Economics for Business: A 10-Year Analysis of Gas Prices in Australia

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Economics for Business
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Table of Contents
Q.1..............................................................................................................................................3
Q. 2.............................................................................................................................................8
References.................................................................................................................................9
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Q.1
The economy of a country is built up including various factors. There are lots of resources
that are utilized by the govt. to make changes and development in the normal lives of people.
There are two types of resources available in the world- renewable and non-renewable. These
are providing various goods that are responsible for improving the living condition as well as
improving the financial status of the country (Cassidy and Kosey, 2015). In economics, there
is phenomenon of demand and supply that is prevalent in deciding the prices of the goods.
This is because there are numerous reasons that leads to the availability of the goods and
whether or not it satiates the demand of the people. This report sheds some light on the
production and sale of gas in Australia and the factors that affects its price or availability. The
period for the study of this report is 10 years.
Crude oil is primarily factor that is responsible for the fluctuations that arise in the retail price
of the gas. There are certain other factors that are prevailing in the country such as the
demand and supply of gasoline which are responsible for the price change. In economics, the
phenomenon of demand and supply of a particular good has significant impact on its prices.
This is according to the demand needs and the quantity of supply available. As a large
number of countries import crude oil, its trade in the international market is done by the
strongest monetary value that is the USD (Mikhaylov, 2018). It is so because US holds the
highest position in terms of commodities transactions, which is why major trade activities are
dominated by the US Dollar.
The rice of the gas is determined on various factors. The main price is quoted from the point
of origin that is the place where the oil is dug out from the oilfields. This is then impacted by
the demand and supply factors. Mostly South Arabian countries have oil wells and major part
of the trade occurs with Iran. If the production of the oil is less in a year, then the rates of the
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oil shoot up. The final consumer price of the oil is not based on the trade price, but the govt.
adds certain tax on it before providing it to the customers. These are few factors that can be
held responsible for the decrease in the supply of oil. There is a certain period in the year
where the price of gasoline is usually high. It is in the peak of summer and spring. In this
period, people prefer to use their vehicles more for commuting. The oil is consumed for
different purposes and the oil is then processed accordingly for the use of particular purpose.
If the gasoline is more refined, then the prices are sure to surge up. One more reason for the
increase in the price is the tax levied by the govt., this helps them in making revenue.
There are certain factors that affect the automotive prices of fuel like diesel, petrol and LPG
in Australia. These are segregated into three divisions:
 Different percent of tax levied on the nature of good.
 Import and Export Duties.
 International Benchmark Price (Timilsina, 2015).
Changes in the international price are the first most reason for the increase or decrease of the
oil and gasoline prices. The prevailing rates are dominant for 50 % of the petrol and 70% of
the diesel prices. Constant changes in the prices of the oil are not a healthy sign for the
economy. This affects the process of the international market and the stock exchange trade.
The fluctuating prices are also affecting the purchasing power of a common individual. The
oil is also used fuel for transportation purpose either for buses, trains and airlines. Even a
slight increase in the prices tends to increase the cost of these services. Another reason that
can be held responsible for the up and down of the prices is due to the difference in the
exchange rates. Basically, the currency of the country from where the oil is imported is
different from that of Australia and as per trade in the international market the exchange rates
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vary. Most of the trade occurs in from US dollar and if the rate of the dollar is high at the
time of trading, then the transaction will also be costlier for the country.
In the present period, the terminal gas price that is being paid by the retailers is 102.1
cents/litre in the city of Melbourne and 102.6 cents per litre in the city of Sydney. The current
price of the oil is at its 12 year lowest. This is because the oil production in Iran is surging.
Even though, the price of oil has decreased in the international market, it is still to be applied
on the domestic market by the govt. There are several reasons why the oil becomes costlier
till the time it reaches the common man. This is majorly attributed to the refineries of
Australia. These companies take cheaper inputs from the traders when they are trading for oil
and then convert it or process it into petrol which is then consumed by the citizens (Baffes,
et.al., 2015). They earn profit through this method. Though it is not openly discussed, but few
more practices of such kinds are taking place in various parts of the country which has in turn
affected the price of the oil. It can also be attributed to the demand and supply position. If the
demand for fuel is higher than that of the stock of supply, then these activities take place at
higher level. Few of the refineries in Australia dealing with such activities are Viva Energy,
Caltex, ExxonMobil and BP.
