Shell Petrol

           Nowadays, no matter cars, buses, airplanes, they are all the vehicles that have been walked through our life and become a necessity to us. As a student, need to take bus to school. A business man needs a car to go to work, sometime even has to take the airplane to other country for a meeting. So that, vehicles are very important as they are helpful in our life.

            Shell, also called by Royal Dutch Shell, a petrol station which is founded by Marcus Samuel in 1897 and it first entered to Malaysia, Miri at 1910 while there was proceeding an oil well drilling project (Royal Dutch Shell, 2013). Until now, Shell becomes the largest natural gas producer and it is the one retailer out of few petrol stations in Malaysia, such as Caltex, Petronas and Petron. (Shell, 2013). Shell is an oligopoly market structure which is described as only a few numbers of companies or firms control over the market, although each of them is the competitors to each other. Because of they are interdependent and only few petrol stations in this industry, each of them is holding a large market share which give them the power to control and influence the prices of petrol (Your friendly tutor, 2007). However, they are prohibited to argue or control the prices of petrol in Malaysia because of petrol is an item which is controlled by government. Thus, all petrol stations have to sell petrol at the same prices. In this situation, Shell and other petrol stations have to follow the instructions given by the government and accept the price ceiling or price floor that set by government. Although it has a price ceiling of the petrol, it actually helps to loosen consumers’ burden and it will help the market by avoiding shortage through both the demand and supply are in equilibrium. Besides, government will set a price floor in order to prohibit anyone influence the prices of petrol by making them lower.

In the diagram above, we can see that price floor is looked like the price which is set by government. Why and what cause the government to set a price floor of the petrol price? It is because of prohibiting the petrol stations from changing the prices of the petrol as they like. If the prices of petrol arise as high as consumers cannot afford it, demand will go down, however, supply will be going up in term of the target or goal of a firm is to maximize their profit. According to the Law of Supply, when the price is higher and higher, supply curve will rise (The Economic Times, 2013). Therefore, producer will definitely supply more in order to get more and more profit. To solve this problem, government has to set a price floor to control the prices of petrol to make sure all the consumers can afford and use petrol when they need. 

Next, government sets a price ceiling which is below the equilibrium point. The demand of demand is obviously higher but the supply is lower. Because of this, there is a significant phenomenon which is shortage of petrol. At this situation, majority of the consumers are demanded to buy petrol, however, due to the lowest profit, making petrol station supplies less petrol.  Although price ceiling is a benefit to the majority of people who need helped but it makes non-profitable to the petrol station. Besides, it also makes a deadweight loss, also a social loss while the quantity supply is controlled by government and cannot equal to the quantity demand ( BusinessDictionary.com, n.d.). This will affect consumers are willing to pay higher and higher the price to buy the petrol in term of there is no petrol for them to buy. A price of black market will involve and make consumers occur more opportunity cost when they are doing searching activities in order to find more petrol in black market, such as consumers will ask their friends where they can buy petrol, drive to each of the petrol station.

There is another situation is government gives the fuel subsidy to the consumers, especially is beneficial the lower income group. From the diagram, the price of petrol will become lower and more affordable for the consumers buying petrol. Thus, the quantity demand of the petrol has been increased while the quantity supply is also increasing. It is because both the quantity demand and supply are having a new equilibrium and this outcome is better than previous time. According to Paul Tan (2013), the price of RON95 was raised by 20sen and it was from RM 1.90 to RM 2.10 per liter on September 2. If government decides to remove the subsidy, the price of petrol will go higher until it original price. The original price without subsidy is unaffordable to the majority consumers just like the diagram above, the Ps rise to P* affect the Qs drop to Q*.

