EXECUTIVE SUMMARY

Company Profile
The Guyana Oil Company Ltd, GUYOIL, was founded on June 16, 1976, upon the
nationalization of the West Indian Oil Company Ltd. Since then it has remained a
company owned and operated by the Government of Guyana.

The Company comes under the purview of the Company Act No. 29 of 1991. The highest
authority in the company is the Board of Directors, which is non-executive and comprises
a Chairman and six Directors.

The Hon. Minister of Finance is the subject Minister to whom the Board of Directors
report.

The Company’s business involves the importation, storage, distribution and marketing of
motor gasoline, dieselene, kerosene, heavy fuel oil, Castrol lubricants and bituminous
products. Fuel products account for 95% of the company’s business.

Fuel importation and distribution are carried out through two terminals which are located
at Providence, EBD, and Heathburn, EBB, and a depot located at Adventure, Essequibo
Coast.

The company owns and operates five service stations and has a dealer network of thirty
five dealers across Guyana.

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INTRODUCTION

Economics is a behavioural science that deals with the relationship of ENDS and
SCARCE MEANS that have alternative uses; ends being all things that people want or
need and means being resources, always limited, which are used to satisfy the needs and
wants.

When wants exceed resources available to satisfy them, there is scarcity. Faced with
scarcity, people must make choices. Economics is sometimes referred to as the science of
choices – the science that explains the choices that people make and predicts how choices
change as circumstances change.

Basic questions of economics are :

1. What is produced and in what quantities?
2. How are these goods and services produced?
3. For whom they are produced?
4. Who makes economic decisions, and by what process ?

Microeconomics studies the product, labour and capital markets, focusing on the
behaviour of individuals, households, firms and other organizations that make up the
economy. It is the study of production and prices in specific markets.

This paper deals with microeconomic issues as they relate to The Guyana Oil Company
Ltd. It will examine economic concepts such as price, cost, profit, demand, supply and
elasticity, with demand being studied in greater detail. This will be done as it relates to
motor gasoline, which accounts for close to 50% of the company’s business.

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PRICE

The basic coordinating mechanism in a market system is price. A price is the amount that
a product sells for per unit. It is the monetary expression of the value of a product and it
reflects what society is willing to pay.

Many of the independent decisions made in a market economy involve the weighting of
prices and costs, so it is not surprising that much economic theory focuses on the factors
that influence and determine prices. This is why microeconomic theory is often simply
called price theory.

Prices respond to shortages and surpluses. Shortages cause prices to rise. Surpluses cause
prices to fall. If consumers decided they want more of a good(or if producers decide to
cut back on supply), demand will exceed supply. The resulting shortage will cause the
price of the good to rise. On the other hand, an increased price will act as an incentive to
producers to supply more, since production will be more profitable. However, the high
price will discourage consumers from buying. Price will continue to rise until the
shortage is eliminated.

On the contrary, if consumers decide they want less of a good ( or if producers decide to
supply more), supply will exceed demand. The resulting surplus will cause the price of
good to fall. This will act as a disincentive to producers, who will supply less, since
production is will now be less profitable. It will encourage consumers to buy more. Price
will continue to fall until the surplus has been eliminated.

The price of gasoline traded at Guyoil is a function of two factors ; the prevailing price
on the world market and the level of E-tax charged by the government. High world
market price leads to increase in price at the company. However, the degree of this
increase may be cushion by the government’s intervention in reducing the value of the E-
tax, which can vary from as much as 50 % to as low as 0%, depending on the world
market price.

The price of gasoline is a significant component of the cost of operation of the

transportation industry, which affects the lives of every Guyanese. Increase price would
lead to increased cost of living and increased inflationary rates. This is why, government
in its economic prudence, manages the price of gasoline so that the economic impact on
society will be as minimum as possible. Guyoil, at the same time, becomes a (low) price
setter for gasoline in the market. In this regard, the price of gasoline does not follow the
liberal free market mechanism. In other words, the burden of high prices is not wholly
and fully passed on to the consumers.

It is noteworthy to mention that Guyana’s economy is totally dependent on the

importation of fossil-based fuel to meet its energy requirements.

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COST
Earlier we discussed choice and concluded that economics is often referred to as the
science of making choices in face of scarcity. In making choices we face costs.
Economists use the term opportunity cost to emphasize that making choices in face of
scarcity implies a cost. Opportunity cost is the value of the closest alternative which has
to be foregone for being involved in a business.

Economic cost comprises explicit cost and implicit cost. Explicit costs are payment made
by a business to other firms and people outside of it, and includes payments made for
materials, machinery, buildings and workers. This is often referred to as accounting cost
because it includes all the costs that appear in the business accounting records.

