Australian Oil Trade: Australian Economy Essay

Question:

Discuss about the Australian Oil Trade for Australian Economy.

Answer:

Introduction

Oil is an important resource to the Australian economy just like in any other world economy. Oil is not produced in many economies; thus trading occurs because all the nations in the world are in continuous demand for oil. The oil producing economies export their surplus to the non-producing ones. Some oil producing nations also may fail to have the potential to produce oil that would meet the demand for the country. This means that there is deficiency of supply in these nations. Thus, an oil producer may also be importing from other producers. Australia is one of the economies that produces and imports oil at the same time (Markus, 2014). The demand for oil determines the quantity of oil that is to be imported over the domestic produced quantity (Matsushita & Schoenbaum, 2016). The oil supply and demand determines the price at which oil is sold.

According to Aip.com.au (2013), the Australian major source of oil is Singapore. For some years, the Australian economy have benefited much from the low price on oil. There has been an oversupply and a deficient demand that has been contributed by oligopolistic competition among the oil producers. However, the low oil price has impacted the Australian oil industry as will be represented in the analysis. The analysis of demand and supply will help the business investors in their pricing decisions. This paper will also help the government on the negative impacts of over relying on cheap oil importation.

Analysis

Frydenberg (2016) noted that there is lost control in the oil prices and thus the only option is to boost the productivity on the oil manufacturing companies in Australia. This was in his article “Oil industry slump means Australia has to boost productivity” where he pointed out of the sustained pressure in the gas and oil industry. The oil prices had reduced by 78.57% as from 2008 to 2016. In 2008, a barrel of oil was sold at $140 whereas in 2016 this price had declined to $30. Given that manufacturing cost in Australia are way high, it became more expensive to produce oil and thus a shift to over dependence on importation (Vivoda, 2014). The low oil price had the greatest impact on the oil producing nations especially those dependent on oil as their primary source of income (Letts, 2015). Such economies include Saudi Arabia, Russia, Nigeria, etc. The price have gone down to extreme level and this has been for a long time now and this has raised doubt of whether the oil prices will come to recover in the future (Koremans, 2015). This doubt has made it more difficult for the oil producing firms to get capital to facilitate their survival as the banks are not willing to lend to them as there is high risk of default if the price fails to recover (the price may continue falling).

Fig: Falling self-sufficiency in Australian oil production

Source: Qer.com.au (2013)

Self-sufficiency is falling in Australia as the production is being neglected to avoid rising production costs. The projected decline is 83 million barrels as at 2030 compared to 183 million barrels in 2008. The low price has slowed down the shifting of consumers to renewable sources as there is much benefit buying at a lower price.

Fig: rising Australian oil Consumption but a declining production

Source: Vivoda (2012)

The growth of population, burgeoning middle class and rapid urbanization has led to the expansion of oil demand. Initially, the world’s oil consumption level was at 84 million barrels every day; this has expanded to 94 million barrels as at 2016. However, the growth of demand has also been followed by a higher than proportionate expansion of supply to 96 million barrels every day. The gap between oil production and consumption is met from importation.

Currently the prices have started rising slowly after a cut in production by shale oil by 400,000 barrels every day. This is as a result of pressure from banks for this company to repay their outstanding loans of over $ 300 billion. This is a strategy of Saudi Arabia to kick the shale oil out of the market. The reduction in production by the major player in the oil market is going to continue falling if the prices do not rise significantly.

Recommendation

The Australian government should ensure that it support its oil producing companies by giving them subsidies to cover their increased production costs. With a low production cost, the Australian oil producers may be able to raise their production and sell at the low prices. Corporate tax is an important cost of manufacturing and its reduction on the oil producing firms would raise their productivity. The disapproval on the over reliance on importation does not mean that Australian government should not take advantage of the low oil price. It could build large oil storage equipment that could hold many barrels of oil to be used in case the prices went up.

Conclusion

If the government fails to intervene in the reduction of production costs, Australia will completely shift from oil production to importing. This would mean that future Australian oil supply will be at risk. Since the future is unknown, the major oil producers may feel like it’s time to limit supply and raise their prices. The rise in price would significantly raise the spending for the importing nations. If Australia neglects its production so as to import more at the lower price, a rise in price would leave it with no other option but to increase its oil expenditure.

References

Aip.com.au. (2013). Australian liquid fuel supply and demand. Aip.com.au. Retrieved 20 August 2017, from

Frydenberg, J. (2016). Oil slump means we must boost productivity. Financial Review. Retrieved 20 August 2017, from

Koremans, S. (2014). What the oil price collapse means for Australia and world economies. NewsComAu. Retrieved 20 August 2017, from

Letts, S. (2015). Oil demand at five-year high, supply glut keeps prices low: IEA. ABC News. Retrieved 20 August 2017, from

Markus, U. (2014). Oil and gas: The business and politics of energy. Basingstoke: Palgrave Macmillan.

Matsushita, M. & Schoenbaum, J. (2016). Emerging issues in sustainable development: International trade law and policy relating to natural resources, energy, and the environment.

Qer.com.au. (2013). Australia's oil supply and demand. Qer.com.au. Retrieved 20 August 2017, from

Vivoda, V. (2016). Australia’s growing oil imports are an energy security issue. The Conversation. Retrieved 20 August 2017, from

Vivoda, V. (2014). Running on empty: Australia's risky approach to oil supplies. The Conversation. Retrieved 20 August 2017, from

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