Australian Economy & Oil Crisis

This assignment analyzes Australia's economic response to oil crises during 1970-1990. It explores OPEC's influence on global oil prices and examines how the elasticity of supply and demand curves fluctuated in both short and long run scenarios. Graphs depicting oil price trends and Australian economic indicators are included to illustrate key points.

ECONOMIC
PRINCIPLES

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Overview of Oil Crisis................................................................................................................1
Price Elasticity of Demand..........................................................................................................3
Price elasticity of Supply.............................................................................................................3
OPEC failure to Keep the Oil Price high....................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................6

INTRODUCTION
Satisfying unlimited wants of consumers with scarce resources is basic concept of
Economic Principles. During 1970 energy crisis, many countries including Australia faced
substantial problems and shortages in petroleum. . This report has deeper insight in Australian
economy and its principles. (Baumol & Blinder, 2015).There was a long boom period in the
economy of Australia and an energy or oil crisis, it started unemployment in Australia. In 1970
members of OPEC decided to raise the oil prices to increase their revenues. Thus, Organisations
of the petroleum exporting countries are having focus on decrease in supply of oil products in
order to have better demand and supply elasticity.
MAIN BODY
Overview of Oil Crisis.
During the 1970's Australian economy faced profound changes in the economic policy
choices in a way it perceived. International environment turned unpredictable, previous verities
of policies of the economy were questioned. Greater turbulence argumentation was in front of
Treasury’s Policy advice, comparing to previous quarter. During 1973 inflation in Australia gave
shock to oil prices and domestic inflationary force. Costs of oil doubled from 1973-1974,
(Cashin and et.al, 2014) despite its attempts to limit economic growth through application of
monetary policy. Along with this, exchange rate also impacts the tariffs in negative manner.
Inflation problem in 1974-75 restrained excessive cost pressures in the budget (Downes,
Hanslow, & Tulip, 2014)
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Economy also faced unemployment during that period. The year when economy got a
stopper, where unemployment starting from 2 percent increased to 5 percent. Graph below is
depicting sharp increase in oil prices in 1972-2008 and its impact in Australian economy.
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(Source: <https://www.rba.gov.au/publications/bulletin/2008/sep>)
Oil Magnitude and Spending: Oil is considered as a product which participates effectively in
development of economy. Overall production and consumption allows to have effective
consideration of sustainable economy. Graph 2 above is reflecting volume of oil per unit of GDP
consumed has been declined due tTilley, C., 2014. Material culture and text: the art of ambiguity
(Vol. 48). Routledge.o decreased significance of oil in the given economy.
Approximately 40 percent consumption was affected in second shock to oil prices by
OPEC in 1980. Similarly, in industrialised service sector has more importance as compared to
manufacturing sector. However, due to common trend of reduced usage in oil, intensity of oil
varied depicting number of factors like range of uses within economy (The year the economy
went 'bung'. 2017.).
In Australia's intensity of oil usage, prices of oil have sharp multi-decade fall over past
five years in 1980 (Graph 3). Even though prices of oil had risen but demand declined. As per
GDP total expenditure on oil stood below the levels seen in late 1970's. 6 percent of GDP peaked
briefly in 1980, expenditure on oil fell by 2 percent in 1980. Approximately spending on oil
returned to 4 percent of GDP after remaining low throughout 1990's, still less than the level in
1970.
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(Source: <https://www.rba.gov.au/publications/bulletin/2008/sep>)
Price Elasticity of Demand.
Crude oil is the most consumed intermediate good and its demand depend upon the
consumers' purchase of petroleum products. When the oil price rises, crude oil demand does not
get slacken. Then outcome would be large increase in oil prices in order to maintain the lower
supply outage. Refiners would consistently purchase crude oil as long as they earn profit from
sale of such goods. When the demand becomes inelastic, they reduce their demand for crude oil
as it becomes more expensive. Accordingly, petroleum product has great changes in respect to
price if the estimate of refiners' get influenced. Moreover, price of crude petroleum also need to
be referred. (Imbs & Mejean, 2015).
Price elasticity of Supply.
It has been noticed that high prices might affect the oil inventory in negative manner.
Arabian nations have better preservation of oil so that production capacity can be advanced.
Such aspects can also impact the oil prices. Another effect could be fall in level of oil the
marginal cost of production, wells can be shut down the fracking operations. (Labandeira
Labeaga & López-Otero, 2017).
OPEC failure to Keep the Oil Price high.
In the 1970's members of OPEC decided to raise the global price of oil in order to earn
higher revenues. To accomplish the goal, they jointly reduced the amount of oil supply. In 1973-
74 the oil price rose by more than 50 percent, few years later did the same thing and price
approximately doubled. Yet OPEC found it difficult to keep the price high. During 1982 to 1985,
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oil price steadily falls by 10 percent each year, leading to dissatisfaction in OPEC countries. In
1986 price plunged down due to issue of OPEC. In 1990 price of oil is being adjusted after
inflation which has advanced the overall outcome effectively.
Complete episode of OPEC revealed that demand and supply act differently in short and
long run. Both are relatively inelastic for oil, in-elasticity of supply is due to capacity of oil
extraction and quality of oil reserves cannot be quickly changed. In-elasticity of demand is the
effect of rigid buying habits of consumers to change in price (Oil prices and the australian
economy, 2017). The short run supply and demand curves are sharp when the supply of oil shifts
from SI to S2 the price increase from PI to P2 is large.
Situations are very different in long run, OPEC builds new extraction capacity to support
increased prices by advanced oil exploration. Customers responds with greater conservation,
falling which creates a elasticity in demand and supply curve. Thus, it can be understood that
OPEC succeeded in keeping oil price high for short term only. They shifted the supply curve
from S1 to S2 in long term, but in short term circumstances were contrasting.
(Source: <https://www.britannica.com/topic/supply-and-demand>)
During year 1861-2015 oil prices fluctuated a lot, below image depicting oil prices and
sharp increase in 1973 and 1979.
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(Source: <http://www.opec.org/opec_web/en/>)
Supply curve shifted to left and oil price were kept high for the short run. Though each
member sold less oil due to changes in level of income aspects. By comparing the long run
aspects, the supply and demand curve can be turned in more elastic way at the same time (Cashin
& et.al., 2014).
CONCLUSION
After going through this report, deeper knowledge of Economy of Australia during Oil
crisis could be gained. Through this report OPEC's failure to keep oil prices high and elasticity of
demand and supply curve are explained. Graphs are included to give exact overview of situation
during 1970-1990. To justify the elasticity fluctuations in demand and supply curve the graphs
taken in this report, they are more relevant for the purpose of understanding the given economy.
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REFERENCES
Books and Journals
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage Learn.
Imbs, J., & Mejean, I. (2015). Elasticity optimism. American Economic Journal:
Macroeconomics.7(3). 43-83.
Labandeira, X., Labeaga, J. M., & López-Otero, X. (2017). A meta-analysis on the price
elasticity of energy demand. Energy Policy. 102. 549-568.
Cashin, P. and et.al. (2014). The differential effects of oil demand and supply shocks on the
global economy. Energy Economics. 44. 113-134.
Downes, P. M., Hanslow, K., & Tulip, P. (2014). The effect of the mining boom on the Australian
economy.
Online
Oil prices and the australian economy. 2017. [Online]. Available through:
<https://www.rba.gov.au/publications/bulletin/2008/> [Accessed on 30th June 2017].
The year the economy went 'bung'. 2017. [Online]. Available through:
<http://www.theage.com.au/news/National/The-year-the-economy-went-bung/
2004/12/31/1104344983057.html> [Accessed on 30th June 2017]
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