Implicit cost relate to the resources provided by the owner of the business. That is, what
the owner gives up by being involved in the business – opportunity cost.

While the accountants keep track of the explicit costs and often ignore the implicit costs
of the firm, the economists consider both the explicit and implicit costs to account for the
firm’s total costs.

Guyoil business is managed by considering only explicit or accounting costs. Implicit

costs are ignored. See appendices 1 &2.

Other cost concepts often come across are relevant cost and irrelevant cost. Economists
deem a cost relevant if it will be affected by choice of alternatives being considered in a
decision. Costs not affected by the outcome of a decision are considered to be irrelevant.

Irrelevant costs are called sunk costs or fixed costs while relevant costs are referred to as
incremental costs or variable costs. Fixed cost is the cost that does not change with the
level of activity or output. Variable cost changes with the level of activity or output.

Guyoil business is managed by considering both fixed cost and variable cost. See
appendices 1 & 2.

Marginal cost is another concept often used by economists, and is defined as the change
in total variable cost divided by the change in output, because fixed costs do not change.
Marginal cost tells us the increase in total cost that arises from producing an additional
unit of output.

Cost curves of the various costs discussed above are shown in fig 1.0 below.
Q - quantity
MC - marginal cost
ATC - average total cost
AVC - average variable cost
AFC - average fixed cost

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 Fig 1.0 COST CURVES
Cost ($) MC

ATC

AVC

AFC

PROFIT
When economic costs are substracted from total revenue, the excess is known as
economic profit. If the result is a negative figure, the business faces a negative economic
profit or loss.

Economic profit = Total revenue – Economic cost (or total cost)

If TR = TC, we say we have zero economic profit or normal profit, set by the average
rate of return obtaining in the economy.

Guyoil’s financial management accounts for accounting profit.

Accounting profit = Total revenue - Accounting cost (or explicit cost), implicit costs
are ignored.

ELASTICITY
Elasticity is a measure of the degree of responsiveness among buyers to changes in
price.This measure is defined as the percentage change in quantity demanded relative to
the percentage change in price.

Ep = % change in Q = (Q2 – Q1)/0.5(Q1+Q2)

% change in P = (P2 –P1)/0.5(P1+P2)

Where Ep = elasticity coefficient

Q1 = the original quantity demanded

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 Q2 = the new quantity demanded
P1 = the original price
P2 = the new price

Different types of elasticity

Demand responsiveness may be classified in absolute terms as :
1. Ep >1, the demand is elastic, that is, reduction in price will lead to
increase in revenue.
2. Ep = 1, we have unit elastic, change in price will lead to revenue remaining the
same.
3. Ep < 1, the demand is inelastic, a reduction in price will lead to a reduction in
revenue.
4. Ep = Infinity, perfectly elastic

5. Ep = 0, perfectly inelastic

The five degrees of demand responsiveness can be demonstrated graphically. Four

demand curves are shown representing four different elasticity situations.

D1 - perfectly elastic situation

D2 - elastic situation
D3 - inelastic situation
D4 - perfectly inelastic situation

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SUPPLY
The amount of a product that a firm wishes to sell in a time period is called the quantity
supplied to that market. Quantity supplied is a flow; it is so much per unit of time.
Quantity supplied is the amount that a firm is willing to offer for sale and not necessarily
the amount that it succeeds in selling.

The amount of a product a firm is willing to produce and offer for sale is influenced by
the following important variables :
• Price of the product
• Prices of inputs
• Technology
• Competition (number of suppliers)

Law of Supply
The law states that for many products, the price of the product and the quantity supplied
are related positively, ceteris paribus. In other words : the higher the product’s price the
more producers will supply, and the lower the price the less its producers will supply.

A graphical representation of a supply curve is shown in fig 2.0 below. The supply curve
represents the relationship between quantity supplied and price, ceteris paribus. The
positive slope indicates that quantity supplied varies in the same direction as price.

Supply Curve
Price

Quantity

Influences on Supply Curve

Change in the product’s price will affect the slope of the supply curve, while changes in
other factors (price of inputs, technology, number of suppliers) will shift the curve to the
left or right. The supply curve will shift to the left for any change that reduces the
quantity that suppliers wish to produce at a given price, and to the right for any change
that increases the suppliers’ wish to supply more at a given price.

Guyoil is established as the price setter in the gasoline market and supplies about 50% of
the gasoline to the local market, competing with transnational companies like Chevron,

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Esso, Shell (Sol). The product is sold solely on the basis of price; the firm that sells at the
lower price gets the customers.

