Some of you may have noticed the extraordinary increase in the price of fuel these past few weeks, driven by an increase in global demand and decrease in global supply. The global energy crisis is also very much driven by factors such as the coronavirus pandemic and transition to renewable energy. However, Australia’s integration with the global economy is particularly evident when examining the energy crisis’ impact on local fuel price inflation.
Supply shortage prompting record high fuel prices in Australia
Recently, the price of fuel has increased to its highest wholesale price since the GFC in 2008, trading at $US84.01 a barrel. This is mainly due to factors such as the pandemic interrupting supply, factories reopening post-lockdown and a rocky transition to renewable energy. The demand for fuel has been severely reduced on a global scale due to the pandemic, due to lockdowns and side-effects such as limited mobility. The extent to which demand had decreased was highlighted in April last year, when oil prices hit a long-term low of US$35.20 a barrel, compared to US$60 a barrel at the beginning of 2020.
Source: SBS News
This very sudden decrease has raised uncertainty for producers of crude oil, particularly the OPEC+ cartel who are responsible for most of the world’s crude oil supply. They have chosen to deliberately restrict supply to avoid a market oversupply situation in the near future and preserve profits. Furthermore, the renewed push to ramp up renewable energy production has discouraged investors and lenders from working with oil producers, restricting the flow of investment capital into new oil projects, further decreasing supply.
So how does this relate to the HSC Economics Syllabus?
1. The Global Economy (Topic 1):
1.1. International Economic Integration
- The Global Economy
- Globalisation
1.2. Globalisation and economic development
- Effects of globalisation
- Trade, investment and transnational corporations
- Environmental sustainability
3.Economic Issues (Topic 3):
3.1 Inflation
- Causes: cost inflation
Because Australia imports 80% of its fuel, the energy crisis has contributed greatly to recent increases in Australia’s CPI, which now stands at 3%. While this may be just within the RBA’s target, it has to be noted that these increases are caused not by increased aggregate demand but by falling/restricted supply, and therefore is not an indicator of improving economic conditions in contrast to the usual message it conveys.
This is evidenced by the increase in consumer petrol prices; there has been a 36% increase in prices compared to April 2020. Additionally, as mentioned by the HSC Economist a few months ago, inflation had reached its highest rate in a decade at 3.8%. This was again driven by the increasing price of petrol across the globe, however, during that quarter, the impact was less substantial as NSW, Victoria and the ACT were in lockdown. Also to note is the role of globalisation on these increased prices, as Australia produced and satisfied around 70% of its own oil needs during the 1970s. This contributed to less volatility in the price of petrol and higher affordability for consumers.
However, the price of oil in the global market was substantially lower than what Australian producers could offer, so the government made the decision to allow more oil imports. The more expensive and less competitive Australian producers thus scaled back production and Australia came to rely heavily on oil imports so the Australian market became heavily exposed to conditions affecting international oil markets.
Global energy crisis and its impacts on Australia
Electricity demanded by countries in Europe and the Asia-Pacific has increased greatly, mainly due to these regions’ economic recovery from the pandemic and increased usage of heaters in the northern hemisphere winter. However, demand is not the only factor at play. In similar fashion to the conditions impacting oil prices, the international supply of energy has been strained as the world transitions to renewable energy.
Economies such as the UK have tried to rely more on renewable energy production, especially with wind energy, however, summer this year was the least windy in 60 years, severely limiting the production of energy. Following a cold winter in the northern hemisphere, coal and gas reserves were exhausted, thus unable to counterbalance the decline in renewable electricity. Other economies in Europe and North Asia faced similar issues with energy supply, causing significant upwards pressure on the price of coal and gas globally.
So how does this relate to the HSC Economics Syllabus?
The Global Economy (Topic 1):
International Economic Integration
- The Global Economy
- Globalisation
Globalisation and economic development
- effects of globalisation
- trade, investment and transnational corporations
- environmental sustainability
Economic Issues (Topic 3):
Inflation
- causes: cost inflation
External stability
- measurement: CAD as a % of GDP
Australia has not been impacted to the same degree by the increasing energy prices, as Australia’s supply of energy resources currently outstrips demand, However, figures such as Jeff Dimery, CEO of energy provider Alinta have noted that electricity prices would “inevitably” increase due to the increasing price of energy as evidenced by the record high prices for LNG exports at $US150 for a single cargo, and this will incentivise providers to shift from supplying energy domestically to supplying internationally if domestic prices don’t increase, impacting inflation. However, he concedes that the federal government’s threats of intervention in the form of reservation policies have prevented wholesale gas prices from being three or four times higher than they are now.
Source: ABC News
Yet, Australia can also stand to reap economic benefit from the global energy crisis. This is because coal and gas are some of Australia’s main goods exports. As aforementioned, the price for a single unit of LNG has reached US$150, more than double its previous record. CEO of Woodside Petroleum, a leading gas production company, Meg O’Neill has noted that the demand for coal and LNG will be sustained because “The long-term certainty they provide also supports market conditions that enable new projects to be sanctioned and developed to ensure a healthy balance between supply and demand”. She believes gas will remain prominent in the transition to renewable energy production and will help Australia sustain export incomes, and support Australia’s growth in the long-term (AD = C + I + G + (X - M)), and also Australia’s external stability through the improvements to the BOGS and current account.
