Report Topic: Petrol Prices in Australia

Petrol prices in Australia have been rising steadily through all of 2021 and have reached new highs in March 2022. With fuel cost being one of the key components of the household budget, the rising price of petrol has received a lot of attention in the popular press as well as among the policymakers at the various levels of government. In this report you will look into the factors that drive these changes in the petrol market as well as evaluate some of the policy proposals aimed at addressing the rising cost of petrol.

Question 2. [5 marks]

As we know, petrol is made from oil. Australia's own production of oil is not sufficient for the needs of the domestic market. Consequently, much of the petrol is either imported from other countries or is produced domestically at the two domestic oil refineries in Geelong, VIC and Lytton, QLD, using the oil sourced from the global oil market. Consequently, to understand the petrol market we need to look into the global market for oil first. For the purposes of this question, we will assume that the global oil market is competitive. Use the demand and supply model to explain how the price of oil is determined in the global market. Briefly discuss the factors that influence the supply of oil (supply shifters) and the factors that influence the demand for oil (demand shifters). Which of these factors do you think are responsible for the recent price dynamics in the oil market? Illustrate your answer on a graph, including all relevant supply and/or demand shifts and the corresponding changes in the equilibrium price and quantity.