The relatively low price offered by the company creates large demands for gasoline
which sometimes result in product stock-out, that is, a shortfall in supply. This occurs
when there is an increase in acquisition price but the company’s price at the pump is not
increased, while the private fuel companies would have responded to the higher
acquisition price by increasing their prices at the pump. Consumers respond to the lower
price offered by Guyoil by moving from the competition to purchase at Guyoil, but the
company’s supply cannot meet the increased demand because of constraints related to
storage capacity and freighting. The company is unable to hold the low price for too long
and is forced to increase its price at the pump.

The table below shows gasoline price at the pump, FOB price and volume sales during
the current year, at Guyoil.

Months Jan Feb Mar April May June July Aug Sept Oct Nov Dec
Pump
price, 122 122 122 130 161 167 167 167 167 167 175 175
$/L
vol.sales
bbl(000) 34 36 38 37 41 38 44 39 39 34
FOB,
USD/bbl 48 53 58 62 66 80 75 85 75 83 83 83

While the FOB price changed by quite significant values on a monthly basis, the pump
price remained unchanged at 122.00/L for the first quarter and $167.00/L for almost two
quarters. At the same time the volume sales (quantity of gasolene supplied) did not vary
much from 38,000 barrels per month. This is because supply is constrained by storage
capacity and freighting capacity. Also, price can be considered a factor.

DEMAND
In economics the concept of demand is employed to describe the quantity of a good or
service that a household can, or a firm chooses, to buy at a given price. The market
demand for a good or service is simply the total quantity that all consumers in the
economy are willing to demand per time period at a given price.
The Law of Demand
The law of demand states that there is a negative relationship between the price and the
quantity demanded of a product. When the price of a good rises the quantity demanded
will fall. The determinants of demand are :
• Product’s own price
• The price of related products
• Average income of households
• Tastes and preferences
• Income distribution

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 • Population

This study examines the relationship between the demand for gasoline at Guyoil’s Regent
Street service station and the price obtaining at the pump during the current year.

Price (of gasoline)

The table below shows the pump price and the monthly volume sale(quantity), at Regent
St service station.

Months Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec
Pump
price, 122 122 122 130 161 167 167 167 167 167 175 175*
G$/L
vol.sales
158 152 194 186 181 165 172 170 167 160 156 170*
IG(000)
*projected values
The table shows that from March to November there has been a steady decline in volume
of gasoline sold (demanded), as the price increased from $122.00/L through to $175/L for
the same period, thus conforming to the law of demand ; negative relationship between
the price and quantity of a product demanded.

The low volume sales in January and February are explained by low
commercial/economic activities in the economy during the post Christmas / New Year
season. This conforms to the general sales pattern observed over the years. Economic
activities tend to pick at the end of the first quarter.

In December it is expected that volume sales will be higher than the preceding months,
despite the higher price. This is explained by increased commercial/economic activities
for the Christmas / New Year season and conforms to the general sales pattern observed
over the years.

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The sale of gasoline at Guyoil’s Regent St service station during the current year is
shown in the graph below.

250

200

150 Pump
price, G$/L
100 vol.sales
IG(000)
50

0 l
ar

ay
n

pt

ov
Ju
Ja

Se
M

N
month

The price curve displays an ascending slope while the quantity (volume sales) displays a
descending slope; conforming to the law of demand – negative relationship between the
price of a product and the quantity demanded, over a given period of time.

DEMAND CURVE

PRICE

QTY

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Influences on Demand curve

Price change in gasoline will affect the slope of the curve.

Income
An increase in income will shift the demand curve to the right, since people will become
less prudent on money spent on fuel able – they can afford to buy more fuel. Also, more
people will possibly afford to acquire vehicles, rather than use public transport. The
converse will occur if income were to be reduced, ceteris paribus.

Population
An increase in population will shift the demand curve to the right. Increased population
will result in an increased vehicle population and general increase in commerce and
economic activities, causing greater demand for gasoline. The converse will occur if the
population were to decline, ceteris paribus.

Service quality ( tastes & preferences)

The quality of service offered to customers can affect the demand curve by shifting it
either to the left or right, especially in a price competitive environment. High quality of
customer service will be preferred by customers and shift the curve to the right, while
poor quality customer service will cause the converse, ceteris paribus.

BIBLIOGRAPHY

The Economic Environment – Commonwealth of Learning Executive MBA/MPA

Block 1 : Introduction to the Economic Environment
Block 2 : Measures of Economic Activity
Block 3 : Understanding the /market Mechanism and Analysing Market Demand
Block 4 : Market Demand and Pricing Decisions
Block 5 : Production, Cost and Profit
Block 6 : Market Structure
Block 7 : Aggregate Demand, Aggregate Supply and Economic Fluctuation

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