Petrol is a product that is used by most of the Australians. As this is one necessary item used every day, people are very sensitive to change in petrol prices. The problem is severe when fuels become more expensive (Wang et al., 2016). Several factors explain the variation in crude oil and petrol price in the national and international market. Change in petrol price is associated with a change crude oil price (Liao, Shi & Xu, 2018).
Aim and objectives
The paper investigates whether the increase in petrol price in Australia is fair or it is the result of greed of petrol traders. This is done by analyzing the correlation between crude oil and price. The objective is to evaluate the trend in crude oil and petrol prices and the extent to which petrol price is related with crude oil price.
Context
World wide
In the world market, oil is a commodity that tends to experience most fluctuation. The most remarkable increase in world price occurred between middle of 2003 and middle of 2008. The surge in oil price was resulted from a disruption in supply of oil along with increase in demand worldwide (Baumeister & Kilian, 2016) The global economic expansion pushed up oil demand especially from Asian economies. Another view explaining fluctuation in world oil price point out that speculative position of financial trade in the oil market causes instability in oil price trend (Gao et al., 2017).
Australia
In Australia both crude oil and petrol price fluctuate widely. The price of oil though is one major factor affecting petrol price, there are however several other factors affecting petrol price (Chiroma, Abdulkareem & Herawan, 2015) A report published by Australian Competition and Commission, several reasons are revealed for fluctuating petrol prices. These include imbalances in demand and supply, fluctuation in relative value of dollar, petrol price cycles and competition in local market (abc.net.au, 2018).
Methodology
Data collection
In order to evaluate trend in crude oil and petrol price monthly data are collected. The paper uses secondary data for the analysis. The chosen sample period for analysis is from 2001 to 2018.
Analysis strategy
Data are analyzed using statistical software package Excel. The trend in prices are observed using time series graph (Plonsky, 2015). Descriptive statistics are analyzed to summarize the data. In order to evaluate the relation between crude oil price and petrol price scatter plot, correlation coefficient and time series graphs are used.
Analysis Results
The figure above summarizes monthly trend in crude oil and petrol prices. The trend line of petrol price lies above that of crude oil prices implying petrol price increases at a faster pace than the crude oil price.
In January 2001, the crude oil price recorded to be $46.15. As against this, the petrol price was $85. At the end of December 2001, crude oil price decline to $36.41 where petrol price declined only by $3 with price became $82. At the end of 2003, price of crude oil rose to $50.37. The petrol price was as high as $90.4. Crude oil price though declined to $40.16 but petrol price remained high at $90.6. Since then both crude oil and petrol price continued to increase till 2007. The crude oil price at the end of 2007 was $104 while that of petrol price was $137.1.
At the last quarter of 2008, crude oil price suddenly lowered to $59.46. The petrol price though lowered during the same time but still remained relatively high at $105.5. Both crude oil and petrol price recovered since 2009 and continued to increase till 2013. The two consecutive years of 2014 and 2015 experienced a decline in crude oil and petrol price due to different global and international events. From 2016 onwards, price again started to regain. In the last quarter of 2018, crude oil price was $104.29 while petrol price was $157.3.
Table 1: Summary for monthly pattern of petrol price
petrol price |
|
Mean |
122.19 |
Standard Error |
1.41 |
Median |
124.20 |
Mode |
89.80 |
Standard Deviation |
20.70 |
Sample Variance |
428.37 |
Kurtosis |
-0.98 |
Skewness |
-0.33 |
Range |
77.40 |
Minimum |
80.40 |
Maximum |
157.80 |
Sum |
26148.60 |
Count |
214 |
As obtained from the summary table the monthly average price of petrol is $122.19. The standard deviation of monthly prices in 20.40. The smaller standard deviation in relation to average petrol price implies a relatively stable distribution of petrol price. The maximum and minimum monthly price for petrol is $80.40 and $157.80 respectively.
The figure above shows an overall upward rising trend in monthly petrol price.
Table 2: Summary for quarterly pattern of crude oil price
Crude oil price |
|
Mean |
80.05 |
Standard Error |
2.93 |
Median |
80.99 |
Mode |
#N/A |
Standard Deviation |
24.86 |
Sample Variance |
617.78 |
Kurtosis |
-1.03 |
Skewness |
0.07 |
Range |
90.70 |
Minimum |
37.85 |
Maximum |
128.55 |
Sum |
5763.29 |
Count |
72 |
The quarterly average of price of crude oil is $80.05. The standard deviation is 24.86. The smaller standard deviation implies a smaller coefficient of variation and hence, a stable distributionThe graph above shows a positive association between crude oil and petrol price. That is with increase in crude oil price petrol price is expected to increase.
