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

Effect on price levels of petrol as a result of the Covid-19 pandemic and price war in the global oil market :

• During the pandemic, movement of vehicles and public transport has been brought to a complete halt. Since, there was no vehicular movement, there was no need for petroleum. Hence, the demand for petrol fell drastically all over the world, including Australia, keeping supply constant, which resulted in the drastic decline in price levels of petrol around the world
• Since, supply was constant, this would mean that the governments would face huge debts as nobody was buying this oil. In response to the fact that major oil producers like Saudi Arabia wanted to cut supply rates to stabilize price levels proportionate to the current demand, Russia backed out of a deal, which led to the Saudi's cutting off their production by a huge margin. This resulted in price levels to fall over the world, which started off a price war between Russia and Saudi Arabia.

The given supply - demand curve shows how price levels fell with drastic cuts in production of oil, owing to declining demand :

The curve below shows, how a price war was started by the Saudis by cutting quantity supplied and raising price levels :