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What Impacts Petroleum Prices?

Do Petrol Prices Increase Faster Than They Fall In Market Disequilibria?

The Role of Government Intervention in the Petroleum Market

The petroleum industry in the Australia is one of the highest contributors in the world. Australia has about 257 trillion cubic feet of the resources of gas (Valadkhani and Smyth 2018). The petroleum industry of the Western Australia is also one of the largest contributors of most of the petroleum goods.  The government should continue to intervene the marketing for petroleum industry in order to avoid any kind of market manipulation. The government needs to enter into the markets even when the price of oil becomes highly volatile in the international markets. The market intervention of the government is a type of institutional orders that is reflected in the regulation of the gas framework. The administration of the government is already taking huge measures for setting out various reforms in the petroleum industry. By entering into the market, the government can combat the inequities of the market with the help of regulations, subsidies and taxations. Australia’s oil and gas industry is therefore, is the major contributor to its economy where the coal and gas sectors in the country plays a very important part. In order to promote economic fairness, the government can enter in to the market of petroleum in Australia (Aph.gov.au. 2018). Market interventions are mostly for correcting the market failure, improving the performance of the economy and achieving equal distribution of both wealth and income. Based on the various reserves in the shelf of North West, the industry of Australia extracts crude oil and natural gas. The largest refinery of petroleum is present at Kwinana and most of the crude oil and petroleum liquids are exported.


The petrol market of Australia has been subjected to various types of price controls and monitoring by the Commonwealth and state governments. One way of government intervention can be the use of taxation policy which states that excise tax should be imposed on petroleum for generating revenue. This is also term as the fuel tax. The reason behind the fuel tax is that it will help in reducing the consumption of fuels along with greenhouse emissions. In addition to the greenhouse emissions there are also presence of negative externalities which includes air pollution. Also, sometimes setting a price floor or a price ceiling will make sure that both the consumers and the producers are earning profits where price floors are usually used by the governments to prevent prices from becoming too low.  Another kind of intervention is providing subsidies as that would lower the cost of production. Some of the possible ways of subsidies includes direect funding and tax giveaways. However, subsidizing petroleum will add a risk of carbon lock in.

Methods of Government Intervention in the Petroleum Market

Government intervention is very important in the industry when there is a presence of market failure. Therefore, the government needs to enter the market for fair distribution of wealth. When the society is not stable because for the distribution of wealth it will result in unemployment and even crimes. Market failure also does not provide good market environment to everyone. Government interventions can have both good and bad effects in the market. The natural gas industry in the United States have been the largest source of the production of energy representing about 33% of the energy produced (Heaney and Treepongkaruna 2017).


The prices of petrol in Australia are on a four-year high where the pinch of thee inflated prices can be felt as the prices are being driven by the trends in the international supply of oil. A study carried out by the Australian Competition and Consumer Commission the petrol prices have seen a dramatic rise after April in the five largest cities although they were stable for the three months before that (Aph.gov.au 2018). The current prices are as high as $1.60 per litre. The international factors are held responsible for inflating the wholesale petrol prices like the tensions in the Middle East, US sanctions having the potential to be renewed against the Iran war and the concerns over the Venezuelan supply. This sent the prices of crude oil to a four year high in May. The fall in the Australian dollar had a compound effect in raising the oil prices as predicted by Morgan Stanley, who also said that this would nullify the impact of the proposed income tax cuts. For the petrol prices to fall, 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).

The government has introduced apps which help drivers to locate places that will supply petroleum at lower prices to aid drivers. This had a downward effect on the prices and the condition of low competition (Hashimi and Jeffreys 2016). However, government intervention in this situation of a high price is very crucial to stop the prices from going higher up and avoiding market failures but this will have no impact on the demand or supply. Economists have agreed that taxing or removing subsidies will have negligible impact on the long run demand of petroleum. Management, they would lead to higher innovations in the field of fuel-efficient cars but the consumers will continue to be dependent on petroleum (Australian Competition and Consumer Commission, 2018).

Importance of Transparency and Price Certainty in the Market


Government intervention has both a positive and negative impact. Subsidies will lead to a price control even though the emissions from the same are leading to environmental issues due to the carbon dioxide emissions (Li, Dodson and Sipe 2018). Lowering the prices through providing subsidies will prevent the prices from rising too high and this will allow for higher consumption. Every year the government of Australia spends millions of dollars in the oil industry. For supporting fossil fuels government provides tax based subsidies.  The government also imposes taxes on petroleum which hike the prices.

