Comprehensive Economic Analysis of Australia's Oil Industry

This report provides a comprehensive economic analysis of the Australian oil industry, highlighting its contribution to the country's economic growth. It examines the key factors influencing the industry's performance, including rising demand driven by the transportation sector and global commodity prices. The analysis delves into the elasticity of demand and supply, the impact of government subsidies, and the effects of weather, exchange rates, OPEC policies, and political stability. The report discusses how technological advancements and legislative changes, such as those related to licensing and permits, and climate change initiatives, are poised to reshape the industry. It also explores market failures, such as reliance on foreign oil imports, and government interventions, including subsidies and regulations, and their impact on consumers. The report references various sources to support its findings, providing a well-rounded understanding of the Australian oil industry's dynamics and future outlook.

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Oil Industry 1
Noteworthy, the oil industry in Australia has contributed to the growth of the
country’s economy. The demand for oil has been fueled by the rise in the transportation sector
and the rising commodity prices. Alongside transport sector demand, Australian oil industry
performance is affected by weather, price, exchange rate, OPEC policies, and political factors.
The Australian oil elasticity of demand is less elastic as compared to price elasticity of supply.
Over the years, the Australian oil industry has suffered high prices thus necessitating intervention
in the form of subsidies and legislation. In the long term, technological policies, legislative
changes on licensing, permits, political stability in oil-producing nations, United States dollar
fluctuations and climate change initiatives have the potential to change the outcome of the
Australian oil industry. Also, the fluctuation of the exchange rate will determine the future
performance outcomes of the oil industry. Overall, the Australian oil industry has contributed to
economic growth through supporting businesses and transport through oil energy consumption
Worth noting, the Australian oil industry performance depends on both internal and
external factors. Specifically, the demand for oil has risen due to an increase in energy
consumption in the Australian transportation sectors (Parliament of Australia, N.d). Alongside,
the transport sector, most businesses in Australia are affected by oil prices because the supply of
goods or services to which oil is input will be affected on the supply side. The growth of the
transportation sector has increased the demand for fossil fuels thus the growth in demand for oil.
Also, economic growth in Australia and other emerging economies has grown the demand for
oil. Also, the injection of Australian government subsidies to the economy has grown the
demand for oil extraction and production. Particularly, the Australian government has introduced

Oil Industry 2
subsidies to Queensland, New South Wales and Western Australia due to the fact that they have
the largest fossil fuel reserves (Makhijani & Doukas 2015). In addition to the introduction of
subsidies into the oil industry has the potential to affect the demand for oil. Usually, subsidies are
meant to encourage the production of a good or service and the same has been introduced an
incentive to oil extraction and refining companies in Australia thus affecting the performance of
the Australian oil industry.
Additionally, the weather has an effect on the demand for oil due to the effects of winter on
refinery and transport operations. This is due to power challenges such as outages which might
slow down the oil extraction and refinery processes thus affecting the demand and price of oil
products. Specifically, weather changes affect the oil demand owing to the fact that it influences
the consumption of oil (Dike 2014). Worth noting is that weather such as winter might affect the
refinery process due to the fact that machines might work slowly due to the frozen weather thus
causing temporary shortages of oil supply thereby influencing oil pricing at the time.
Regarding oil supply, high oil prices encourage extraction of oil (Investopedia 2018). The
fact that oil prices are valued in the United States dollar makes the fluctuation of the dollar
impact on oil production. Undoubtedly, prices influence the behavior of consumption and
production. For production (Supply side).price increase encourages production. However, the
increase in prices of commodity goods such as oil leads to reduces consumption (demand).
Overall, United States dollar appreciation encourages oil extraction whereas dollar depreciation
discourages oil production (Beckham, Czudaj & Arora 2017).

Oil Industry 3
Pettinger, T. (2011). Factors Affecting Oil Prices in Short Term and Long Term. Available at
https://www.economicshelp.org/blog/3809/oil/factors-affecting-oil-prices-in-short-term-and-
long-term/
With reference to the figure above an increase in price from P1-P2 causes a rise in
demand as evidenced by D-D2 thus the assertion that price has an effect on the demand of oil.
On the supply side, a price increase causes an increase in the supply of oil hence the assertion
that price affects the quantity of oil production.

Oil Industry 4
Similar to other commodities and services, oil experiences price elasticity of
demand and supply. Unlike other products, the supply of oil is slowly affected by price changes
thus the assertion that oil supply is less elastic. For the oil to be less elastic in supply there must
be an increase in the unconventional supply of oils. Basically, price elasticity implies how supply
and demand forces of the economy respond to price changes (Konrad 2012). Essentially, a
product is considered elastic in the event that a small price change causes a large shift in the
demand curve. In the Australian context, the demand for oil is elastic.
Following the substitution of oil energy consumption with alternative energy sources
such as gas might affect the future performance of the Australian oil industry. Owing to the calls
for sustainable energy sources, there is more advocating for renewable energy sources such as
wind, solar and energy thus encouraging consumers to switch to sustainable, clean energy
consumption. This move might discourage fossil fuel consumption thus affecting the operation
of the Australian oil industry through revenue drop. Also, technological advancement might lead
to uncertainties in the oil sector due to the uncertain nature of innovations (Bocca 2015). The
desire to switch to renewable energy momentum has grown thus likely to reduce the desire of
energy production from nonrenewable energy sources such as oil thereby affecting oil industry
performance globally. Also, amendments to the existing oil industry regulations might impact the
production of oil in Australia. Specifically, any changes to the legal requirements affecting the
oil operations companies in Australia affect oil operations in the country.
For instance, any amendments to the offshore petroleum and greenhouse Gas and storage
Act 2006 will impact the oil industry performance. Also, any changes to the laws governing the
oil industry operations such as licensing, permits, refining, production and packaging of the oil

