Monday, October 13, 2008

2.0 Literature Review

2.0 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According to Uma Sekaran (2007) Literature Survey is the documentation of a comprehensive review of published or unpublished work from secondary sources of data in the areas of specified interest to the researcher.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[1] 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[2] 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.

With such increase in fuel prices[3], 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 http://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[4] 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.


2.3 Government Subsidies

2.3.1 Definition of subsidy

Your dictionary (1995) defined subsidy[5] 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[6] as money paid by government or organization to make price lower, reduces the cost of producing goods.

Elaine Ang[7] (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.

2.3.2 Streamlined diesel subsidy[8].
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[9] (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[10] for the following:


· RM625 per yearFor private vehicle with engine capacity of 2000cc and below, including

private pickup trucks and jeeps with engine capacity of 2500cc and below.
· RM150 per yearFor each private motorcycle with engine capacity of 250cc and below
· RM200 reduction on road taxFor private petrol and diesel vehicles with engine capacity

above 2000cc
· RM50 reduction on road taxFor private motorcycles with engine capacity above 250cc


2.5 NGV

2.5.1 Definition of NGV

According to NGV Network Malaysia (2008), Natural Gas[11] 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[12] 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.


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[13] 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[14], 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.


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)[15] 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%.


[1] Business dictionary (2007). Accurate & Reliable Dictionary: Definition of fuel oil. Retrieved 2004-2008 from http: http://www.businessditionary.com/
[2] OPEC (2008). Reference Price: OPEC Basket Price. Retrieved 2008 from http://www.opec.org/home/powerpoint/OPEC%20share.htm
[3] MARC(2008). 2h 2008 Economic Outlook: Bumpy ride ahead. Retrieved July 2008 from http://http://www.marc.com.my/
[4] Property Eradication and Restructuring of society, http://www.epu.jpm.my/new%20folder/development%20plan/RM8/c3_cont.pdf.
[5] Yourdictionary.com (1995), definition of subsidy
[6] Longman dictionary of contemporary English (1995), definition of subsidy, Longman group Ltd 1978, 1995. http:// www.longman-elt.com/dictionaries
[7] Elaine Ang, (January 14, 2008), Experts say fuel subsidy unsustainable, http://biz.thestar.com.my/news/story.asp?file=/2008/1/14/business/19952483&sec=business
[8] 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
[9] Jed Yoong, (4 June 2008), Malaysia cuts fuel subsidy, http://asiasentinel.com/index.php?option=com_content&task=view&id=1239&Itemid=31
[10] 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
[11] NGV Network Malaysia (2008), definition of natural gas, http://www.ngv.net.my/aboutngv.htm
[12]Wikepedia (2008), Compressed Natural Gas (CNG), http://en.wikipedia.org/wiki/NGV
[13] NGV Network Malaysia (2008), http://www.ngv.net.my/location.htm
[14] 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].
[15] Dr. Ibrahim ibn Abdul Aziz Al Muhanna is an adviser in the Ministry of Oil and Mineral Resources.)

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