Petroliam Nasional Berhad, or commonly known as PETRONAS
is the national oil company of Malaysia and owned by the Malaysian government.
The company was established in the year 1974 (PETRONAS, n.d.) and has, since
then strives to become one of the biggest companies in Malaysia’s oil and gas
industry. It has over more than two subsidiary companies up to date. The
company offers services that ranges from manufacturing oil and gas to selling
oil and gas products such as petrol and natural gasses.
Oil and gas are defined as consumer goods. Consumer goods
are goods that are produced to satisfy human needs and wants directly
(McConnell et al., 2012). The products that PETRONAS sells, such as petroleum
and natural gasses are commonly used by consumers in their life everyday as
fuels for their vehicles, or gasses for cooking purposes.
According to the CEO of PETRONAS, Tan Sri Shamsul Azhar,
“For Malaysia, the foremost energy
challenge lies in meeting rising demand, whilst at the same time domestic production
continues to experience natural decline,” (Tuah, 2013). The statement shows
that the demand for petrol is always increasing, but the supply is becoming
lesser. The decrease in supply is due to the fact that oil and gas are not
renewable sources and will be running out in coming decades. That being said, the
demand for oil and gas is relatively inelastic because as it has no close
substitute.
Normally, the
increasing demand and decreasing supply for oil and gas will lead to the
increase of market equilibrium price in most industries. However, in the oil
and gas industry, the producers cannot increase the price of the petrol as they
want due to government intervention on the price. This intervention applies to
PETRONAS. The government controls the price by subsidizing the oil, such as
petrol and diesel, and setting the price ceiling in the market. On September
2013, the subsidy on petrol has been cut by 20 sen (6 cents; 4
pence) a litre and on diesel by 20 to 80 sen a litre as fiscal consolidation to
reduce Malaysia’s current deficit of 4.5% of its GDP in 2012 (Anon, 2013).
The reduction in subsidy will cause
the demand to be slightly lower, and makes the equilibrium price lower too.
However, the price of oil and gas is regulated in the market, which makes the
imposing of price ceiling as a part of the government intervention. Based on
the diagram(s) above, PETRONAS can’t charge the consumers for their product at
the price above the price ceiling. In doing so, the price ceiling will cause
PETRONAS and their rivals a shortage in supply and surplus of consumers. In
this case, if the price ceiling remains the same, there will be a market
failure due to underproduction of oil and gas.
PETRONAS is in the long
run production. This is because they have assembled offshore buildings in some
of the oilfields that are located in few places, in which the capital needed to
implant to support the operational cost is higher. However, the process of
opening an offshore building elsewhere takes a longer time and the decision
cannot be reversed easily. In September 2013, PETRONAS has targeted to increase
the supplies of oil from 14 different oilfields which consists of the ones in
Sabah and Sarawak (Wong, 2013). It shows that PETRONAS has managed to apply
different techniques of production and manages to acquire the total quantity
that they want.
Moreover, PETRONAS enjoys economies of scale due to the
existence of their subsidiary companies. Economies of scale are defined as the
increasing scale of production which leads to a lower cost per unit of output
(Sloman et al., 2012). PETRONAS has implemented specialization and division of
labor by incorporating companies as their subsidiaries, such as Petronas Gas
Bhd. In the subsidiary company stated, there are few divisions of labor which
comprises of Plant Operations Division, Transmission Operations Division, and
Centralised Utility Facilities Division (Petronas Gas Berhad, n.d.). By doing
this, PETRONAS manages to make their workers more efficient to work in specific
areas based on their specific skills without giving them more training and
eases the process of switching from one operation to another without
disruptions.
In addition to that, PETRONAS also experiences spreading
of overheads which only large firms like PETRONAS can achieve. For example,
their subsidiary company, PETRONAS Research Sdn Bhd, is responsible for the
research and technology development services of PETRONAS. When the total
production of the company increases, the overhead costs will be more spread.
PETRONAS belongs to the oil and gas industry and adapts
the oligopoly market structure in Malaysia. Oligopoly is defined as a market
structure which has only a few firms which creates barriers to entry for new
firms to enter (Sloman et al., 2012). PETRONAS is one of the “Big Names” in the
market alongside SHELL Malaysia, Petron Corporation, and BHPetrol. In order to
be an oligopolist, PETRONAS and their competitors had to go through and create
some barriers to entry in the oligopoly market.
Furthermore, PETRONAS is protected by various forms of
licensing due to being the national oil company of Malaysia. Whenever a new
company wants to enter the oil and gas industry, they will have to sign a
production agreement with PETRONAS in order to explore and develop the upstream
oil and gas reserves in Malaysia (Anon, n.d.).
Other than that, PETRONAS also enjoys the economies of
scope. As a large company, PETRONAS produces a lot of products which will most
likely enable them to experience a lower average cost of production. The
incorporation of their subsidiary companies such as Petronas Gas Bhd and
Petronas Dagangan Sdn Bhd, enables PETRONAS to use the shared research
information about their product and use them to promote their product to the
public as a marketing step. By incorporating these subsidiary companies,
PETRONAS will experience a lower cost of production and indirectly creates
barriers to entry for new firms into the market.