The supply and demand phenomenon is the reason witnessed for the fluctuation in the prices
of gas in Australia. The impact of oil prices is a serious cause of concern in the international
market. The fluctuation of the prices also impacts the economy of the banks. Banks provide
loans to the oil and gas companies on higher interest and if there is fall in the price, it leads to
their loss (Shi and Variam, 2017).
The demand and supply factors that needs to be considered for concluding the factors
responsible for the fluctuation in the prices of oil in Australia are mentioned below:
Supply Factors
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 The production rate of oil in the Middle East Companies.
 The stockpiles size of the crude oil which is very important to safeguard the changes
that are seen in the prices of oil.
 The size of the current existing reserves of oil wells in the Arabic Countries.
 Cost of development of new oil wells.
 Impact of issues such as unplanned war, coarse weather conditions, treaties.
 Cartel policies related to the production of oil (Breunig and Chia, 2015).
 Growing Demand of Oil in the other countries.
 Refining the oil for different purposes.
Demand Factors
 Increasing Price of the oil.
 Purchasing power of the sections of the country.
 No of vehicles per house.
 Maintenance cost of the vehicles.
 Several types of taxes levied by the govt.
 Weather conditions in the country.
 Shipping cost of oil.
Below provided is the graph representing the change in the prices of oil in Australia
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Source: (Levashov, 2019)
The demand of petroleum products and other items have built up a lot of pressure for the
supply of oil and related items. The population of the world has been soaring in the past few
years and the along with that the needs of the people are also surging high. These increasing
rise in the demand is the biggest factor that is churning the demand and supply phenomenon
in the economy of the Australian govt.(Baffes, et.al., 2015)The govt imports oil and they
prepare a budget every year. If the needs increase, the govt. has to pay more to fulfil the
needs, but this happens with certain costs.
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If the govt. shells out extra capital for the import, it increases the taxes that are to be paid for
the consumption of oil at the domestic level. This varies from state to state. Not everyone is
capable to paying the set taxes. There are certain methods that are adopted by the govt. to
maintain a reserve of oils for adverse situations like war or any natural calamity.
The appreciation of the Australian dollar has helped the country lessen the burden from the
country in terms of exchange rates. It has also positively affected the business and consumers.
The use of oil is for the domestic purpose as well as an input for the production process. As
per the Australian economy, the value of oil consumed per unit of the total GDP is 40%
(Timilsina, 2015). It is such that the oil consumption is gradually rising more in the
industries. This has also been a factor when it comes to a sharp rise in the price of the crude
oil. Though the companies are solely responsible for the payment for their consumption, yet it
does have a significant impact on the Australian economy.
The external environment is also responsible for the fluctuation in the prices of the oil. The
trends followed from the 1970’s are completely different from that of now. The oil shocks in
the early 70’s are very different from that of now. It is seen that a largely selected supply
shock has led to rapid escalation in the prices, which has been controlled after formation of
several stringent policies.A recent upward trend in the prices was noticed in mid-2005, it was
responsible for a strong increase in the demand of oil against a very weak background of
supply.
It is also been observed by various economists that there has been a rapid increase in the
emerging economies and this has been associated with the increasing use of oil per capita.
This is due to the rising population and their needs. There are certain countries that are solely
responsible for the increased consumption of oil, one of them being china. It is indeed a
difficult task to satiate the demand of all the countries. There are certain methods that are
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being adopted by countries to manage the rising demand. There are various products that are
being formed from petroleum, the demand for the same is also rising rapidly in the
international market. Various companies are indulging into substitutes which are extremely
harmful for the environment (Mikhaylov, 2018).
It is been anticipated that the demands are going to only rise further in the coming period. For
this, countries have to take measures accordingly. The trends related to the demand and
supply pattern has to be studied profusely and it also has to be monitored closely. There can
be situations in the future that the supply of such items will be relatively low. To counter this
situation, proper measures like to preserve the resources should be taken. The natural
capacity of the earth to provide oil is declining gradually. The development of oil fields in the
international market is determined by several factors such as rising costs and political
uncertainty (Cassidy and Kosey, 2015). Oil companies are also facing tough competition in
providing sustainable oil resources.
To conclude, it can be rightly said that the world economy for any particular object runs on
the factors of demand and supply.This is applicable to other products as well. Oil being one
of the most crucial resource and is beneficial for lot of purposes. The demand for crude oil
will be increasing in the near future. This is mainly due to the increasing population and
various innovations that are taking place in the world. The prices of oil have considerably
decreased in Australia for past few years. Though, the common people are yet to face more
relief in this area. There is a combination of factors that are responsible for the consumption
price. There are various policies framed by the govt. for the distribution and use of oil.
