Driving a deeper understanding of petrol prices

Dr. David Byrne is an economics lecturer with a deep interest in petrol prices. He has been studying in detail petrol price markets in Canada and America and now he and his team at the Faculty have turned their expert attention on Australia. Their research will provide extremely valuable information for policymakers in Australia, information that will prove significantly beneficial for consumers.

Petrol is the lifeblood of daily life and the springboard for economic activity. In Australia the average Australian spent $51.02 per week on petrol, or 4.1% of their total weekly expenditures. After food and rent or mortgage costs, petrol is usually the next major item in the budget of most consumers. 

The average Australian spends $51.02 on petrol every week

As such a common feature of our lives and as a vital ingredient to our economic strength, it is highly advisable that we gain a deeper understanding of the dynamics of petrol pricing.  Australia through the Australian Competition and Consumer Commission (ACCC) closely monitors competition in Australian petrol markets, but additional economic research in this area can prove beneficial as Dr Byrne outlines, ‘policymakers need to benchmark economic models that predict how prices should behave if stations set prices competitively. With such a model, authorities can effectively monitor petrol stations’ conduct, identify collusive behaviour, and design policies that help ensure consumers pay fair petrol prices.’

Extensive academic research has been conducted in this field and it has found that petrol price cycles occur in markets where there is more prevalence of smaller independent stations. In effect smaller independent stations look to undercut the prices of some larger petrol retail brands and this leads to occurrence of price cycles as the price of petrol goes up and down over a period of time. Dr Byrne and his team within the Faculty are building on this research and are providing insightful information from the Australian marketplace.

For example their initial research shows exactly at what time during the week that petrol prices rises occur in the major cities of Sydney and Melbourne and how the dynamics of these markets work as Dr Byrne explained, ‘75% of the petrol market in Melbourne and Sydney is held by four large petrol chains and due to the dominance of such large petrol brands, both these cities experience regular petrol price cycle. You can think of price cycle like a conductor and an orchestra. The conductor is the big brands who typically lead the jump in prices and everyone follows, the independent petrol retailers are the ones who usually lead the price cutting as they seek to gain business. Independents in the marketplace lead to a disciplining of the big brand petrol retailers.’

Dr. Byrne is currently using data he has obtained from working with industry partners such as gasbuddy.com in North America and Motormouth.com.au in Australia to create an econometric model that will be of benefit to policy organisations such as the ACCC. In addition Dr. Byrne and his colleagues are examining the commonly held assumption that petrol prices are increased over long weekends. 

All this research when concluded will provide sharper insights into the dynamics of the petrol price market in Australia, will assist in creating anti-trust policy that achieves its aims and will allow consumers to make an informed decision when purchasing petrol.

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