Relationship Between Crude Oil and Retail Petrol Prices in Australia

This report examines the relationship between crude oil and retail petrol prices in Australia. It explores whether petrol prices are influenced by fluctuations in crude oil prices or if there is an attempt to exploit the situation by petrol traders. The report also highlights the import dependence of Australia on crude oil and the potential impact of price changes on economic growth.

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Table of Contents
Introduction 2
Background 2
Aim and objectives 2
Context 2
World wide 2
Australia 2
Methodology 3
Data collection 3
Analysis strategy 3
Analysis Results 3
Question 1 3
Question 2 4
Question 3 4
Question 4 6
Question 5 7
Question 6 8
Discussions and Conclusions 8
Academic contribution 8
Practical implications/recommendations 8
Limitations and future work 9
References 10

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Introduction
Background
A pivotal role in the economic development of a country is played by oil considering that it is one of
the primary energy sources. A derivative of crude oil name petrol is typically useful as it is used as
automobile fuel and hence the economic development is critically dependent on keeping the prices
of petrol under check. Taking into consideration the importance of petrol prices it is imperative that
there should not be any abuse of pricing by the petrol traders and hence adequate measures need
to be taken by the government in order to ensure that consumer interest is safeguarded.
Aim and objectives
The given report aims to outline the potential relationship between prices of crude oil and retail
petrol prices in the context of Australia. The key objective is to highlight if the movement in petrol
prices is a result of corresponding fluctuations in crude oil prices or is an attempt on the part of the
oil traders to exploit the situation and charger price considering the lack of available substitutes for
petrol.
Context
World wide
Majority of crude oil production is limited to a few countries especially those located in the Middle
East along with Russia, USA, Venezuela and some African Nations. This implies there are number of
nations which do not have which oil deposits and hence are dependent on imports to fulfil their
energy requirements. This is particularly the case for some of the developing countries in Asia such
as China and India which are the biggest importers of oil in the world. Also the economies of various
oil exporters particularly in the Middle East are highly dependent on the revenue obtained from
exporting crude oil. Considering the importance of crude oil to various economies it is imperative
that the price of petrol should be maintained at the level so that the economic development is not
adversely affected.
Australia
In context of Australia, more than 90% of the fuel requirements are fulfilled through imports
primarily from the Middle East. This crude oil is refined by foreign countries suggest South Korea and
China before the fuel does ship to Australia. this implies that there is a significant import
dependence with regards to fuel such as petrol in Australia. As a result, the retail price of petrol is
highly dependent on any changes in the crude price and it is imperative that these changes should
be enacted to the extent necessary by fluctuations in oil price. Any attempt to profit from the
changes in oil price by the petrol retailers could have adverse impact on the economic growth in
Australia.

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Methodology
Data collection
For the period corresponding between 2001 and 2018, the monthly opening prices of retail petrol
price and crude price have been collected with the underlying currency being Australian dollars. The
currency has been kept the same so as to avoid any influence on pricing want to exchange rate
fluctuations.
Analysis strategy
Using the collected data statistical analysis has been conducted with correlation analysis and data
visualisation being the two major techniques deployed. The price Trends with regards to movement
of both retail petrol price and crude price have been graphically expressed. for the correlation
analysis has been conducted in order to highlight the nature of relationship between crude oil and
retail petrol prices in context of Australia. Also the monthly returns of both petrol price and crude
oil price in Australia have been computed and correlation analysis performed between the two
monthly returns.
Analysis Results
Question 1
The price Trends of retail petrol price and crude price are summarised in the following graphical
representation.