Table 3: Summary Statistics for crude oil and petrol price
Crude oil price |
Petrol Price |
||
Mean |
79.82 |
Mean |
122.19 |
Standard Error |
1.72 |
Standard Error |
1.41 |
Median |
80.16 |
Median |
124.20 |
Mode |
#N/A |
Mode |
89.80 |
Standard Deviation |
25.15 |
Standard Deviation |
20.70 |
Sample Variance |
632.65 |
Sample Variance |
428.37 |
Kurtosis |
-0.99 |
Kurtosis |
-0.98 |
Skewness |
0.11 |
Skewness |
-0.33 |
Range |
102.72 |
Range |
77.40 |
Minimum |
36.40 |
Minimum |
80.40 |
Maximum |
139.12 |
Maximum |
157.80 |
Sum |
17081.30 |
Sum |
26148.60 |
Count |
214 |
Count |
214 |
Table 4: Correlation between crude oil and petrol price
Crude oil price |
Petrol price |
|
Crude oil price |
1 |
|
Petrol price |
0.93 |
1 |
The correlation coefficient between crude oil and petrol price is 0.93. This shows a strong positive relation between crude oil and petrol price.Relationship between crude oil price and petrol price over the years.
The scatter plot between yearly price of crude oil and petrol reveals a positive relation as before. The positive linear trend fits better for yearly data compared to the monthly series.
Conclusions
Several past literatures evaluated the fluctuation in world oil price. One group of economic pointed out that oil price surged following a rapid increase in demand for oil combined with constrained supply. The increase in oil price pushes up price petrol and other by products as well. Another explanation for upward trend in oil price is the greed and speculative power of financial traders in the world market (Kilian & Murphy, 2014) The paper finds a positive association between crude oil price and petrol price implying crude oil price is one factor causing an increase in petrol price. The petrol price however rises at a faster pace than crude oil price.
Practical implications/recommendations
Using the above result, it can be said that in Australia there is a gradual upsurge in petrol prices. Increase in fuel price creates an alarming situation for government. The government may consider a downward revision of exercise duty on petrol price. Strict regulation should be taken to prevent greedy businessmen from selling petrol at an excessively high price. Australian government should encourage competition among retailers. Competition among retailers help to lower price to capture a larger market.
Limitations and future work
The paper does not perform any statistical test to evaluate the relationship between crude oil and petrol price. Conclusion are drawn based on only time series graph, scatter plot, summary statistics and correlation. Besides, the paper does not consider other factors that might influence variation in petrol prices. Future research can be undertaken considering the other relevant factors or significant statistical test to determine variation in petrol price and further explores the relationship between crude oil and petrol price.
References
abc.net.au. (2018). Why do petrol prices fluctuate from city to city, day to day?. Retrieved from https://www.abc.net.au/news/2015-01-07/why-do-petrol-prices-fluctuate-around-the-country/6004866
Baumeister, C., & Kilian, L. (2016). Forty years of oil price fluctuations: Why the price of oil may still surprise us. Journal of Economic Perspectives, 30(1), 139-60.
Chiroma, H., Abdulkareem, S., & Herawan, T. (2015). Evolutionary Neural Network model for West Texas Intermediate crude oil price prediction. Applied Energy, 142, 266-273.
Gao, X., Fang, W., An, F., & Wang, Y. (2017). Detecting method for crude oil price fluctuation mechanism under different periodic time series. Applied energy, 192, 201-212.
Kilian, L., & Murphy, D. P. (2014). The role of inventories and speculative trading in the global market for crude oil. Journal of Applied Econometrics, 29(3), 454-478.
Liao, J., Shi, Y., & Xu, X. (2018). Why Is the Correlation between Crude Oil Prices and the US Dollar Exchange Rate Time-Varying?—Explanations Based on the Role of Key Mediators. International Journal of Financial Studies, 6(3), 61.
Plonsky, L. (2015). Advancing quantitative methods in second language research. Routledge.
Wang, M., Chen, Y., Tian, L., Jiang, S., Tian, Z., & Du, R. (2016). Fluctuation behavior analysis of international crude oil and gasoline price based on complex network perspective. Applied Energy, 175, 109-127.
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