Oil demand and supply is has a close relationship with its price (Carollo, 2012). This paper shall consider the various theories that determine the price of a commodity. Australia is one of the biggest importer of oil. Thus, it can be argued that holding all other impacts constant, it has benefited from the fall in oil prices. Where the importing economies have greatly benefited, losses has accumulate to the exporting firms. The paper will provide insights on whether in future the oil prices will be lower or high. It has been argued that the world supply of oil has been very high in the past 3 years. However, the growth in demand is at a lower rate. The paper shall consider the action that could possibly make the oil price rise to at least a fair level. This study will be useful to the oil producing economies as it will help them predict the future of their operations. It will create awareness on the government to understand the risks facing its oil producing and refining companies and initiate actions that would prevent them from closing down. Recommendations provided may be used by the government in choosing its policies.
The article under analysis is “Why do oil prices keep going down?” by Arak and Tschinkel (2016). The article highlighted that there is a great oversupply of oil from US and the OPEC economies (McGrath, 2015). Although the price have been too low, none of the major producers is agreeing to cut its production with the intention of pushing up the prices. If the oversupply continues, many economies will not be able to stand making huge losses and will opt to terminate their production. Many exporting countries have been greatly hit by the price slump. Low oil prices have negatively affected the global stock markets; many stocks were recorded to fall as a result (Herron and Burger, 2016). The price of oil in 2016 was at the all-lowest level for 12 years. Arak and Tschinkel (2016) noted that a year earlier (reference year 2016), the price per a barrel of oil was selling at more than $ 100, but in 2016 it sold for only $ 27. This is a greatest price cut ever. Since cutting of production by US and the OPEC economies wasn’t agreed upon, this situation was expected to become even worse. The behavior of the oil market is contrary to what economics suggests it should be.
The prices are too low but the producers are still increasing their supply and the demand is weak (Lannin, 2015). Generally, it is expected that a lower price would discourage supply. This therefore makes the oil market to be related to the oligopoly market structure. In this market, the action of every supplier is interdependent such that one supplier’s decision affect all the others. In this market, increasing the price of output in not a common strategy; the other producers always fail to raise their price and hence the supplier with the high price loses its market share. But when price is cut, every other supplier cuts own price so as to ensure that the initial market share is not lost to the leading supplier. The rise in oil supplier at very low prices indicates that the producers are competing in terms of quantity. Even at very low prices, the biggest producers are able to make some profits since they have economies of scale.
At the beginning of 2016, the demand for oil was lower than two million barrels in a day. The article noted that demand was expected to shrink further even after the supply continued surging. The fall in prices has resulted in Australia cutting its production and depending more on importation (Vivoda, 2012 and Frydenberg, 2016).
Graph: Australian crude oil production
Source: Tradingeconomics.com (2017)
Initially the production level was very high but has kept falling with time. This means that demand for oil in Australia is satisfied through huge importation. The trend for 10 years is falling. This has contributed to loss of self-sufficiency.
Graph: Australia oil self-sufficiency
Source: Queensland Energy Resources (2013)
The decline is production from 2008 to 2030 was from projected to be from 183 million barrels to 83 million barrels. For the same period, it was also projected that demand will grow from 341 to 474 million barrels. Queensland Energy Resources (2013) noted that in 2013 the level of oil importation in Australia was 158 million barrels and projected that this is going to increase to 335 million barrels by 2030. High importation will be very costly. Compared to the projected production level, Australia will be producing less than a quarter of what it will be importing. The supply gap is as shown below.
Fig: Production and consumption of oil in Australia
Source: Vivoda (2012)
Although the prices of oil has decreased, it hasn’t contributed to a high influence on the quantity demanded. The reason is that oil demand is inelastic to price changes. Oil price rise would only be achieved if a production cut is agreed by the OPEC economies.
The economics situation of low oil price is very attractive to the Australian economy since it’s an importer, however, the situation probably won’t last for long. Some years to come, the oil price might get back to normal high prices. So the idea of neglecting production and increasing overdependence on importation is a bad idea for the Australian economy. The government should focus on improving its production level since this is the only quantity it has complete control on. This could be achieved through ensuring that the production costs are maintained at lower levels especially this period of low oil prices. This is to make sure that their profit margins are not greatly impacted owing to high production costs. For price to go up, the US and OPEC should agree to cut the level of their production.
The price of oil in Australia is influenced by the global demand and oil supply. Though the prices are too low on world assessment, the Australian oil price is higher. This is because, there is no oversupply of oil in Australia. The economy is importing quantity level that the Australian production cannot meet. Importation taxes and shipping costs is what causing the prices to remain higher. The reliance on importation will be dangerous to the Australian economy in the period to come. Since it’s projected that quantity produced will fall in years, the costs of importation will greatly rise. Action should be taken now before the situation worsens.
Arak, M. and Tschinkel, S. (2016). Why do oil prices keep going down? [Online] The Conversation. Available at: [Accessed 23 Apr. 2017].
Carollo, S. (2012). Understanding oil prices: a guide to what drives the price of oil in today's markets. 1st ed. Chichester, West Sussex: John Wiley & Sons, Ltd.
Frydenberg, J. (2016). Oil slump means we must boost productivity. [Online] Financial Review. Available at: [Accessed 24 Apr. 2017].
Herron, J. and Burger, D. (2016). U.S. Stocks Close Lower After Late-Day Rally. [Online] Bloomberg.com. Available at: [Accessed 24 Apr. 2017].
Lannin, S. (2015). Oil price falls below US$50 because of oversupply and weak demand. [Online] Abc.net.au. Available at: [Accessed 24 Apr. 2017].
McGrath, P. (2015). Oil price tipped to remain depressed to but petrol prices on the rise. [Online] Abc.net.au. Available at: [Accessed 24 Apr. 2017].
Queensland Energy Resources (2017). Australia's oil supply and demand | Queensland Energy Resources. [Online] Qer.com.au. Available at: [Accessed 24 Apr. 2017].
Tradingeconomics.com. (2017). Australia Crude Oil Production |1994-2017 |Data |Chart |Calendar. [Online] Available at: [Accessed 24 Apr. 2017].
Vivoda, V. (2012). Australia’s growing oil imports are an energy security issue. [Online] The Conversation. Available at: [Accessed 24 Apr. 2017].