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Based on the above graph it is evident that between the period 2002 to 2007 that has been an
increase in prices in both retail petrol price and crude oil. However during the global financial crisis
in 2008-2009 a majority of these gains were given up as the demand of these products slowed down
on account of growth concerns. However from 2010 onwards till 2013 the oil prices have increased
but has slowed down from 2014 onwards primarily on concerns with regards to growth in China.
From 2006 onwards till October 2018 that has been a general firming up in the prices.
Question 2
The comparison of the monthly returns of crude oil and retail petrol prices is facilitated through the
following graph on the basis of the collected price data.
From the graph exhibited above, the first observation is that while the fluctuation in crude oil
returns tend to be higher, it is considerably lower with regards to the monthly returns in retail
prices. While there have been instances when the monthly oil price change has exceeded 25% but
the retail petrol price over a month for the given period has never exceeded 14.72%. As a result, the
extent of skew seems to be greater in crude oil returns as compared to the petrol prices returns
(Flick, 2015).
Question 3
The retail petrol prices during the given time period can be summarised with the aid of the following
histogram.

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Taking the above graph into consideration, it is apparent that the petrol price monthly price
distribution is not symmetric which is indicative of presence of skew and therefore the distribution
cannot be termed as normal distribution (Hillier, 2016). The summary descriptive statistics related to
monthly petrol prices are indicated below.
The average monthly petrol price comes out as $122.19 which is slightly lower than the
corresponding median value of $124.20. The variation in the retail petrol monthly prices is quite
moderate and not high as is apparent from the various measures of dispersion such as standard

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deviation, IQR etc. Also, there is presence of negative skew because of the very low prices that were
seen during 2008-2009 (Eriksson & Kovalainen, 2015).
Question 4
The crude oil quarterly price distribution is captured through the graph below.
Based on the above histogram, it becomes apparent that unusually high crude oil prices i.e. in excess
of$ 122 have been observed only in 2 quarters while low oil prices have been more common
considering that $ 37.56 - $58.56 has been visible for 18 quarters. The distribution above is non-
normal considering the slight positive skew that seems to be present (Hair, Wolfinbarger, Money,
Samouel & Page, 2015). The descriptive summary statistics for the quarterly crude oil prices are
indicated below.

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The average crude oil price on quarterly basis comes out as $79.70 which is about 90 cents higher
than the corresponding median value. The amount of dispersion in the quarterly crude prices seems
to be moderately higher as is apparent from the various measures of dispersion highlighted as part
of the above summary statistics (Hillier, 2016).
Question 5
The scatter plot to highlight the underlying relationship between crude oil price and retail petrol
price is highlighted as follows.

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The scatter plot above highlights a positive relationship between independent variable (crude oil
price) and dependent variable (retail petrol line). The underlying coefficient of correlation between
the given variables is 0.9256 which highlights that a very strong correlation exists between crude oil
prices and petrol prices (Hastie, Tibshirani & Friedman, 2016).
Question 6
The scatter plot to highlight the underlying relationship between monthly returns on crude oil price
and retail petrol price is highlighted as follows.
The above plot indicates that while the two variables are highlighting a positive correlation but the
underlying strength of this relationship seems to be lower than that corresponding to the above
scatterplot between prices. The correlation coefficient seems to validate this observation as it is
0.6145 and hence, it seems that the precise determination of petrol prices is dependent on other
factors as well besides crude (Hillier, 2016).
Discussions and Conclusions
Academic contribution
The above analysis contributes to the existing literature by highlighting that while the correlation
between the petrol prices and crude oil prices may be high but the same may not be observed with
regards to the returns of these two variables.
Practical implications/recommendations
The above analysis hints at the retail petrol price returns being dependent to a lesser extent than
estimated. This may be on account of the precise pricing mechanism used which might be average of
certain day prices or may hint to moves on the part of petrol retailers to maximise profit at the
expense of consumers. Therefore, the government or suitable regulatory body should fix an
objective pricing mechanism linked to crude price.

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Limitations and future work
It might be possible that other relevant factors besides crude price may determine the petrol prices
particularly in Australian context since refining is also done abroad. Also, instead of taking one retail
price, it may be worthwhile to take the average retail petrol prices over the given period for different
states in Australia which would also exhibit if there is any significant difference in the petrol prices
and then the underlying reason can be explored.

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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
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