Relationship between Petrol Price and Crude Oil Prices in Australia

This report examines the relationship between petrol price and crude oil prices in Australia. It analyzes the fluctuations in prices, conducts correlation analysis, and explores the impact on consumers. The report also discusses the role of petrol traders and provides recommendations for pricing mechanisms.

INDIVIDUAL TASK COVER SHEET
Table of Contents
Introduction...........................................................................................................................................1
Background........................................................................................................................................1
Aim and objectives............................................................................................................................1
Context..................................................................................................................................................1
World wide........................................................................................................................................1
Australia............................................................................................................................................1
Methodology.........................................................................................................................................1
Data collection...................................................................................................................................1
Analysis strategy................................................................................................................................2
Analysis Results.....................................................................................................................................2
Question 1.........................................................................................................................................2
Question 2.........................................................................................................................................3
Question 3.........................................................................................................................................3
Question 4.........................................................................................................................................4
Question 5.........................................................................................................................................5
Question 6.........................................................................................................................................6
Discussions and Conclusions..................................................................................................................7
Academic contribution......................................................................................................................7
Practical implications/recommendations..........................................................................................7
Limitations and future work..............................................................................................................7
References.............................................................................................................................................8

Introduction
Background
Oil plays a crucial role in the economic development of many countries including Australia
considering that it is one of the major energy sources. The derivatives of crude oil in the form of
petrol tend to act as fuel for automobiles and thereby the underlying prices of these tend to play a
crucial role in the overall economic development. Considering the utility of petrol, it is prone to
pricing abuse by the petrol traders which needs to be checked against so as to safeguard the interest
of the consumers.
Aim and objectives
The aim of this report is to outline the underlying relationship between the petrol price and crude oil
prices. This would highlight if the fluctuations in petrol price are indeed the result of corresponding
fluctuations of crude oil or there is malice on the part of Australian oil traders who tend to adversely
impact the consumers by charging a higher price that justified by the underlying crude price.
Context
World wide
The production of crude oil is concentrated only in a handful of countries with majority of the
production coming from Middle East, USA, Russia, Venezuela and part of Africa. A lot of nations tend
to depend highly on oil imports while a lot of countries tend to depend significantly on the exports of
oil. For instance, developing countries such as India and China along with Japan are the largest
importers of crude oil. Similarly, the economies of few countries especially in the Middle East are
highly dependent on oil exports. As a result, the petrol pricing tends to fluctuate with oil prices and
must be accurately computed.
Australia
With regards to Australia, 90% of the fuel requirements are met through imports where the oil is
imported from Middle East and refining is done in countries such as South Korea and the fuel is
shipped to Australia. As a result, Australia is significantly dependent on imports for fulfilling the
energy needs. Also, this makes the fuel price highly sensitive to changes in the crude price and it is
imperative that the prices charged by the petrol retailors is in line with the crude oil price
movements.
Methodology
Data collection
Monthly data has been collected for the period from 2001-2018 corresponding to crude oil and retail
petrol price in Australia dollars. This data corresponds to the price on the first day of every month
starting from January 2001 to October 2018. Further, this data has been used to conduct analysis.
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Analysis strategy
With regards to analysis of the collected data, data visualisation and correlation analysis have been
used as the two main tools. The price trends for the crude oil and retail petrol price have been
graphed so as to enable comparison between the two. Additionally, the monthly changes in the
price of crude oil and retail petrol price has been computed and correlation analysis has been
conducted between the two. Besides, the correlation analysis between the price of crude oil and
petrol prices has also been conducted so as to determine whether the price movements of petrol is