 These price hikes bring higher tax revenues which is beneficial to the government but has negative welfare effects on the consumers (Competition and Consumer Commission 2014). In this rising price situation, government will provide subsidies to let the consumers continue with the international consumption of petroleum and thus increase the welfare as major part of the population is highly dependent on the consumption of petroleum.

Intervention from the side of the government in Australia has been beneficial, as it has led to the reduction in the price cycle volatility (Dodson and Sipe 2016). Government can intervene both directly and indirectly in the market when there is price fluctuation. The government intervenes in the market for mitigating high oil prices.  The app introduced by the government, FuelWatch, has played a crucial role in the monitoring of petrol prices and has led to higher transparency and price certainty. This app is administered by the Petroleum Products Pricing Act 1983 and has enabled consumers to have access to information regarding where they would get petrol at the lowest rate (Competition and Consumer Commission 2018). If left unregulated, petroleum prices will skyrocket and given the current situation it has become a necessity. Therefore, soaring petroleum prices will not have any effect on the consumers demand for it but it will have a negative impact on the overall welfare of the economy, as it would lead to an increase in the price level or, inflationary trends (Prsindia.org. 2018). Under the act, all retailers have to provide the details regarding the price that they would charge for petrol by 2PM every day and by 2:30 PM the app notifies all the citizens through the app notification, hotlines websites and similar mediums (Davey 2015). This also helps in the facilitation of competitive wholesale prices in the market for petroleum. The Petroleum Products Pricing Act 1983 states that when a wholesale price is prescribed the price for petroleum products, none of the wholesaler shall change the price. This act therefore, prevents excessive pricing in relation to wholesale trading.


To sum up, petrol price regulation in the Australian market would result in increased stability and lesser fluctuations in the petrol prices. This addresses consumer concerns. The intervention would lead to interference with the competition and reduce competition. With the petrol prices at a four-year high capping the prices of petrol would result in a point where petrol is not likely to be priced competitively and the petrol cannot be sold at high prices. However too high price regulations are not good but some monitoring of prices would benefit the individuals due to transparency in information and increase welfare.

References

Aph.gov.au. (2018). Chapter 3 - The Petrol Price Rollercoaster – Parliament of Australia. [online] Available at: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Completed_inquiries/2004-07/petrol_price/report/c03 [Accessed 29 Sep. 2018].

Australian Competition and Consumer Commission. (2018). Australian Competition and Consumer Commission. [online] Available at: https://www.accc.gov.au/ [Accessed 29 Sep. 2018].

Chua, C.L., De Silva, C. and Suardi, S., 2017. Do petrol prices increase faster than they fall in market disequilibria?. Energy Economics, 61, pp.135-146.

Competition, A. and Consumer Commission, 2014. Monitoring of the Australian petroleum industry, Report of the ACCC into the prices, costs and profits of unleaded petrol in Australia. ACCC: Canberra.

Competition, A. and Consumer Commission, 2018. Compliance and enforcement policy. Gas, 2017, p.2020.

Davey, A., 2015. Refinery Exchange Agreements: Pro?Competitive, Anti?Competitive or Benign?. Australian Economic Review, 48(2), pp.150-162.

Dodson, J. and Sipe, N., 2016. Oil and mortage vulnerability in Australian cities. Planning After Petroleum: Preparing Cities for the Age Beyond Oil, p.129.

Hashimi, H. and Jeffreys, I., 2016. The impact of lengthening petrol price cycles on consumer purchasing behaviour. Economic Analysis and Policy, 51, pp.130-137.

Heaney, R.A. and Treepongkaruna, S., 2017. The Pricing of ULP and Diesel in the Western Australian Retail Fuel Market.

Li, T., Dodson, J. and Sipe, N., 2018. Examining household relocation pressures from rising transport and housing costs–An Australian case study. Transport Policy, 65, pp.106-113.

Oczkowski, E., Wong, A. and Sharma, K., 2018. The impact of major fuel retailers on regional New South Wales petrol prices. Economic Analysis and Policy, 57, pp.44-59.

Prsindia.org. 2018. the PRS Blog » What impacts petroleum prices?. [online] Available at: https://www.prsindia.org/theprsblog/?p=4081 [Accessed 27 Oct. 2018].

Valadkhani, A. and Smyth, R., 2018. Asymmetric responses in the timing, and magnitude, of changes in Australian monthly petrol prices to daily oil price changes. Energy Economics, 69, pp.89-100.

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