology so vertical integration of the future industry could be achieved.

Bioplastics and bioasphalt

Main article: Bioplastic

Another major factor in petroleum demand is the widespread use of petroleum products such as plastic. These could be partially replaced by bioplastics, which are derived from renewable plant feedstocks such as vegetable oil, cornstarch, pea starch,^[79] or microbiota.^[80] They are used either as a direct replacement for traditional plastics or as blends with traditional plastics. The most common end use market is for packaging materials. Japan has also been a pioneer in bioplastics, incorporating them into electronics and automobiles.

Also bioasphalt can be used as a replacement of petroleum asphalt.

United States Strategic Fuel Reserve

The United States Strategic Petroleum Reserve could, on its own, supply current U.S. demand for about a month in the event of an emergency, unless it were also destroyed or inaccessible in the emergency. This could potentially be the case if a major storm were to hit the Gulf of Mexico, where the reserve is located. While total consumption has increased,^[81] the western economies are less reliant on oil than they were twenty-five years ago, due both to substantial growth in productivity and the growth of sectors of the economy with little oil dependence such as finance and banking, retail, etc. The decline of heavy industry and manufacturing in most developed countries has reduced the amount of oil per unit GDP; however, since these items are imported anyway, there is less change in the oil dependence of industrialized countries than the direct consumption statistics indicate.

Fuel taxes

Main article: Fuel tax

One recourse used and discussed in the past to avoid the negative impacts of oil shocks in the many developed countries which have high fuel taxes has been to temporarily or permanently suspend these taxes as fuel costs rise.

France, Italy, and the Netherlands lowered taxes in 2000 in response to protests over high prices, but other European nations resisted this option because public service financiation is partly based on energy taxes.^[82] The issue came up again in 2004, when oil reached $40 a barrel causing a meeting of 25 EU finance ministers to lower economic growth forecasts for that year. Because of budget deficits in several countries, they decided to pressure OPEC to lower prices instead of lowering taxes.^[83] In 2007, European truckers, farmers, and fishermen again raised concerns over record oil prices cutting into their earnings, hoping to have taxes lowered. In England, where fuel taxes were raised in October and are scheduled to rise again in April 2008, there was talk of protests and roadblocks if the tax issue was not addressed.^[84] On April 1, 2008, a 25 Yen per liter fuel tax in Japan was allowed to lapse temporarily.^[85]

This method of softening price shocks is even less viable to countries with much lower gas taxes, such as the United States.

Demand management

Transportation demand management has the potential to be an effective policy response to fuel shortages^[86] or price increases and has a greater probability of long term benefits than other mitigation options.^[87]

There are major differences in energy consumption for private transport between cities; an average U.S. urban dweller uses 24 times more energy annually for private transport as a Chinese urban resident. These differences cannot be explained by wealth alone but are closely linked to the rates of walking, cycling, and public transport use and to enduring features of the city including urban density and urban design.^[88]

For individuals, telecommuting provides alternatives to daily commuting and long-distance air travel for business. Technologies for telecommuting, such as videoconferencing, e-mail, and corporate wikis, continue to improve, in keeping with the overall improvement in information technologies ascribed to Moore's law. As the cost of moving information by moving human workers continues to rise, while the cost of moving information electronically continues to fall, presumably market forces should cause more people to substitute virtual travel for physical travel. Matthew Simmons explicitly calls for "liberating the workforce" by changing the corporate mindset from paying people to show up physically to work every day, to paying them instead for the work they do, from any location.^[89] This would allow many more information workers to work from home either part-time or full-time, or from satellite offices or Internet cafes near to where they live, freeing them from long daily commutes to central offices.

Political action against market speculation

The price rises of mid-2008 led to a variety of proposals to change the rules governing energy markets and energy futures markets, in order to prevent rises due to market speculation.

On July 26, 2008, the House passed the Energy Markets Emergency Act of 2008 (H.R. 6377)^[90], which directs the Commodity Futures Trading Commission (CFTC) "to utilize all its authority, including its emergency powers, to curb immediately the role of excessive speculation in any contract market within the jurisdiction and control of the Commodity Futures Trading Commission, on or through which energy futures or swaps are traded, and to eliminate excessive speculation, price distortion, sudden or unreasonable fluctuations or unwarranted changes in prices, or other unlawful activity that is causing major market disturbances that prevent the market from accurately reflecting the forces of supply and demand for energy commodities."

Both major 2008 US presidential candidates have also spoken out against energy market futures manipulation.

8.2.2 Title : Petrol Price Up by 78 sen – and Will Be Reviewed Monthly

Sources : www.thestaronline.com

Years to Publication : Thursday June 5, 2008

PUTRAJAYA: The Government announced yesterday an increase in petrol and diesel prices, stating that it can no longer continue to subsidise fuel.

Prime Minister Datuk Seri Abdullah Ahmad Badawi said the new prices were still at a 30-sen per litre discount from market prices.

In other words, if the market price is RM3 per litre, Malaysians will be charged RM2.70 at the pump. He said the price would be adjusted monthly based on the global oil price.

Half empty or half full?: Azhan Sharom showing the difference of how much petrol one can buy with RM1 Wednesday and today at a petrol station in Kuala Terengganu.

"Malaysians still pay lower than the market prices as far as petrol is concerned," he told a packed press conference when announcing the restructuring of the subsidy package.

Abdullah said that although the restructuring would result in consumers having to pay more, prices were still lower compared with Singapore and Thailand.

He said the Government would save RM13.7bil through the restructuring.

From the savings, he said RM4bil would go to the National Food Supply Guarantee Policy, RM1.5bil for subsidising cooking oil and RM400mil to subsidise rice imports to make the price uniform in peninsular Malaysia, Sabah and Sarawak.