A Markov chain model for petroleum products demand

A Markov chain model (being a stochastic model) is robust in theory and has applications which cover various areas of management sciences, medicine, marketing, decision making and energy. As opposed to econometric methods Markov chain models require that the stochastic process is stable over time without having to know its structure. Despite its simplicity, this model has not been widely applied in decision making in the public and private sectors in Malaysia. Thus, the modest aim of this paper is to discuss the application of Markov chain models in analysing the characteristics of petroleum products demand. The discussion will focus on product substitutions, the time to initiate and prepare for substitution. This information, which is important to energy planning, will be used to find (intuitively and empirically) the relationship between the elasticity of demand and the characteristics inherent from the demand process. This paper hopes to create interest among local academic to research further on Markov chain models especially their relationship to econometric model.