Introduction
The rise in the price of gasoline is a widely discussed topic in Australia. This market affects and significantly affects the lives of both end consumers and at larger and larger levels of the economy. Since the Morrisson government significantly promoted the idea of reducing the pressure on the cost of living, one of the levers was the reduction of fuel excises (Australian Association Press, 2022). Although the oil and fuel market is sufficiently dependent on macroeconomic processes, being also an independent determinant of its changes, this paper will consider the microeconomic factors of this phenomenon. Although the plan to cut excise taxes has begun to fail, a much more severe impact of the rise in oil prices is on the purchasing and solvency of the population burdened with mortgage loans and other debt obligations (Australian Association Press, 2022). Several reasons led to such a problematic situation at once, each of which will be considered through certain concepts and models of microeconomics.
Concepts and Model
The first apparent reason that led to this outcome of events should be viewed through the prism of trade restrictions. Global demand, including Australia, lost a significant player in the form of Russia after the G7 countries banned the purchase of raw materials in the region (Australian Association Press, 2022). The aggravated geopolitical situation and global unification processes against the aggressor caused this embargo. Far from every country or region can supply oil in the exact quantities to all regions in need: at least, it takes time and resources to establish logistics, contracts, and operations, which significantly increases the final price of the product (Borland, 2020). In this situation, not taxes or distance serve as a barrier, but the global sanctions policy towards Russia, which makes this type of restriction nontariff. At the same time, in this situation, the basic principles of protectionism aimed at protecting the local market are far from being the main reason for price increases (Kilian, 2022). The natural decline in trade is due to reduced purchasing power against the backdrop of increased excises.
Another model that can describe aspects of this process is government intervention. Initially, this problem existed even before the spring of 2022, when the restrictions mentioned earlier appeared. Scott Morrisson has repeatedly emphasized the problem and, under pressure from independent senators, Labor, and the country’s people, announced a reduction in excise taxes on fuel (Carp and Hurst, 2022). In fact, a reduction in excise taxes on fuel, even if introduced, might not have the proper impact on end-user prices. In the best case, higher oil prices would be offset by such a mechanism of state intervention, but the rate of increase in the price per barrel significantly exceeds the rate of possible leverage on the microeconomics of the market (Carp and Hurst, 2022; Macrotrends, 2022). At the same time, on the part of buyers, demand has a minimal impact on fuel pricing and market-based regulation. If the situation is not resolved shortly, perhaps the state should consider such an intervention mechanism as paternalism, but forecasts indicate otherwise.
Analysis
The share of Russian oil is relatively small in the total import of Australia. It is 1.2%; however, even the loss of this channel leads to an increase in excises (Hannam, 2022). Trade restrictions imposed at the global level are expected to be restored after a specific time when the volume of imports of 147 megaliters of oil can be obtained by companies such as Shell and Ampolo from other sources (Hannam, 2022). The uniqueness of the situation and this concept of protectionism lies in the fact that support for restrictions is not aimed at increasing oil production in the local market. Currently, Australia has the three largest deposits and 0.3% of the reserves of the total world reserve, which is not enough to meet local demand within the country (Australian Government, n.d.). Increasing production will require much greater costs that will fall on public and private companies than organizing a logistics chain and increasing import supplies. Although it will not be possible to reduce excises shortly since oil is becoming more expensive on the world market, and players other than Russia are forced to increase their production (Macrotrends, 2022). Reducing pressure on the cost of living for the end consumer of gasoline in Australia is only possible long term.
Government intervention cannot influence external factors that are mediated by global processes that are not under the control of the Australian government. In turn, regulatory mechanisms can be applied directly using available resources. The current situation is hardly close to an emergency, but it takes time to normalize new supplies, adjust prices, and, accordingly, costs. According to the International Energy Program, participating countries must have a reserve of 90 days for such cases (Summers, 2022). However, according to the same source, Australia’s net oil import stock will only last 67 days (Summers, 2022). This factor complicates the injection of reserves into the local market for state support for production, maintaining supply at the level of supply until the major players can increase supplies. On the other hand, the state is obliged to build up oil reserves for up to 90 days; otherwise, the global security regulated by the IEA is called into question (Summers, 2022). Therefore, state intervention in the situation is required not only at the level of local players in the country but also from the point of view of environmental responsibility.
Conclusion
The government was held hostage when it announced an essential relaxation in end-user fuel pricing but faced uncontrollable circumstances. As a result, it turned out that the reserves do not meet the requirements of world standards in terms of volume, which complicates the application of such a concept of microeconomics as government intervention. The cause of the problem was the trade restrictions model; however, its application did not carry the initial functionality of stimulating the local market that was put into it.
Companies will take time and resources to replace their slightly more than one percent share of oil imports amid rising oil prices. In fact, even the domestic oil market has become beyond the control of either the state or demand mechanisms, and therefore intervention can only manifest itself in the form of paternalism or stimulation by subsidies of both consumers and producers. Considering the market through the prism of microeconomic processes is the only way out for both state regulators and organizations adjusting supplies, due to the complexity of influencing the macroeconomic aspects of the situation. The experience gained in this phenomenon can become a defense mechanism for further similar global market shocks.
Bibliography
Australian Association Press. (2022) “Fuel excise cut savings eroded by rising petrol prices amid increasing cost of living pressures”, The Guardian.
Australian Government. (n.d.) “Oil.”
Borland, J. (2020) Microeconomics: Case studies and applications. Southbank, Victoria: Cengage AU.
Carp P. and Hurst D. (2022) “Scott Morrison dismisses fuel excise cuts amid ‘temporary’ petrol price hikes”, The Guardian.
Hannam, P. (2022) “Australia to join US and UK in banning Russian oil imports”, The Guardian.
Kilian, L. (2022) “Understanding the estimation of oil demand and oil supply elasticities”, Energy Economics, pp. 1-14.
Macrotrends. (2022) “Crude Oil Prices – 70 Year Historical Chart.”
Summers, W. (2022) “Energy minister misleads on oil reserves in Australia”, The Canberra Times.