An oligopoly market structure obtains a supernormal profit in the long-run ( Answers, n.d.). In the long run, new firms are not allowed to develop in the particular industry easily and hence they do not have the power to fight against the old companies which are developed many years, and definitely the profit that new firms are earned will lesser than the old companies. The supernormal profit in the long-run is only can be involved when the firm has high barriers to entry. In the opposite, if the firm has weak barriers to entry, a normal profit will be involved due to the few of new firms are entering the market and share the profit together. In oligopoly petrol markets, there are few of competitors, such as Caltex, Petronas, they are existing and are large enough to be a threat to Shell. Because of oligopoly market is interdependent, it one of the firms get a new action, the competitors will follow up and taken the same action to make sure they all are still at the same level. Therefore, the main point is how and what will Shell do and respond while they have desire to earn more profits. And what kind of skills they use in order to attract the consumers. From before to now, Shell always promote itself by holding variety of events such as consumers can use a “Bonus Link” point card to collect the point in order to exchange the gift from Shell (BonusLink , 2013), fuel save event.

Furthermore, the price elasticity of demand of the petrol is definitely inelastic due to the reason no matter how much the price of petrol go through, as a consumer still needs it in order to let the vehicle be functional. Assuming that petrol is rising to a sky-high price, the demand of petrol to the consumers is still at there. Only the vehicle has the petrol, people just can drive their vehicle to work, to any places they want to go. There is no substitute for petrol until now, so that it completes the condition of perfectly inelastic. Besides, the amount of vehicle is rising and the quantity demand is also going up. Although the price of petrol increases, the quantity demanded will go down but not that much because of petrol is a necessity to everyone and so that the consumers do not take care about how much the price of petrol is. Not only prices will influence quantity demanded, such as substitution of the good is one of the determinants of price of elasticity of demand. If I do not have a car, I still have many choices for me going to work, no matter it is taking the bus or riding a bicycle or motorbike. This is the alternative choice for me and it exactly is a substitution whether I have a car or not. Otherwise, I have no choice that I have to buy petrol for my car and this is why the price of petrol increases but consumers still have the desire to buy petrol.

However, there is a new type of car comes out and it is running on hybrid electrical engine. It uses lesser petrol and gives more power to car to speed up. Will this influences the price elasticity of demand of petrol becomes elastic? In my own words, the value of the hybrid electric vehicles might be costly and majority consumers who are belonging to lower income group cannot afford the price of it. They are willing to choose a normal car and continuously pay the high petrol fee. Moreover, limited resources in nowadays will also become an obstacle while producing hybrid electric vehicle, at least most car factories are unable to do the mass production. Therefore, the demand of hybrid electric vehicle will not influence the elasticity of petrol. 

Reference Lists

Answers  (n.d.)  Types of profits in the long run in oligopoly?. Available from: http://wiki.answers.com/Q/Types_of_profits_in_the_long_run_in_oligopoly [Accessed 23 October 2013].

BonusLink (2013) Bonuslink. Available from: http://www.bonuslink.com.my/EN/Highlights/130412_SBPI_2013.aspx [Accessed 23 October 2013].

businessdictionary.com  (n.d.)  deadweight loss. Available from: http://www.businessdictionary.com/definition/deadweight-loss.html [Accessed 23 October 2013].

Paul Tan,P. (2013) No fuel price hike tonight, says Datuk Ahmad Maslan. paultan.org [blog]. 27 September. Available from: http://paultan.org/2013/09/27/fuel-price-hike-tonight-says-datuk-ahmad-maslan/ [Accessed 23 October 2013].

Royal Dutch Shell. (2013) Wikipedia [online]. 21 October last updated. Available from: http://en.wikipedia.org/wiki/Royal_Dutch_Shell [Accessed 23 October 2013].

Shell(2013) Shell Malaysia. Available from: http://www.shell.com.my/aboutshell/who-we-are/history/malaysia.html [Accessed 23 October 2013].

The Economic Times (2013) The Economic Times. Available from: http://economictimes.indiatimes.com/definition/law-of-supply [Accessed 23 October 2013].

Your friendly tutor, Y. (2007) Market Structure (MC & Oligopoly) Section 3 Q2. Oh my econs~ [blog]. 12 September . Available from: http://ohmyecons.blogspot.com/2007/09/market-structure-mc-oligopoly-section-3.html  [Accessed 23 October 2013].