Oil Industry 5
will affect the operation of the Australian oil companies in case amendments are made to
existing petroleum laws. Usually, laws are applied retroactively hence raising the issue of
uncertainty prior to the enactment of such pieces of legislation.
Similar to OPEC decisions, political turmoil’s affect oil industry performance. More
specifically, the political instabilities in major oil-producing countries have the effect of affecting
oil industry performance through supply and prices. Owing to the commodity nature of oil as a
product, its supply is crucial to the pricing of other goods and services tow which oil is an input
thus affecting other commodity pricing. For instance, the Middle East disruptions have affected
the supply of oil due to the volatility of the region. Worth noting, the stability of Middle Eastern
countries is crucial to oil supply due to the fact that they own most of the global oil reserves
(Mahony 2018). Undoubtedly, pricing affects the demand and supply of oil (Investopedia 2018).
According to the laws of demand and supply, an increase in demand without matching supply
will lead to an increase in price. The price movements influence the behavior of consumption
and production hence the assertion that price affects both laws of demand and price.
Unfortunately, the Australian oil industry has experienced market failure necessitating
government intervention. Particularly, in the year 2018, 75% of Australian oil needs were
sourced from Malaysia and the United Arb emirates despite the fact that Australia has a
substantial oil reserve (Sutton 2019). Usually, market failure might occur whereby consumers are
being exploited thus necessitating government intervention. The introduction of licensing and
permits for oil extracting countries has led to the regulation of the oil extracting, refining
companies for the benefit of Australian consumers. Despite the allocation of subsidies, the
benefits are not significant for poor households this is because poorer households consume less
than wealthier households there causing inequalities. Also, energy sector subsidies might lead to

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energy shortages due to fixed prices (Sovacool & Jewell 2018).In a way, subsidies benefit
consumers rather than producers and the same can be applied to oil production thus reducing the
incentive for oil production thus leading to a shortage in oil production.
Overall, price affects the forces of demand and supply of any commodity and the oil
industry is no exception. Alongside price, OPEC‘s Quota system, weather, technological
changes, exchange rate fluctuations, and political factors influence the operation of the
Australian oil industry. The high oil prices have necessitated the intervention of the Australian
government in the Oil industry. However, the impact of subsidies isn’t always beneficial to poor
consumers. The Australian government introduced subsidies so as to protect its consumers from
high oil prices due to internal and external factors. Owing to the commodity nature of oil, pricing
fluctuations determine the pricing of other goods and services. Noteworthy, the Australian oil
industry performance depends on weather changes, political stability, exchange rate fluctuations,
legislation requirements, OPEC policy directives and technological changes in the industry in the
long term. Overall, the Australian oil sector performance has contributed to the country’s
economic growth.

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References
Beckmann, J., Czudaj, R & Arora, J. (2017). The Relationship between Oil Prices and Exchange
Rates: Theory and Evidence. Energy Information Administration.[Online].Available at
https://www.eia.gov/workingpapers/pdf/oil_exchangerates_61317.pdf[Accessed 9 May 2019]
Bocca, R. (2015). 4 factors that will affect long-term oil prices. World Economic Forum.
[Online].Available at https://www.weforum.org/agenda/2015/02/4-factors-that-will-affect-long-
term-oil-prices/[Accessed 9 May 2019]
Dike C.J. (2014). Does Climate Change Mitigation Activity Affect Crude Oil Prices? Evidence
from Dynamic Panel Model. Journal of Energy. Vol 2014, Article ID 514029,
Ibis world. (2019)..Oil and Gas extraction =Australia market research report. Ibis world.Com.
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mining/oil-gas-extraction.html[Accessed 9 May 2019]
Investopedia. (2018). How does the law of supply and demand affect the oil industry?.
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does-law-supply-and-demand-affect-oil-industry.asp[Accessed 9 May 2019]
Konrad, T.(2012).The end of elastic oil. Forbes. [Online].Available at
https://www.forbes.com/sites/tomkonrad/2012/01/26/the-end-of-elastic-oil/
#384b658836d6[Accessed 9 May 2019]

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Mahony, J. (2018).How can political events affect oil prices?. .IG.com?.98[Online].Available at
https://www.ig.com/au/news-and-trade-ideas/commodities-news/how-can-political-events-affect-
the-oil-price--42098-180209[Accessed 9 May 2019]
Makhijani & Doukas 2015. G20 subsidies to oil, gas and coal production: Australia. Odi.Org
[Online].Available at https://www.odi.org/sites/odi.org.uk/files /odi-assets/publications-opinion-
files/9992.pdf[Accessed 9 May 2019]
Parliament of Australia. (N .d).Australia's energy consumption, production, imports, and
Exports.[Online].Available at
https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Rural_and_Regional_Affai
rs_and_Transport/Transport_energy_resilience/~/media/Committees/rrat_ctte/
Transport_energy_resilience/c02.pdf[Accessed 9 May 2019]
Pettinger, T. (2011). Factors Affecting Oil Prices in Short Term and Long Term. Economics
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prices-in-short-term-and-long-term/ [Accessed 9 May 2019]
Sovacool, B & Jewell, J. (2018). Fossil fuel subsidies need to go – but what about the poorer
people who rely on cheap energy?.The Conversation.[Online].March 2018.Available at
https://theconversation.com/fossil-fuel-subsidies-need-to-go-but-what-about-the-poorer-people-
who-rely-on-cheap-energy-92388[Accessed 9 May 2019]
Sutton, M. (2019). Government accused of doing 'bugger all' to shore up Australia's fuel
security. ABC news. [Online].Jan 2019.Available at
https://www.abc.net.au/news/2019-01-23/government-accused-of-doing-little-to-improve-fuel-
security/10732978[Accessed 9 May 2019]