Question

Use a demand and supply model to explain and draw a graph how petrol price has been affected as a result of COVID19 pandemic and price war in the global oil market. You need to articulate the determinants that lead to the change.

•The market: Australian petrol market.

•Events: “COVID19 pandemic and price war in the global oil market”.

•Identify influences for each event, and articulate the direct impact on demand/supply.

•Outcome shall be consistent with the article (price drop).

Answer 1

In the Australian petrol market, two major forces have affected the petrol prices:

Demand side:

• Fall in demand of petrol by households and firms
• This is due to the lockdown and its effects
• The unemployment situation has gotten worse, with many low and middle income workers losing their jobs
• There are strict restrictions on moving out of your home, and traveling
• The fear in peoples' minds of getting infected, even if they do move out

Supply side

• Rise in supply of petrol due to lack of coordination among OPEC countries
• There was also a price war between Arab countries and Russia, and newer countries have also started producing oil
• Instead of cutting output, the countries kept on pumping more and more oil
• Each country wanted a larger share of the market, by increasing output

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Result: A drastic drop in the market price of petrol

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Due to all these factors, the market price of petrol has fallen.

The quantity in the market has actually increased, inspite of the lack of demand. This is mainly due to the excess production.

(However, recently in June, OPEC has started cutting output again)