The Price of Petrol

Oil price

As students, I suspect there is little likelihood you (a) listen to Radio 4 in the morning, and (b) listen to it before 8am. However, if you do, you’ll have heard a section of the Today programme on petrol prices, which the RAC expects will fall below a pound before Christmas.

This is, of course, music to the ears of anybody who drives a car. But as you’ll be increasingly aware as a student of economics, the demand side of the market is only one side – there’s also the supply side. Contrary to how we might view large oil companies, the huge range of fluctuation in the price of oil makes it clear that they are price takers, rather than price makers, when it comes to the price of oil, and subsequently the price of petrol.

The graph above shows why petrol is so cheap again – the price of oil has fallen by close to 60% over the last 18 months, and this is part of a general fall in commodity prices over this time period. This raises questions, and perhaps the most pertinent are (1) why? and (2) what does it mean?

On the why, one explanation that Vince Cable (who came to the university earlier in term) put forward was that China and other strong growth economies of recent years like Russia and Brazil are all either slowing down or in recession. This removes a huge amount of demand for commodities.

On the what does it mean: the likelihood is it means job losses as firms that mine and trade in these commodities have to cut back given decreased revenues from their activities. It seems more than likely this would affect the UK, and Scotland in particular where the oil industry resides. But equally, other large mining companies are headquartered in the UK, and this may result in job losses.

It’s not all good…