in line with crude oil price movements or not.
Analysis Results
Question 1
The objective is to visually represent the fluctuations in price of crude oil and retail petrol price over
the given period. This is captured below.
From the above chart, it is apparent that both crude oil and petrol price saw a growth in prices from
2002 to 2007. However, a majority of the gains were given in 2008-2009 owing to the global financial
crisis when there was a slowdown in the global economy and oil demand plummeted. From the last
quarter of 2009 to 2013, there was a steady firming in the oil prices which again plummeted in 2014
owing to the growth concerns in China. However, the prices have again started firming from 2016
and this trend has continued till 2018 October.
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Question 2
The objective is to compare the fluctuations of crude oil prices and retail petrol prices. The monthly
returns have been computed using the data provided and the boxplot for the returns has been
drawn which is indicated below.
From the above boxplot, it is apparent that the fluctuations in retail petrol price tend to be smaller in
comparison to crude oil price which may be on account of the petrol prices reflecting an average of
past crude oil prices rather than depending on only the previous day. As a result, the number of
outliers present in the petrol prices tend to be lesser than corresponding to crude oil prices (Flick,
2015).
Question 3
The visual representation of monthly price of retail petrol price is indicated below.
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Based on the above, it is apparent that the petrol prices are not symmetric owing to which skew is
present and hence the underlying petrol price distribution is not normal (Hillier, 2016). The relevant
summary statistics
From the above summary statistics, it is apparent that mean retail petrol price is A$ 122.19 while the
median price is higher at A$ 124.20. Further, the extent of variation in the prices seems moderate
considering the value of variance and standard deviation. Further, negative skew is present which is
on account of exceptionally low price witnessed during the global financial crisis (Eriksson &
Kovalainen, 2015).
Question 4
The quarterly crude oil prices are captured using the following graph.
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The above histogram clearly represents that the high quarterly prices (i.e. greater than A$ 121.56)
seem to have prevailed for only two quarters. Further, the distribution of prices across different
quarters seems to be quite even considering that all class intervals except the highest tend to have
almost same quarterly frequency (Hair, Wolfinbarger, Money, Samouel & Page, 2015). The
requisite summary statistics are indicated below.
From the above, it is apparent that average quarterly crude oil price is A$ 79.70. Further, the
deviation in quarterly crude oil prices seems to be on the higher side taking into consideration
standard deviation, variance, range and IQR. The amount of skew is almost zero which indicates at a
symmetric distribution of quarterly crude oil prices (Hillier, 2016).
Question 5
The requisite scatter plot is indicated below.
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From the above scatter plot, it is apparent that there is a positive relationship between crude oil
prices and retail petrol prices which is on expected lines. The correlation coefficient between the
two variables has been computed as 0.9256 which indicates that very strong correlation in the
pricing of crude oil petrol prices do tend to exist (Hastie, Tibshirani & Friedman, 2016).
Question 6
The requisite scatterplot between monthly returns on crude oil prices and retail petrol prices is as
indicated below.
-30.00% -20.00% -10.00% 0.00% 10.00% 20.00% 30.00%
-20.00%
-15.00%
-10.00%
-5.00%
0.00%
5.00%
10.00%
15.00%
f(x) = 0.318182754887257 x + 0.00150507925575933
R² = 0.377573992666542
Scatter Plot: Monthly Returns Oil_audollar vs Petrol _price
Monthly Returns Oil (audollar)
Monthly Returns Petrol_price (audollar)
From the above scatter plot, it is apparent that while the two returns seem to be positively
correlation, the magnitude is comparatively smaller when compared to the scatterplot shown above
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that corresponds to prices of crude oil and retail petrol prices. This is also captured from the
correlation coefficient which is 0.6145 and thereby indicates moderately strong correlation (Hillier,
2016).
Discussions and Conclusions
Academic contribution
The key academic contribution that arises from the above analysis is that the crude price and petrol
tend to show a strong correlation with regards to price movement as a significant amount of
variation in these is expected to be caused by corresponding changes in the crude price.
Practical implications/recommendations
The key practical implication of the above analysis is that the returns in retail petrol price and crude
oil seem to have significantly lower correlation when compared to the corresponding correlation
between retail petrol price and crude oil. This tends to highlight that the actual change in retail
prices may be driven by the petrol traders objective to maximise profit. As a result, it is
recommended that the pricing mechanism being used to price petrol ought to be studied.
Limitations and future work
The given data was limited with regards to time and also various other factors besides crude oil were
not included. Further, it would have been better if the average prices of a given day from various
retailors are noticed so as to critically evaluate the pricing of petrol by each retailer and the
underlying mechanism that they follow. Hence, the introduction of the retailor must also be done
and also the data over a longer time may be taken.
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References
Eriksson, P. & Kovalainen, A. (2015). Quantitative methods in business research (3rd ed.).
London: Sage Publications.
Flick, U. (2015). Introducing research methodology: A beginner's guide to doing a research
project (4th ed.). New York: Sage Publications.
Hair, J. F., Wolfinbarger, M., Money, A. H., Samouel, P., & Page, M. J. (2015). Essentials of
business research methods (2nd ed.). New York: Routledge.
Hastie, T., Tibshirani, R. & Friedman, J. (2016). The Elements of Statistical Learning (4th
ed.). New York: Springer Publications.
Hillier, F. (2016). Introduction to Operations Research. (6th ed.). New York: McGraw Hill
Publications
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