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Q. 2
The theory of specialization and trade is a very diverse part of the micro-economics. It is an
important aspect of the economy that has significant impact on the trade relations between
two countries. Under the phenomenon of specialization and trade, the countries that do not
produce oil and its relevant items trades with the counties that are producing oil. This can be
noted as barter trade that was held in earlier times. In return of the crude oil, countries have to
export items like food, clothes, spare parts, machinery and other consumable items. This is
the basic concept of trade between two countries and it helps in boosting the economic
conditions of both the countries respectively. Every country is enriched with certain specific
resources. So, to create a balance in the economy, these resources are being sold of for better
and efficient utilization (Edwards, et.al., 2015). When a country indulges in import or export
of specific products, they save themselves from various manufacturing costs involved in the
entire process.
The theory of specialization and trade has a significant impact on the costs of the heavy
industry of Australia. In the period of 1900, the prices of gas were very low in Australia. The
consumption was also very low comparatively. The rate of tax levied or implied on the
transactions related to gas were also very less. Trade was less complex with fewer
applications and process. The economy of the country was also balanced in terms of
expenditure related to this particular segment. There were numerous reforms made in the
energy sector for increasing the levels of productivity in the country. Increase in the energy
production meant more supply. These reforms led to competition in prices in the international
market and this was responsible for trading with higher costs. These reforms introduced by
the Australian govt. brought significant change in the production and prices of gas and energy
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(Schandl, et,al, 2016). Certain policies and decisions taken by the Australian govt. is
responsible for extremely high escalation of the prices and this has brought down negative
impact on the economy of the country.
The modern economy is characterized by the exchange of goods and services and
specialization of production means. Specialization involves labor, machines, manufacturing,
regional and local specialization.
Specialization and trade involve the method of production under which the company focuses
on the products or goods which have got k=limited scope for getting a high amount of
efficiency. Many of the countries specialize in goods which native to their part and in
exchange, they trade for the other gods and services from different countries (Capello, 2015).
Specialization involves the various communities, groups or the organization in which each
member take up the particular responsibilities for the successful outcome.
There are two types of specialization which are - Microeconomic specialization - Here
specialization occurs in an individual manner which can be in the form of the labor or the
career specialization. For example – each person of a group has got their own different talent,
skills and the abilities to perform a particular task.So, micro specialization helps in exploiting
these different and unique talents and assigns the people in the areas in which they can
perform best as per their skills and ability.
Macroeconomic specializationinvolves the firms who have realized about the comparative
advantages which mean the ability or skill to produce the services and goods at the lower
opportunity and the marginal cost than the other product (Grman, et. al., 2012).
Whenever an economy specializes it gets the advantages from the foreign trades such as if a
country can produce the apple at less cost than the banana, that country can specialize and put
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all its resources for the production of the apple and using some of them for the trading of the
bananas.
There can be various Key points regarding this such as - With the help of the comparative
advantages specialization can help an economy to produce more.Macro specialization
involves the benefits that an economy holds in the process of production, and micro includes
the individual components of the economic and the individual actors.
Australian industries and the communities have been enjoying the lower energy price for the
long decades without getting any price shocks. This has changed now as electricity and the
gas prices in Australia have rapidly increased. In the year between 2007 and 2013,the price of
the electricity and the gas have risen various times and in some of the states of Australia, it
has risen for more than 100%.
There can be various causes of this increase in the price as these prices are related to the
economic regulations of the networks in some of the big states and also due to the mitigation
measure of the greenhouse gas. In the year 2007-08, it was clear that the rise in the price of
the energy is because of the regulatory outcome from the reviews of the network pricing for
the NSW distribution companies. NSW network income determination was first under the
Australian regulator of energy from the year 2009 to 2014. High capital expense rates were
granted for the networks, in the NSW and Queensland which set the major increased energy
price in these states (Parliament of Australia, 2013)).
Electricity was the traditional wisdom of the energy industries which was also inelastic as it
is not affected by the changes in the price. The consumption of electricity was always high
even during the time when the trends were down. The rise in the price of the electricity was
due to the high greenhouse gas mitigation policy which further stated that the demand of the
energy was elastic due to which there was fall in the demand of the electricity because of that
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