The Ackaringa Oil Discovery - Case Study Example

The Ackaringa Oil Discovery Name of University Submitted by Names: Tutor: Date The Ackaringa Oil Discovery According to Link Energy, the company’s exploration team has discovered a massive oil deposits in Ackaringa Basin of South Australia. Notably, the oil deposits occur in an approximate area of 284,000 acres nearly at the depth of over 8854 meters. The Brisbane Company officials said that the South Australia State was sitting on massive barrels of oil that range from 3.5 billion to 233 billion; this could be the highest ever found oil deposits in Australia. In fact, analysts note that it could be several times bigger than all oil deposits that have previously been found in Australia. Nevertheless, the deposits have the possibility of turning the country from an oil importer to an oil exporter. According to the independent investment experts, they estimate the deposits as valued at $20 trillion. The company has also spent about $130 million in the Basin. Moreover, apart from these oil deposits, the Basin has a coal deposit whose extraction development is going on at a cost of $3 billion so that 560-megawatt power plant could be created. Additionally the region boasts to produce the highest opal minerals in the world. This discussion will therefore analyze the project and it its opportunity cost, asses its effect on Australia in loanable fund market, on gross domestic product in development and after development stage (Linc Energy 2011). Analysis on Production Possibility Frontier The Production Possibility Frontier (PPF) is a graph that shows how various combinations of amounts of two separate commodities can be in the fixed total amount of a certain factor of production. Therefore, the Production Possibility Frontier will show a possible maximum amount of one commodity that can be produced in a combination with the other in a fixed factor(s) of production, depending on the existing level of technology. An economy that operates on the PPF will be said to be efficient. This implies that no more outputs of a given products will be produced using same the fixed input without sacrificing the output of the other products. This can be explained by the concept of opportunity cost. The striking feature of Production Possibility Frontier is the Opportunity cost, which is the highest possible cost of the other / alternative product foregone. This will be explained using the following curve. For instance, in the figure above, the points running along the curve will display the tradeoffs between the two goods. For one to produce a certain good, he must sacrifice the second one. The number of units of the other good sacrificed is called opportunity cost. For instance, in this case, for a district to produce 10 more butter buckets, it will have to sacrifice 5 guns. The movement shows this from A to B. Therefore, the opportunity cost of producing more 10 buckets will be 5 guns. As by the Case of Ackaringa It is important to note the oil deposits were discovered near a town of Coober Pedy. The fixed factor of production is the land of 284,000 acres. The town’s climate is predominantly arid, having high temperatures during daytime. On production, it is mainly becoming a regional centre of services that include tourism, opal mining, primary production and support services. Notably, apart from mining, the town is a tourism centre. It has also attracted several filmmakers that come there to produce due to its hinterland. As already noted, the oil in the Basin is valued at $ 20 trillion, and it is going to make the country to be a game changer in oil industry. When this becomes the case, multiplication in developments of other industries that directly depend on it will be realized (Bacchi 2013). It is important to note the tourism activities accounts for only 3.5% of the total Australian GDP. According to environmentalists, the drilling company will obviously employ fracking to reach the oil deposits. The opportunity costs therefore will include, clean unpolluted water, non-cancerous environment, and so forth. Tourism industry is also likely to be affected. Therefore, the government should be prepared to prevent problems such as contamination of water as a result of flammable methane, increased cases of Earthquakes, cancer and other disorders such as those of kidney, liver, respiratory skin ones and birth defects. While the opal mining industry will not be affected, tourism sector may be devastated. However, the town has very few people and virtually no farms. The few people in the town can easily be taken care of (Bacchi 2013). Mining oil holds immense economic benefit, which calls for the government to go on. Loanable Funds Market Model The Loanable Funds Market Model can be expressed as: National Savings= Net Foreign Investment + Domestic Investment Net foreign Investment is also called Net Capital Outflow. According to Boundless (2013), the funds that are in the National savings can be used for two purposes: to fund or finance foreign investments or domestic ones. Most countries will demand loanable funds when they want to invest, either in home or foreign interests, but a country will only do this if it believes that loanable funds are profitable and the planned project is the best alternative among