Tuesday, January 16, 2007

Petrol Prices, Economics and Politics

ACCC Chairman Graeme Samuels has made a rare public statement, this time about the slow, or non-existent, fall in the price of petrol. The price of petrol in Australia is set by the oil companies. They follow, more or less, the price of crude sold on the Singapore market. Recently, it seems have been "more" ... for the oil companies.

The ACCC quite powerless, but can try to “name & shame” oil companies that it believes are not dropping prices. Interestingly, some service stations in Sydney dropped their prices this afternoon ... AFTER MR Samuels' statement was released.

The price of petrol has historically been quite inelastic – it is controlled by only a few companies ( an oligopoly) & demand is reasonably constant. This conforms roughly to Keynesian economic theory for goods run by an oligopoly. However, after petrol hit $1 / litre a few years ago, it is more likely to suffer falling demand if price rises quickly /stays too high, as people react and complain.

Deputy PM Mark Vaille has said the Federal Government would look at more powers for ACCC if needed. Here it is caught in political push-pull. Oil companies are significant donors to political parties, but the Government could suffer voter backlash about the continuing high price of petrol, as as happened previously. Then, the Federal Government fixed the amount of fuel excise, in order to reduce the CPI increases in excise, and therefore price. It wants to avoid a voter backlash because there is an election this year.

The Government would like to think fuel price in Australia would be set by “free market forces” (demand/supply). Here, it reverts to Keynesian economics, rather than the “economic rationalism” theory it uses elsewhere. The reality is it needs to have a mixed economy where there is some government regulation in order to prevent excessive price blowouts. This might well include giving the ACCC greater powers to fine, or otherwise penalise, oil companies, and their executives. When it's personal, executives are more likely to be responsible and conform to regulation.

The Analyst