This essay is taking into account Australia as the country of analysis. The petroleum industry has been analyzed for its price fluctuations and the effect of government intervention on this industry has further been looked into. The current petrol prices in Australia are on a four-year high. This can be blamed on the effect of inflation as trends in the oil supply determine the price to a great extent at the global markets. The “Australian Competition and Consumer Commission” carried out a study and explored that the prices of petrol have risen quite dramatically after April 2018 in five biggest Australian cities that include Melbourne, Sydney, Brisbane, Perth and Adelaide. The prices rose to the highest point at 153.7 cents per litre from 138 cents per litre, which was the lowest point. Before this price rise, the petrol prices had remained stable (Aph.gov.au 2018). The price per litre has increased highly to $1.60. This price is almost 12% higher than the previous year’s prices. A wide range of factors can be held responsible for this rise in prices. These include the concerns over the supply situation in the Venezuelan market. The sanctions of the US possess the ability of renewing against the war of Iran and the tensions that are taking place in the Middle East. This ended up in significant rise in crude oil prices, in which it has reached its maximum in May in four years (Valadkhani and Smyth 2018). The Australian dollar value decline had a compound effect in causing the prices of oil to rise. In order to control petroleum price, government adapts strategy of price surveillance. The price regulation in the petroleum market is taken in three broad forms of price inquiry, price notification and price monitoring. The paper analyzes “whether government intervention should be continued in the petroleum market”. Direct price control is not a welcome measure to stabilize price. The paper provides three arguments to analyze the thesis statement.
Price ceiling refers to the policy of setting a legal maximum price, which is below the equilibrium price (Cowell 2018). In Australia, Price Surveillance Authority controls the wholesale prices of petrol. PSA decides the daily wholesale prices of petrol and diesel sold by major oil companies. The ceiling price is set depending on the estimated cost of imported refined petroleum product into Australia. It is in effect a form of import parity. PSA also sets the maximum charges of freight in Australia. Aim of PSA is lower the fuel prices within the country at the expense of consumers in the capital city. In reality however prices in the city market usually remain well below the maximum price The intense competition pushes prices to a considerable low level. This makes price ceiling non-binding in nature. Government thus has a little scope of doing much for consumers. In markets where wholesale price fails to recover the entire cost because of Ministerial intervention such a policy results in poor quality service, lower investment and lower competition. In metropolitan cities, because of higher competition, price ceiling fails to impose a constraint on market price (Chua, De Silva and Suardi 2017). Instead, such a price become a target for the companies where prices after the discounting cycle. It adds further volatility in market prices.
In case of binding price ceiling that is upper limit of price set below the equilibrium price the market ends with a supply shortage. The impact binding price ceiling on the petroleum market is described in the figure below.
Figure 1: Price ceiling in petroleum market
(Source: as created by Author)
In the given figure, demand and supply in the petroleum market is given as DD and SS respectively. Without price control measure price in the market is determined by independent forces of demand and supply. The corresponding equilibrium position in the market are is shown as E in figure 1. Now, consider the impact of a price ceiling where government sets the price below the equilibrium price at P1. At the legally set maximum price, petroleum becomes much more affordable compared to uncontrolled prices (Cowen and Tabarrok 2015). Demand thus increases to Q2. Supplier on the other hand reduce the market supply to Q1. Market thus suffers from a shortage of fuel which deteriorates social welfare.
Price Surveillance authority should discontinue regulation on prices of petroleum products as existence of effective competition in the wholesale and retail market makes such interventionist measure unnecessary. Further, in the metropolitan market setting of maximum wholesale price lead to volatility in the price cycle. The policy of price ceiling distorts market signals and lowers profit. There seems to be a misconception lack of competition increases petroleum prices to a much higher level than the desirable level (Li, Dodson and Sipe 2016). In reality however evidences do not support this claim. The regulatory measure to control price has several adverse consequences.
Despite government intervention through PSA to stabilize petroleum prices, price inquiry suggests that there still remain concerns regarding the level of prices and also there are some instances where such policy measures result in volatility in retail prices of petroleum. Common people is more concern with what is happening to retail prices and the associated uncertainty. Price volatility refers to a situation where different people face a different set of prices (Oczkowski, Wong and Sharma 2018). There is considerable concern regarding variation in offered prices in different outlets. The degree of variation in petroleum prices is also a matter of serious concern as prices may change over number of days or even in single day.
