Family Price Fears as Petrol Predicted to Climb to $2 a Litre - Article Example

Family Price Fears as Petrol Predicted to Climb to $2 a Litre Introduction The prices of fuel are going up all over the place. No country who imports oil for their domestic needs is safe from this. Australia is no different than the rest. The recent crisis taking place in the Middle East, including countries like Libya, Egypt, and Bahrain etc has put a panic across the major economies of the world that are dependent on the oil production from these Arab nations to meet their daily energy requirements. The price of oil has gone up due to supply shocks and paranoia of the impending reduction in the global oil output. The article stresses on the fact that countries such as Australia are completed helpless to do anything against the prevalent situation in the oil market, and reminders of the 2007-08 oil crisis are now looming in the air. Last year, the prices of oil crept past 1.7 AUD and the forecast for this year is somewhere around the $ 2 AUD mark. Since it is a need which cannot be substituted, the general cost of living of people will go up, and the most evident scenario is another economic bubble as seen in early 2008. This paper encompasses the implications of various economic indicators and economic fundamental concepts which apply to this article. It will analyze the potential outcomes of the given variables in continuance. Economic Concepts Oil is a subject which has always been the centre of attention in economics. There are a plethora of theories and concepts which apply to this case study, but for brevity’s sake, we will limit ourselves to just a few. These include the following: Importing Inflation Supply Shocks Weaker Currency The use of relevant diagrams will be made so as to establish the key facts unequivocally. Although there can be more concepts, the discussion will just be limited to inflation and its reasons, and the counteraction of the deteriorating price levels due to exchange rate differentials. Analysis We have already witnessed an oil crisis in the not so distant past when the prices went up to $147 per barrel in 2008. Back then, the prices were elevated primarily due to speculative positions taken by investors and speculators. Today’s situation however, it differs from the previous one due to the fact that this is an issue driven purely due to economics. The Middle East region accounts for a majority of the world’s oil producing countries. Since this region has come under a lot of turmoil, the supply of oil has been witnessing bottlenecking and this has caused mass panic in the developed and developing economies the world over, to the point where alarmingly high buying is taking place. This aggressive buying by various nations is driving the prices of crude oil higher and higher. When we break it down on the most primitive levels, we see two things happening simultaneously. The first is that there is a very apparent shortage of oil as millions of barrels per days are not being produced. Secondly, these supply shocks are triggering investors, companies and even governments to buy large reserves of oil to ensure that they have adequate supply in the coming months. Both these factors, when combined, lead to a huger price hike which is being witnessed in these past few weeks. In 2008, there were definitely speculative buying going on, but the supply shocks were not as great as they are today. As you can see from the diagram, the decrease in supply lead to a hike in the price of the underlying commodity. The next economic concept is that of inflation. As mentioned earlier, oil is a commodity that is used by all economies and that too in a large quantum. Since many economies are obliged to import oil for their energy needs, they do not have the luxury of negotiating finer prices for the commodity. And with the price of oil going higher and higher by the minute, these countries are effectively importing inflation into their own economic cycles. This has some serious repercussions for the economic indicators of the country. First of all, it will increase the trade budget which will hurt the forex reserve position of the country. Secondly, it will cause a rise in the utilities of the country. Furthermore, it will trigger a weakening of the currency with respect to the US Dollar, which is the primary currency used in international trade. These factors alone will trigger inflationary pressures into the business cycle. To counter this effect, the interest rates will be driven upward and this will in turn hamper GDP growth. It’s actually a vicious circle, and it’s hard not to fall into this trap. The last relevant economic concept which applies to this case is the currency factor. In the case of Australia, a stronger AUD/USD parity has kept the prices at bay, relatively speaking. However, if this trend continues, the AUD will lose ground against the USD and this will in turn trigger more inflationary pressures. Since the mode of payment for oil is usually USD, a continuous demand for the currency will weaken other currencies relative to the USD. This would mean that you need more AUD to buy the same amount of USD. Hence the cost of imports goes even higher. This will reflect in the weaker AUD/USD exchange rate. Conclusion The oil crisis in the Middle East will have a ripple effect on economies across the globe irrespective of whether they are dependent on imported oil for their needs or not. We’ve seen the implications which fuel prices will have on the common man. To sum up the affecting factors, they are as follows: Supply shocks in the form of reduced production/production halts in the Middle East have left supply of crude oil at an alarmingly level, which is jacking up the price of oil. Mass hysteria regarding the availability of oil is also a crucial factor which is driving up the price of oil. Higher international import prices implies that countries importing oil for their needs are genuinely importing inflation into their system and this inflation is permeating rapidly to various segments of the economy. Inflationary pressures will trigger a rise in the policy rates of countries, including Australia. The exchange rate of the AUD/USD has shielded the country, but this will not last long if the prices of oil keep going higher, and Australia has no option but to import its requirements. References Rhys Haynes. March 31, 2011. “Family price fears as petrol predicted to climb to $2 a litre”. The Daily Telegraph. Accessed on April 09 2011. http://www.news.com.au/money/money-matters/family-fuel-fears-as-petrol-to-hit-2-a-litre/story-e6frfmd9-1226031072830#ixzz1J3Ryhl8b Anonymous. April 04, 2011. “Gold futures rise on surging oil prices, inflation concerns”. 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