all other Investment opportunities in the area. By starting to develop the oil deposits, Australia will have access to global market and easily get loan able funds. This is because the $20 trillion venture is just much profitable. As the revenue for the products starts flowing, there is believed that there will be huge amount of savings available to service the foreign debt. This will go on to the extent that the country can even lend abroad. On the other hand, oil supplies will ease inflationary pressures especially, the cost push one. When inflation is low, lenders will be encouraged to release their money even if there will be a reasonably small rise in it. This is because of relative stability in inflation and therefore less currency volatility will assure lenders about fluctuations in interest rates. Secondly there is hope that the expected revenues will provide tax to the government which will be used to service any debt occurring It is remarkable that large and chronic deficits also tend to raise budget deficits, and oil revenue will exactly solve this problem.. If Australia had been having persistent debt, that has been discouraging lenders, it will be reduced when revenues from oil start to trickle. In The Development Stage The technology of oil extraction will be costly as initial extraction starts. This is because the extraction costs will cover fracking fluids, steel, electricity, jet fuel and diesel fuel. Cost pressures are likely to increase due to pressures from the extraordinary large amount investment resource that will be taking place at once. Additionally, this will also reflect the cost of labor, that had been occurring due to outpacing wages that have engulfed the overall Australian economy. When investments start booming, cost pressures will ease, which will encourage producers to continue with further projects. Oil will also have a greater impact on wage inflation. If the government relaxes on its mining taxes, will see it decline in its costs. If the costs will be high, the firms may try to cover up them. Producers will obviously try to increase production, which is furthering the quantity of oil produced. Keeping in mind that fracking shale oil will need a lot energy intensive technology, the firm will be motivated to recoup its cost of investment. Some times when extraction costs increase, they may not match the selling prices on the market. If oil prices will not rise because of affordability issues, it will have other impacts. They may include low salary growth for its employees, low transfer payments and low growth in debts. In some cases if the investment proceeds are not enough to cover up the current prices, firms may have to cut it to the level that becomes profitable. Therefore, the Gross Domestic Growth will largely depend on proceeds derived. When the oil product gets down, analysts note that government may start imposing high taxes, and the extraction costs will be high. This is because the country where oil is extracted needs resources to feed and house its growing population and they would not like to continue producing so that they can disrupt their business. Source: Investopedia (2013) After Development Source: Investopedia (2013) From the graphs above, when the technology is available and production stabilized, it may turn out to be a windfall of foreign exchange, whereby as foreign firms buy in domestic currency, the country’s currency will get stronger. As fixed costs continue to reduce, the country may start enjoying economic stability, which will stimulate other levels of activities. Importantly, the country will attain impressive employment growth since oil is the key driver of all sectors in the economy. As these trends continue, there will always be positive relationship between economic growth and oil production as seen in the first diagram. In the long run however, as the graphs present, fixed costs per unit due to low production may result. This will make the overall variables of economy that depend on oil to start declining and therefore the overall economy will start to fall. On wage effect, it is important to note that oil price increases have a substantially adverse effect on real wages of any country. The large effect could result to other variables that are very much related to oil prices in the economy. This can be noted when oil has a significant wage effect on several countries. Oil price shocks will have a diverse effect on employment in the long run. The reverse will be possible for the case of Australia. When oil starts trickling, domestic firms will have reduced production costs that will result in cheap production of commodities that will make the country to earn more. This will mean that it will have a large amount of revenues to increase the wages of employees. Although wage will increase in the short run, it may not present a high threat of inflation. List of References Bacchi, U (2013), Australia: 'Massive' Multibillion Barrel Oilfield Found by Linc Energy, International Business Times, viewed 18 October 2013, Boundless, (2013), Loanable Funds Market, viewed 20 October 2013, Investopedia, (2013), Microeconomics - Marginal and Average Total Cost Curves, viewed 20 October 2013, Linc Energy, (2011), Significant Oil Shale Discovery, viewed 18 October 2013, Read More