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Essay On Australian Petroleum Market
This essay is taking into account Australia as the country of analysis. The petroleum industry has been analysed for its price fluctuations and the effect of government intervention on this industry has further been looked into. The petroleum industry in Australia has about 0.3% of the total gas human resources of the world and accounted for 1.4 billion barrels of oil according to the Oil and Gas Journal. There is an abundant supply of both onshore and offshore oilfields in Australia. (Oczkowski, Wong and Sharma 2018). Australia’s oil and gas industry serves as one of the primary contributors to its economy and the country’s exports. Crude oil and a part of the petroleum is exported and the petroleum and diesel for local consumption is produced at Kwinana, the largest oil refinery in Australia.This essay aims to check the recent trends in the petroleum prices and to discuss the impact that government intervention has in this situation and whether the intervention is beneficial.
The current petrol prices in Australia is on a four year high. This can be blamed on the effect of inflation as trends in the oil supply determine the price to a great extent at the international markets. The Australian Competition and Consumer Commission carried out a study and explored that the prices of petrol have risen quite dramatically after April 2018 in the five of the largest cities: Sydney, Melbourne, Brisbane, Adelaide and Perth. The prices rose to the highest point at 153.7 cents per litre from 138 cents per litre which was the lowest point. Before this price rise, the petrol prices had remained stable (Aph.gov.au 2018). The current prices are as high as $1.60 per litre. This price is almost 12% higher than the previous year’s prices. A wide range of factors can be held responsible for this rise in prices. These include the concerns over the supply situation in the Venezuelan market, US sanctions having the ability to be renewed against the Iran war and the tensions that are taking place in the Middle East. This ended up sending the prices of crude oil to a four year high in May. The Australian dollar value decline had a compound effect in causing the prices of oil to rise. This was predicted by Morgan Stanley, who also predicted the proposed impact that the cuts in the income tax was supposed to have had will be nullified. In order to cause a decline in the petrol prices, there has to be more definite easing of the production restraint agreement from the side of Saudi Arabia and Russia (Chua, De Silva and Suardi 2017).
In this situation Government intervention plays a very important role in the industry because of the presence of a market failure as these external factors are leading to drastic changes in the price trend of petroleum. Therefore, the government needs to intervene in the market to ensure the fair distribution of wealth. In the case of an instability in the society due to the distribution of wealth the result of this situation will be unemployment. Government interventions can have both good and bad effects in the market
Australia allows the government intervention over mineral and petroleum resources where the government has rights to the petroleum market controls. However, the government adopts minimalist intervention in the petroleum market.. It establishes broad economic policies like personal and company income tax, interest rates, government spending, foreign investment guidelines, trade and customs, commercial corporations and international agreements and a regulatory framework for the functioning of the petroleum sector and this helps in reducing the commercial risks. The government also tries to remove impediments to the competition (Heaney and Treepongkaruna 2017).
The government intervention ensures that there is full transparency and competition but comes with its own set of disadvantages. The markets get imbalanced as in this scenario a price ceiling would be imposed where the maximum price would be set by law and it may be lower than the marketing management. This keeping of prices artificially low, leads to high consumer demand which leads to a condition of a shortage in supply. This gives rise to black markets which resorts to non-monetary bargaining like violence and nepotism resulting in price discrimination which reduces the efficiency of the market. It also leads to rationing as petroleum is a scarce product. Rationing also leads to the emergence of a black market.
While long run price controls lead to major economic drawbacks but for the short run it is a very successful measure. A price control, or a price ceiling will ensure that petroleum is affordable. It is a necessary item given how dependant people are on transportation. It also helps in regulating the frequent fluctuation in the prices of petrol which is very inconvenient as consumers would not always be aware of the price changes if the prices fluctuate so frequently. A ceiling also acts as a protection to the consumer otherwise the suppliers of petrol will charge exorbitant amount much higher than the prices prevalent in the international markets. It also ensure that the international supply and demand of petrol remains unaffected.
Therefore, government intervention will enable both positive and negative impacts. Subsidies are a kind of a price control which boosts demand but the emissions from the use of petroleum lead to environmental issues which arise the carbon dioxide emissions (Li, Dodson and Sipe 2018). Lowering of the prices by the provision of subsidies prevents the prices from increasing too much and this will enable higher consumption among consumers. Imposing taxes on petroleum which hikes the prices is also an act of the government. Price hikes like these bring greater tax revenues and this is beneficial to the government at the same time having negative welfare effects on the consumers (Competition and Consumer Commission 2014). In these rising price conditions, the government will balance it with subsidies to enable the consumers to carry on with the international consumption of petroleum. This increases the welfare of the individuals as major portion of the population is highly dependent on the petroleum consumption.
The government of Australia has brought in apps, which enable drivers to locate petrol pumps, which are supplying petroleum at lower prices. This had a downward effect on the prices as consumers now had an option to go to pumps that were offering petrol at comparatively cheaper rates and this led to lowering down of existing competition (Hashimi and Jeffreys 2016). However, government intervention when prices were on a four year high was very vital to deter the price rise from increasing and thus avoiding failures in the market but this will not have any impact on the demand or supply condition. Economists have agreed that the long run demand for petroleum will remain unaffected or the impact will be negligible if taxing or removal subsidies are taken up. This leads to increased levels of innovation in the fields of fuel efficient cars which would benefit the environment yet the consumers will continue to be just as dependant on petroleum (Australian Competition and Consumer Commission, 2018).
The reduction of price cycle volatility has been made possible due to the intervention from the side of the Australian government which served beneficial (Dodson and Sipe 2016). FuelWatch is the app that the government introduced and this app has played a crucial role in monitoring the price of petrol and thus has enabled a higher degree of price certainty and higher transparency in the prices. This app is controlled by the Petroleum Products Pricing Act 1983 and this ensure that customers have all the information technology regarding the places that would be offering petrol at a lower rate in their locality (Competition and Consumer Commission 2018). When the petroleum prices are left unregulated, they will rise to a great extent and since petroleum has turned into a necessity in the present day such high prices will deter growth. The deterrence will be because the consumer demand will not be affected by the rising petrol prices as it has now become a necessity thus the overall welfare of the economy will fall. The overall economy will face a negative impact due to the increase in price levels which leads to inflationary trends. This act enforces that all retailers must provide the price details of what they will charge on the next day for petrol by 2 PM every day and by 2:30 PM and the app notifies all the consumers through hotlines, the app notification, websites and other similar mediums (Davey 2015). This also helps in facilitating a competitive wholesale price environment in the market for petroleum.
To conclude, price regulation in the Australian market for petrol would increase the level of stability and dampen the fluctuations in the petrol prices. This in turn addresses concerns of the consumer. A government intervention would result in an interference with the existing competition and thus reduce the competition. Since the petrol prices are at a four year high, by capping the prices of petrol the market will reach a point where petrol will no longer be priced competitively and it cannot be sold at high prices any more. However if price regulations are too high it will not be healthy but some amount of price monitoring would be beneficial to the individuals due to increased transparency in information and welfare.