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.
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.
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.
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.
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.
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.
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.
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).
The retail petrol prices during the given time period can be summarised with the aid of the following histogram.
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
The average monthly petrol price comes out as $122.19 which is slightly lower than the corresponding median value of $124.20. The variation in the retail petrol monthly prices is quite moderate and not high as is apparent from the various measures of dispersion such as standard deviation, IQR etc. Also, there is presence of negative skew because of the very low prices that were seen during 2008-2009 (Eriksson & Kovalainen, 2015).
Based on the above histogram, it becomes apparent that unusually high crude oil prices i.e. in excess of$ 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 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).
The scatter plot to highlight the underlying relationship between crude oil price and retail petrol price is highlighted as follows.
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).
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
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.
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.
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.
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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