Next, the products and services that PETRONAS sells are homogeneous
because of the standard of the oil and gas that they sell to the consumers. PETRONAS
sells products that are similar to their rivals such as PRIMAX 95 Xtra petrol, PRIMAX
97 Xtra petrol, and Dynamic Diesel.
However, due to the existence of their rivals, PETRONAS
suffers from interdependency as they are affected by their rivals’ actions. One
of their competitors, Shell, advertises their product by sponsoring fuels and
lubricants to the Formula 1 team, Scuderia Ferrari through their technical
partnership (Shell, n.d.). Consequently, in the year 2009, PETRONAS has reacted
to their rivals’ action by advertising through signing a five-year agreement
contract sponsor for the Mercedes GP team, which changes the team name to
Mercedes GP Petronas Formula One Team (PETRONAS, n.d.). “Within the limits of
the new Formula One resource restrictions, The Mercedes GP PETRONAS Formula One
Team will be well positioned to achieve our goals”, said Mercedes’ Norbert Haug
(Allen, 2009). As a complimentary to the sponsorship, PETRONAS has managed to
display its’ brand name on the team’s Formula 1 car.
Furthermore, collusion in which is the cooperation with
rivals in oligopoly (McConnell et al., 2012), is a way to avoid interdependency.
In the year 2011, PETRONAS’ subsidiary company, Petronas Carigali Sdn Bhd, and
Shell signed an agreement to extend the life and increase the recovery factor
of Baram Delta and North Sabah Fields (Shell, 2011). The agreement will result
to the increase in an efficiency of the oil production as a return for their
investment and extend the life of the oil field to several years. From this
agreement, the two companies will be benefited through their cooperation by
sharing the oil production, and it shows that they are not secretive with each
other about costs and production method due to the forming of the
collaboration.
In an oligopoly market, the firms are usually price
setters compared to being price takers. In addition, PETRONAS is a company that
is owned by the government, which subsequently makes them price makers in the
industry in Malaysia.
In contrary to economies of scale, PETRONAS may also face
several situations with diseconomies of scale. Although specialization and
division of labor could increase the productivity, the workers of PETRONAS may
get bored to the repetitive. Other than that, there might also be some
management problems due to the expansion of the subsidiary companies, which
involves lack of communication and personal involvement in the companies.
Lastly, PETRONAS is arguably the leading brand in the
market for oil and gas, but they might also be exposed to the risk of law of
diminishing returns. They might have employed more employees to produce more
products, but the marginal product they produced might have decreased after a
certain point.
References
Allen, J. (2009). Available from: http://www.jamesallenonf1.com/2009/12/mercedes-lands-e30-million-petronas-sponsorship/
[Accessed 24 October 2013]
Anon. (2013) Malaysia Cuts Subsidies On Fuel. Available
from: http://www.bbc.co.uk/news/business-23926411
[Accessed 24 October 2013]
Anon (n.d.) Licensing Requirements for Doing Business
in Malaysia. Available from: http://www.yycadvisors.com/licensing-requirements-for-doing-business-in-malaysia.html
[Accessed 24 October 2013]
McConnell, C., Brue,
S., Flynn, S. and Grand, R. (2012) Economics.
New York: McGraw-Hill.
PETRONAS (n.d.)
About Us. Available from: http://www.petronas.com.my/ABOUT-US/Pages/default.aspx [Accessed 23 October 2013]
Petronas Gas Berhad
(n.d.) Business Overview. Available
from: http://www.petronasgas.com/Pages/BusinessOverview.aspx
[Accessed 24 October 2013]
PETRONAS (n.d.) PETRONAS Motorsports. Available from: http://www.petronas.com.my/community-education/community/sports/Pages/sports/motorsports.aspx
[Accessed 24 October 2013]
Shell (n.d.). Available from: http://www.shell.com/global/products-services/motorsport/shell-ferrari-technical-partnership.html
[Accessed 24 October 2013]
SHELL (2011) PETRONAS and Shell Sign Heads of Agreement
for New Enhanced Oil Recovery Production Sharing Contracts. Available from:
http://www.shell.com.my/aboutshell/media-centre/news-and-media-releases/archive/2011/petronas-shell-sign-hoa-for-eor-contracts-20111111.html
[Accessed 24 October 2013]
Shell (n.d.). Available from: http://www.shell.com/global/products-services/motorsport/shell-ferrari-technical-partnership.html
[Accessed 24 October 2013]
SHELL (2011) PETRONAS and Shell Sign Heads of Agreement
for New Enhanced Oil Recovery Production Sharing Contracts. Available from:
http://www.shell.com.my/aboutshell/media-centre/news-and-media-releases/archive/2011/petronas-shell-sign-hoa-for-eor-contracts-20111111.html
[Accessed 24 October 2013]
Sloman, J., Wride, A.
and Garratt, D. (2012) Economics. 8th
ed. Harlow: Pearson Education Limited.