The fright charges add to the wholesale price to recover cost of transportation. The Commonwealth government however intervenes through Ministerial Direction requiring exclusion of storage and transportation cost from freight prices. There is a long term adverse consequences of Ministerial direction and non-recovery of transportation cost. Under recovery of transportation and storage cost creates pressure on suppliers to leave the market (Bell et al. 2017). The ceiling price of PSA behaves as an active restriction to in some region following its insufficiency in complete cost recovery.
Apart from direct price control, Australian Competition and Consumer Commission provides indirect assistance to the consumers. The government of Australia has brought in apps, which enable drivers to locate petrol pumps, which are delivering petroleum at minimised costs. The effect is deemed to be downward on the prices, as consumers now had an option to go to pumps that were offering petrol at comparatively cheaper rates and this led to lowering down of existing competition (Hashimi and Jeffreys 2016). However, government intervention when prices were on a four- year high was very vital to deter the price rise from increasing and thus avoiding failures in the market; however, the supply and demand condition might be affected. The economists have added that the long run demand for petroleum will remain unaffected or the impact will be negligible if taxing or removal subsidies are taken up. This leads to increased levels of innovation in the fields of fuel efficient cars which would benefit the environment yet the consumers will continue to be just as dependant on petroleum
The reduction of price cycle volatility has been made possible due to the intervention from the side of the Australian government which served beneficial (Dodson and Sipe 2016). FuelWatch is the app that the government introduced and this app has played a crucial role in monitoring the price of petrol and thus has enabled a higher degree of price certainty and higher transparency in the prices. This app is controlled by the Petroleum Products Pricing Act 1983 and this ensure that customers have all the information regarding the places that would be offering petrol at a lower rate in their locality (accc.gov.au 2018). This act enforces that all retailers must provide the price details of what they will charge on the next day for petrol between 2 p.m. and 2:30 p.m. and all the customers are notified by this app through hotlines, the notification of app, websites as well as other sources (Davey 2015). A competitive wholesale price environment is facilitated in the petroleum market.
Conclusion
The sky reaching prices of petroleum calls for government active policy measure to control prices in the market. One direct measure of price control is to set a legal maxim price which is lower than the equilibrium price. The Price Surveillance Authority of Australia regulates wholesale petroleum prices in Australia. Evidences however suggest that the direct price control measure is not much effective. Firstly, intense competition in metropolitan cities keeps prices well below the legal maximum price. The price ceiling thus becomes non-binding in nature. In case of binding price ceiling, the lower price leads to supply shortage in the market. Secondly, price regulation increases volatility in prices. The Ministerial Direction reduces available supply following non-recovery of cost. Thirdly, indirect assistance through launching different application program benefit consumers without any distortion in the market.
References
Accc.gov.au 2018. Australian Competition and Consumer Commission. [online] Available at: https://www.accc.gov.au/ [Accessed 29 Sep. 2018].
Aph.gov.au. (2018). Chapter 3 – The Petrol Price Rollercoaster – Parliament of Australia. [online] Available at: https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/economic/Completed_inquiries/2004-07/petrol_price/report/c03 [Accessed 29 Sep. 2018].
Bell, W.P., Wild, P., Foster, J. and Hewson, M., 2017. Revitalising the wind power induced merit order effect to reduce wholesale and retail electricity prices in Australia. Energy economics, 67, pp.224-241.
Chua, C.L., De Silva, C. and Suardi, S., 2017. Do petrol prices increase faster than they fall in market disequilibria?. Energy economic, 61, pp.135-146.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan International Higher Education.
Davey, A., 2015. Refinery Exchange Agreements: Pro?Competitive, Anti?Competitive or Benign?. Australian economics Review, 48(2), pp.150-162.
Dodson, J. and Sipe, N., 2016. Oil and mortage vulnerability in Australian cities. Planning After Petroleum: Preparing Cities for the Age Beyond Oil, p.129.
Hashimi, H. and Jeffreys, I., 2016. The impact of lengthening petrol price cycles on consumer purchasing behaviour. Economic Analysis and Policy, 51, pp.130-137.
Li, T., Dodson, J. and Sipe, N., 2018. Examining household relocation pressures from rising transport and housing costs–An Australian case study. Transport Policy, 65, pp.106-113.
Oczkowski, E., Wong, A. and Sharma, K., 2018. The impact of major fuel retailers on regional New South Wales petrol prices. Economic Analysis and Policy, 57, pp.44-59.
Valadkhani, A. and Smyth, R., 2018. Asymmetric responses in the timing, and magnitude, of changes in Australian monthly petrol prices to daily oil price changes. Energy Economics, 69, pp.89-100.
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