Market Operation Issues of Australian Oil Industry

This report discusses the market operation issues of Australian oil industry and the reasons for such issues. The structure of the market, the change in demand supply of petrol and relevant reasons have been discussed.

Running head: ECONOMICS FOR BUSINESS
Economics for Business
Name of the Student
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Executive Summary
This report discusses the market operation issues of Australian oil industry and the reasons
for such issues. The structure of the market the change in demand supply of petrol and
relevant reasons have been discussed. It discussed how an oil exporter became an oil importer
with decreasing oil reserve. The lack of refineries as one of the prominent resource
constraints worsened the condition of oil industry in Australia that forced the country to take
help from other countries for refinery services. It has been discussed in the report that how
demand supply disparity increased petrol price. Indications of future threat to the oil industry
like global warming and electric cars have been given in the report. Thus, it is concluded that
the oil industry in Australia is definitely facing severe issues and there are more to come.

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Table of Contents
Introduction................................................................................................................................3
Key Issues of Oil Industry in Australia......................................................................................3
Economics of the Oil Industry in Australia................................................................................5
Supply Demand Mismatch.....................................................................................................5
Resource Constraint...............................................................................................................6
Market Structure of Oil Industry............................................................................................7
Substitute of Petrol Cars.........................................................................................................7
Conclusion..................................................................................................................................9
References................................................................................................................................10

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Introduction
Oil industry is among one of the most important industry for any country in the world.
Likewise, in Australia oil industry holds a good position because it is the main driving force
of transport system in the world. In recent times, the oil industry in Australia is facing many
issues and mismatch in supply and demand of petrol creating a major problem. This report
tries to discuss the main issues like increase in exploration, finding and drilling cost and strict
government licencing policy for new oil production unit that are affecting the operation of oil
industry in Australia and declining the petrol productivity. Other issues like lack of oil
refineries, introduction of new pollution free technology to run cars and global warming
discouraging people to use petrol operated vehicles. However, the report discusses the
operational issues of the oil industry in Australia with special emphasis on petrol from the
microeconomic aspect. Apart from the existing issues, focus is given on the problems that
might affect the demand and supply of petrol in long run.
Key Issues of Oil Industry in Australia
During early days, Australia used to produce and meet its entire domestic demand for
petrol. Even 20 years earlier, it is true for Australia, but in the last few years, production of
petrol has declined drastically. Australia currently imports about 90% of its domestic demand
for petrol (BBC News 2018). It has only 23 days of petrol reserve for emergency purposes
(Department of the Environment and Energy 2018). The major issues that are affecting the
Australian oil industry are high cost of finding and drilling new oil sites, lack of oil refineries
and low production of petrol (Velins 2016). Exploration and production at new sites require
social licence from the government, receiving which is critical. These issues decreased the
exploration and production in Australia, which might affect the future supply of petrol and
fail to meet the demand. High cost of finding and drilling oil sites forced Australia to import

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oil from other countries. The lack of sufficient oil refineries in Australia compels it to take
help from the countries like China, Singapore and South Korea to refine imported crude oil.
These only add up to the cost of petrol, which is one of the primary reason behind oil price
increase in Australia. The low production and high consumption is one of the factor due to
which importing oil at a large volume has become mandatory for Australia. Figure 1 shows
the increasing demand and supply gap between consumption and production of petroleum in
Australia.
Figure 1: Petrol and other oils consumption in Australia (barrel per day)
Source: (Eia.gov 2017)
As reflected from the figure, with every passing year, the gap is only increasing
making Australia dependent on imports of petrol (SBS News 2018). It is evident that the oil

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industry in Australia is declining significantly and it is very much possible that the industry
will succumb in near future. Hence, for the oil companies in Australia operation in the market
has become challenging and competing with the foreign suppliers of crude oil without
government intervention and support is probably impossible.
Economics of the Oil Industry in Australia
Supply Demand Mismatch
The condition of the Australian oil industry can be understood with the help of
microeconomic concepts. The demand and supply theory explains the increase in price of
petrol in Australia.
The demand supply theory states that if the demand of a product is higher than the supply of
the product then price of the product goes up to reach the market equilibrium (Varian 2014).
The production of petrol in Australia is much less compared to the consumption. Thus, price
of petrol increased in the recent years. Figure 2 shows the change in price of petrol in
Australia.
Figure 2: Petrol price hike
D1
D2
S2
Q2 Q1
S1
Price of petrol
P2
P1
Supply of
petrol

