Question 4

Read the following article ‘Why is petrol so expensive right now?’ (by Stuart Marsh) in Oct 2021 (https://www.9news.com.au/national/petrol-prices-australia-why-is-it-so-expensive-right-now-explainer/b7f466db-731c-4dad-926e-744957335c3d). You are required to write an essay and your answer should address the following questions:

a. Discuss reasons for high petrol prices in October 2021.

b. Discuss whether the demand for and supply of petrol is elastic or inelastic in the short run. What about in the long run?

c. Do you believe that the petrol market is close to a perfectly competitive market? Explain why or why not.

d. If governments decided to limit petrol price increases in the future, what would be the effects of such a policy?

Research, Presentation

Petrol prices soar to record highs across Sydney, Melbourne and Brisbane

“Why is petrol so expensive right now?

Motorists are continuing to be slugged with all-time high petrol prices, with three of Australia's biggest cities setting new average price records throughout October.

Sydney broke new ground on October 18, with the average price for regular unleaded breaching 170 per cent per litre, following in the footsteps of Melbourne (174.7 cents per litre) and Brisbane (176.6 cents per litre).

Worryingly, experts say there is little sign of a reprieve on the horizon for motorists and their wallets.

So just why are fuel prices so high, and who sets them? As a result, stocks have been quickly used up and many households have been unable to buy.

The short answer is that the price of crude oil – the major ingredient of petrol – is currently at multi-year highs.

The long answer is that the world is waking up from its coronavirus-induced economic slumber and restarting the world's economy calls for huge demand on natural resources.

Crude oil is a finite resource and supply cannot keep up with the demand, meaning the cost of the resource itself is rising.

How does the price of crude oil affect the price of petrol here in Australia?

Not even our little island on the other side of the world can escape the all-encompassing effects of rising oil prices.

Put simply, the more a barrel of oil costs to buy, the more expensive it is for a fuel refinery to take that oil and distillate it into the product you pump into your car.

The more expensive it is to create petrol, the more petrol stations are forced to raise their prices to cover overheads such as wages, electricity bills, storage and cleaning costs and, of course, profit.

So is crude oil the only factor that affects petrol prices?

No, but it is a major component.

Other factors that can pull petrol prices higher or lower include local competition - you're more likely to get cheaper fuel in a city full of petrol stations than in the outback - the value of the Aussie dollar compared to the US dollar and costs like the Australian Government fuel excise.

As of August 2021, the price you pay for unleaded petrol includes the Australian Government fuel excise set at 43.3 cents per litre.

You're losing me. Who sets the price of petrol and why do all the petrol stations seem to have similar prices?

Okay. Without getting too technical, it is the market that sets the price of petrol.

Petrol stations must make sure their business overheads are covered, that they aren't losing too much business to the competition, and that they are making a profit.

All of this tends to happen in a fairly narrow "band" of prices, so it doesn't seem too obvious.

For example, independent petrol stations may not have to pay rent or have lower staffing levels, so might make the decision to offer lower fuel prices and work to a volume-selling strategy.

Conversely, big chain petrol stations may be able to offset costs of running stations by offering cheaper fuel and hoping more motorists shop there.

It's a tight and murky budget that's constantly changing to make the business of selling petrol worth being in.

Petrol retailers keep a very close eye on what each other is charging and adjust their prices to suit.

What's to stop petrol stations from hiking up prices for no reason so they make lots of profit?

There's a few safeguards in place to prevent outrageous price rorts.

The first is simply market forces: if one petrol retailer decides to charge (for example) $10 a litre for petrol, and another charges a normal rate of $1.50, it only makes sense that the more expensive station will lose all of its business to the cheaper one.

I like to use the example of two coffee shops on either side of a busy road. If one shop charged $8 for a coffee while the other charged $4, consumers would have to make the decision if it was worth an additional $4 to buy the more expensive coffee.

Because the quality of Australia's petrol is regulated, it's unlikely that motorists will pay more for a similar grade of fuel because of branding.

Another is the Australian Competition and Consumer Commission (ACCC).

The ACCC does not set fuel prices but monitors them on a daily basis. It has powers to investigate activities like anti-competitive behaviour such as secret meetings to "agree" on a standard price.

... [edited by examiner for assessment purpose].