Australian Petroleum Market: Government Intervention and Price Control

This essay analyzes the petroleum industry in Australia, including price fluctuations and the effect of government intervention. It discusses whether government intervention should be continued in the petroleum market and provides arguments against direct price control. The paper also suggests measures other than price regulation that could be more useful.

Running head: AUSTRALIAN PETROLEUM MARKET
Australian Petroleum Market
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1AUSTRALIAN PETROLEUM MARKET
Introduction
This essay is taking into account Australia as the country of analysis. The petroleum
industry has been analyzed for its price fluctuations and the effect of government intervention on
this industry has further been looked into. The current petrol prices in Australia are 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 global 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 five biggest Australian cities that include Melbourne, Sydney,
Brisbane, Perth and Adelaide. 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 price per litre has increased highly to $1.60. 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. The sanctions of the US possess the ability of renewing against the war of
Iran and the tensions that are taking place in the Middle East. This ended up in significant rise in
crude oil prices, in which it has reached its maximum in May in four years (Valadkhani and
Smyth 2018). The Australian dollar value decline had a compound effect in causing the prices of
oil to rise. In order to control petroleum price, government adapts strategy of price surveillance.
The price regulation in the petroleum market is taken in three broad forms of price inquiry, price
notification and price monitoring. The paper analyzes “whether government intervention
should be continued in the petroleum market”. Direct price control is not a welcome measure
to stabilize price. The paper provides three arguments to analyze the thesis statement.
Reason 1: Distortionary effect of price ceiling
Price ceiling refers to the policy of setting a legal maximum price, which is below the
equilibrium price (Cowell 2018). In Australia, Price Surveillance Authority controls the
wholesale prices of petrol. PSA decides the daily wholesale prices of petrol and diesel sold by
major oil companies. The ceiling price is set depending on the estimated cost of imported refined
petroleum product into Australia. It is in effect a form of import parity. PSA also sets the
maximum charges of freight in Australia. Aim of PSA is lower the fuel prices within the country
at the expense of consumers in the capital city. In reality however prices in the city market

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usually remain well below the maximum price The intense competition pushes prices to a
considerable low level. This makes price ceiling non-binding in nature. Government thus has a
little scope of doing much for consumers. In markets where wholesale price fails to recover the
entire cost because of Ministerial intervention such a policy results in poor quality service, lower
investment and lower competition. In metropolitan cities, because of higher competition, price
ceiling fails to impose a constraint on market price (Chua, De Silva and Suardi 2017). Instead,
such a price become a target for the companies where prices after the discounting cycle. It adds
further volatility in market prices.
In case of binding price ceiling that is upper limit of price set below the equilibrium price
the market ends with a supply shortage. The impact binding price ceiling on the petroleum
market is described in the figure below.
Figure 1: Price ceiling in petroleum market
(Source: as created by Author)

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In the given figure, demand and supply in the petroleum market is given as DD and SS
respectively. Without price control measure price in the market is determined by independent
forces of demand and supply. The corresponding equilibrium position in the market are is shown
as E in figure 1. Now, consider the impact of a price ceiling where government sets the price
below the equilibrium price at P1. At the legally set maximum price, petroleum becomes much
more affordable compared to uncontrolled prices (Cowen and Tabarrok 2015). Demand thus
increases to Q2. Supplier on the other hand reduce the market supply to Q1. Market thus suffers
from a shortage of fuel which deteriorates social welfare.
Reason 2: Price control is not the solution
Price Surveillance authority should discontinue regulation on prices of petroleum
products as existence of effective competition in the wholesale and retail market makes such
interventionist measure unnecessary. Further, in the metropolitan market setting of maximum
wholesale price lead to volatility in the price cycle. The policy of price ceiling distorts market
signals and lowers profit. There seems to be a misconception lack of competition increases
petroleum prices to a much higher level than the desirable level (Li, Dodson and Sipe 2016). In
reality however evidences do not support this claim. The regulatory measure to control price has
several adverse consequences.
Despite government intervention through PSA to stabilize petroleum prices, price inquiry
suggests that there still remain concerns regarding the level of prices and also there are some
instances where such policy measures result in volatility in retail prices of petroleum. Common
people is more concern with what is happening to retail prices and the associated uncertainty.
Price volatility refers to a situation where different people face a different set of prices
(Oczkowski, Wong and Sharma 2018). There is considerable concern regarding variation in
offered prices in different outlets. The degree of variation in petroleum prices is also a matter of
serious concern as prices may change over number of days or even in single day.
The fright charges add to the wholesale price to recover cost of transportation. The
Commonwealth government however intervenes through Ministerial Direction requiring
exclusion of storage and transportation cost from freight prices. There is a long term adverse
consequences of Ministerial direction and non-recovery of transportation cost. Under recovery of
transportation and storage cost creates pressure on suppliers to leave the market (Bell et al.

4AUSTRALIAN PETROLEUM MARKET
2017). The ceiling price of PSA behaves as an active restriction to in some region following its
insufficiency in complete cost recovery.
Reason 3: Measures other than price regulation is more useful
Apart from direct price control, Australian Competition and Consumer
Commission provides indirect assistance to the consumers. The government of Australia has
brought in apps, which enable drivers to locate petrol pumps, which are delivering petroleum at
minimised costs. The effect is deemed to be downward 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; however, the supply and demand condition
might be affected. The economists have added 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
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 regarding the places that would be
offering petrol at a lower rate in their locality (accc.gov.au 2018). This act enforces that all
retailers must provide the price details of what they will charge on the next day for petrol
between 2 p.m. and 2:30 p.m. and all the customers are notified by this app through hotlines, the
notification of app, websites as well as other sources (Davey 2015). A competitive wholesale
price environment is facilitated in the petroleum market.
Conclusion
The sky reaching prices of petroleum calls for government active policy measure to
control prices in the market. One direct measure of price control is to set a legal maxim price

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which is lower than the equilibrium price. The Price Surveillance Authority of Australia
regulates wholesale petroleum prices in Australia. Evidences however suggest that the direct
price control measure is not much effective. Firstly, intense competition in metropolitan cities
keeps prices well below the legal maximum price. The price ceiling thus becomes non-binding in
nature. In case of binding price ceiling, the lower price leads to supply shortage in the market.
Secondly, price regulation increases volatility in prices. The Ministerial Direction reduces
available supply following non-recovery of cost. Thirdly, indirect assistance through launching
different application program benefit consumers without any distortion in the market.

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References
Accc.gov.au 2018. Australian Competition and Consumer Commission. [online] Available at:
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