Global Rise of Oil Prices (Free Essay Sample)

Oil prices on the global market are determined by crude oil prices. In February, the price of international refined and average retail gasoline increased due to recovering oil demand and the global relaxation of COVID-19 limits. Due to the Russia-Ukraine crisis, prices have risen even higher. A barrel of crude oil currently costs around $100.

Fuel prices in the Australian market seem to be horrendous. Fuel prices have risen to tiers not seen since early 2014 due to increased demand and hostilities in the country's five largest cities. The price of refined gasoline and retail gasoline in Sydney, Melbourne, Adelaide, Brisbane, and Perth rose in February and has continued to rise in the first two weeks of March. “The shocking events in Ukraine have forced crude oil prices even higher, as Russia is a major supplier of oil.” (Tom Mcllory, 2022). In the last year, the average petrol price increased by 41.4¢ per liter about 34% per cent. This trend can be seen as an example of a positive analysis that focuses on what is currently unfolding and is connected to what is and value-free claims. In the case of advocating price reductions and stabilization, this would be a normative analysis or a strategy to determine what should be done in positive analysis, we simply examine the event and investigate it using a theoretical or empirical framework.

Oil prices are determined by demand and supply. Price change often leads to a change in the quantity demanded and supplied. These prices are affected by several elements within the global market

Factors affecting demand:

• Economic growth: As the economy continues to grow so does the demand for petrol and vice versa. Conversely, demand decreases when the economy goes down.

• Environmental factors: the combustion of petrol as a fossil fuel plays part in polluting emissions (e.g., carbon dioxide) which are harmful to the environment. With the reduction of CO emissions and use of electric vehicles and friendly environment technology and electric vehicles, it leads to the fall in demand for petrol.

Factors affecting the supply of petrol:

supply is usually determined by elements such as new economic cycle, reported trends and contemporary policies

• Political stability: supply of Petrol is affected by the political instability in counties that produce oil.  

Political instability in this case has greatly contributed to the rise of oil prices. The current price dynamics involving Russia’s invasion of Ukraine have led to an even greater increase in oil prices. High prices lead to an increase in quantity supply and decreased quantity of demand. As the price went from $1.37 per litre to $1.55 (Australian institute of petroleum 2022), People turned to a more cost-effective alternatives such as carpooling and public transportation ultimately leading to a decrease in demand. Above is a graph illustrating the current demand and supply of crude oil in the global market

Various factors that affect the demand and supply of products. Factors responsible for the recent price dynamics include levels of oil consumption, political stability, and costs of production. 

Level of oil consumption: This affects demand. The level of consumption increased due to increasing transportation network and increasing economic activities leading to the increasing in oil consumption. Thus, leading to high demand for petrol. 

Political stability: The factor affects the supply of goods. The supply of Petrol has been affected by the political instability in counties that produce oil (Russia-Ukraine war)

Price in a market is determined by interactivity between supply and demand. It depicts the keenness of consumers and manufacturers are willing to go buy and sell a product. The Australian market on its own does not have sufficient requirements necessary for the production. It majorly depends on imports from other countries. We can conclude that prices in Australia are substantially influenced by the global prices. Generally, the petrol prices are higher the further the petrol travels to the pump. The present situation of the Ukraine-Russia war had a major impact on the global supply of oil as Russia is the major producer of oil products that affected the global supply of oil products. Due to the market being competitive, demand would increase causing the prices to go up with prosperous companies imposing high prices.

Treasurer Josh Frydenberg considered cutting of taxes by the government due to extreme rise of petrol prices. Excises are taxes that the government enforces on goods (Richard Webb, 2000).  After the extreme increase in petrol price due to political stability between Russia and Ukraine, citizens opted for a cheaper mode of transportation eventually leading the demand for oil to go down. Frydenberg proposed policy of reducing fuel excise tax as an aid for the citizens affected the demand curve. Oil being set at a reasonable price has caused the demand curve to shift right as the result of increasing demand. The supply would be lowered to maintain equilibrium.

The policy from the social welfare point of view might be considered a good scheme. “Fuel excise will be cut in half meaning the cost of filling up a tank of petrol or diesel will reduce, which will be applauded by many small businesses and their families,” (Hunter, 2022).  The policy creates a relief on cost of living in childcare system with parents having to drive their kids to and from school. It is beneficial to low-income earners and pensioners as well as taking off the pressure on power bills. However, this solution might not be suitable for the long run. In the recent interview (D. Keane 2022) Frydenberg said that what they were doing will be temporary and it will be targeted. Short run seems to be the best fit for the current situation as there might be a potential loss to the government if the policy were to be instated long term. Overall, the policy was well needed as it provides motorists a faster commute and keep their family well rounded.

References

ABC News. 2022. Treasurer Josh Frydenberg urged to cut fuel excise in budget amid soaring petrol prices. [ONLINE] Available at: https://www.abc.net.au/news/2022-03-13/treasurer-urged-to-cut-fuel-tax-amid-record-petrol-prices/100906370. [Accessed 6 May 2022]. 

Clegg 2022 pg. 55 – 77 Mcllory, T., 2022. Petrol prices hit eight-year high. [online] Australian Financial Review. Available at: <https://www.afr.com/politics/federal/petrol-prices-hit-eight-year-high-20220314-p5a4f8> [Accessed 5 May 2022].

News, B. and News, I., 2022. Explainer: Who is buying Russian crude oil and who has stopped - Times of India. [online] The Times of India. Available at: <https://timesofindia.indiatimes.com/business/international-business/explainer-who-is-buying-russian-crude-oil-and-who-has-stopped/articleshow/91159965.cms> [Accessed 4 May 2022].

Parliament of Australia. 2022. Petrol and Diesel Excises. [ONLINE] Available at: https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/rp/rp0001/01RP06. [Accessed 6 May 2022].

Sharafedin, B., Kelly, S. and Vicente Rua, P., 2022. As fuel prices rise to record highs, governments look for solutions. [online] Reuters. Available at: <https://www.reuters.com/business/energy/fuel-prices-rise-record-highs-governments-look-solutions-2022-03-10/> [Accessed 6 May 2022].