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Source: (Created by the Author)
In the above figure, Q1 is the amount of petrol produced and supplied by Australian
domestic companies before the petrol production crunch. With decline in petrol production
due to high cost of exploration and stringent licencing policies for drilling and production
price has gone up as the demand increases. The increase in demand is shown as shift in
demand curve to the right from D1 to D2 and decrease in supply is shown as the shift in
supply curve to the left from S1 to S2 in Figure 2. Hence, due to fall in quantity supplied
from Q1 to Q2 price has increased from P1 to P2. However, if government intervene
effectively and encourages the production of petrol in Australia then in future oil prices may
come down.
Resource Constraint
Australia meets most of the domestic demand of petrol by importing crude oil.
However, as there are not enough refineries in Australia, it takes service of other countries to
refine the imported crude oil and extracts petrol. This has increased the cost of extraction by
many folds, as transport cost is quite high because the distance between Australia and crude
oil refining countries are long. Hence, it is reflected in the high price of petrol. However,
even after experiencing the rise in petrol price Australia is neither constructing more
refineries and nor encouraging exploration and drilling because the cost of import is lower
than the cost of developing new infrastructure. Hence, importing seems to keep the petrol
price lower and the supply remains regular (Byrne 2014). On the other hand, oil is a natural
resource and is limited, thus it will eventually depletes. Therefore, with time, supply of petrol
will reduce and price will go up as demand is ever increasing. However, the government
investment in importing and refining crude oil is going outside the country and the domestic

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producers are worse off with no hope for revival in future. Therefore, in the short run it seems
that there will be no improvement in the oil industry by investing in refineries and
exploration but in future when the refineries and new crude oil extraction units becomes fully
operational then the production will definitely increase and Australia will again gain its past
position in oil industry.
Market Structure of Oil Industry
The oil market in Australia is a competitive market as there is no restriction for new
entrants. The Trade Practices Act 1974 gives this provision of competition in oil industry in
Australia (Aph.gov.au 2019). Thus, as most of the countries Australia does not control oil
prices it is decided upon changes in the world prices of oil but the government keeps a
regular monitoring over the price change to avoid exploitation of consumer by the oil
producing companies (Lin 2014). This monitoring is done by Australian Competition and
Consumer Commission Thus, if the price of petrol determined by the market is not sufficient
to achieve market efficiency and aggravates consumer exploitation then the regulators
intervene and bring the prices to efficiency level and protects customer from exploitation.
Thus, government intervenes in the oil market by three forms of surveillance, namely, price
inquiry, price notification and price monitoring (Legislation.gov.au, 2019). Hence, the
surveillance is a kind of indirect market interventions by the government to control the oil
market in Australia.
Substitute of Petrol Cars
Global warming is increasing gradually with time and one of the primary reasons for
it is the carbon emission from the vehicles using it. The awareness regarding this is spreading
gradually among the people and many are willing to stop using petrol run vehicles. Yet most
of the alternatives of petrol run vehicles are in concept stage. Electric vehicles has zero
emissions and are available but yet to capture the market, as they are not as good in

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comparison to petrol operated vehicles from performance perspective (Hooftman et al. 2016).
However, many companies have developed concept high-performance battery-operated
vehicles, which will definitely replace the petrol operated vehicles in near future. Countries
like France and Norway have already taken the objective to replace all the petrol-operated
cars with electric cars by 2040 (Kass 2018). Tesla the American automotive giant has
provided South Australia with mammoth battery backup to supplement uninterrupted solar
power (Forbes.com 2018). Thus, future of high-performance electric cars is not very far.
Electric cars are perfect substitutes of petrol operated cars because it has no carbon emission
and thus generates no harmful effect on the environment.
Figure 3: Cross price elasticity
Source: (Created by the Author)
In Figure 3, the price of electric cars is considered as the harmful effect it has on the
environment. Therefore, more a petrol operated car harms the environment more is its price.
People are more likely to replace the petrol-operated cars with electric cars if its harmful
effect is higher and vice versa (Graditi et al. 2015). At price, P1 the quantity of electric cars
D
Q2Q1
Price of petrol cars
P2
P1
Demand for electric cars

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demanded is Q1 and the case is similar for the price and quantity points P2 and Q2
respectively. The figure is based on the current scenario, considering the high price (in terms
of money), hence the demand curve is upward sloping (Kristoufek, Janda, and Zilberman
2014). In the long run, the demand curve will be horizontal as the price (in terms of money)
of high-performance electric cars reduces and people will replace all petrol operated cars with
electric cars. Hence, the cross-price elasticity of electric cars is positive with respect to petrol
operated cars.
Conclusion
It can be concluded from the above discussion that oil industry in Australia does
facing market operational issues and gradually it is worsening. Once an exporter of oil ha
snow became an importer. With every single passing day its oil petrol reserve is decreasing.
Old oil wells are drying up but no new wells are excavated due to its high exploration cost
and difficult licencing procedure. Conversely, the consumption of petrol has increased with
decrease in production resulting in high demand supply disparity, thus, Australia is importing
huge amount of crude oil. Hence, price of petrol is increasing. However, government tries to
control price by indirect market interventions. Furthermore, resource constraints like lack of
refineries is another drawback that pulling the oil industry down. On the other hand, issues
like global warming is discouraging people from using petrol operated cars that might give an
adverse shock to the oil industry in near future and emerging electric car market will
definitely be another reason that demand for petrol decreases completely at least in transport
industry in some point in distant future.

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References
Aph.gov.au 2019. Chapter 7 - Petrol Market Regulation – Parliament of Australia. [online]
Aph.gov.au. Available at:
https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/
Completed_inquiries/2004-07/petrol_price/report/c07 [Accessed 11 May 2019].
BBC News (2018). Is Australia running out of petrol?. [online] BBC News. Available at:
https://www.bbc.com/news/business-44027042 [Accessed 10 May 2019].
Byrne, D.P., 2014. Fuelling Australia: structural changes and new policy challenges in the
petrol industry. Australian Economic Review, 47(4), pp.523-539.
Department of the Environment and Energy (2018). Australian Petroleum Statistics.
Australian Government.
Forbes.com 2018. Prices Are Up, But Challenges Remain For Oil And Gas Companies.
[online] Forbes.com. Available at: https://www.forbes.com/sites/uhenergy/2018/04/05/prices-
are-up-but-challenges-remain-for-oil-and-gas-companies/#7df3a9c4213d [Accessed 10 May
2019].
Graditi, G., Langella, G., Laterza, C. and Valenti, M., 2015, June. Conventional and electric
vehicles: A complete economic and environmental comparison. In 2015 International
Conference on Clean Electrical Power (ICCEP)(pp. 660-665). IEEE.
Hooftman, N., Oliveira, L., Messagie, M., Coosemans, T. and Van Mierlo, J., 2016.
Environmental analysis of petrol, diesel and electric passenger cars in a Belgian urban
setting. Energies, 9(2), p.84.
Kass, M.J., 2018. The End of the Road for Gas-Powered Automobiles?. Natural Resources &
Environment, 32(4), pp.53-54.

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Kristoufek, L., Janda, K. and Zilberman, D., 2014. Price transmission between biofuels, fuels,
and food commodities. Biofuels, Bioproducts and Biorefining, 8(3), pp.362-373.
Legislation.gov.au 2019. Monitoring of Prices, Costs and Profits Relating to the Supply of
Petroleum Products in the Petroleum Industry in Australia. [online] Legislation.gov.au.
Available at: https://www.legislation.gov.au/Details/F2019L00064 [Accessed 11 May 2019].
Lin, K.C., 2014. Protecting the Petroleum Industry: Renewed government aid to fossil fuel
producers. Business and Politics, 16(4), pp.549-578.
SBS News 2018. Is Australia's fuel supply about to be cut off?. [online] SBS News. Available
at: https://www.sbs.com.au/news/is-australia-s-fuel-supply-about-to-be-cut-off [Accessed 11
May 2019].
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International
Student Edition. WW Norton & Company.
Velins, E., 2016. The price of petrol-What next?. Energy News, 34(3), p.10.