Activity 5(l)

Activity 5l: A history of fuel price movements

  1. During 2019- 20, fuel prices trended downwards. This initially contributes to disinflation (i.e. slower growth in average prices across the economy), but if the fall is significant enough, it can actually contribute to deflation (a fall in average prices across the economy), which indeed was the case during 2020 when the economy experienced deflation due to a full in prices of many goods and services, including fuel.
  2. Conflicts of this nature ultimately lead to a restriction in the global supply of oil either for geopolitical reasons or simply because some oil fields/supplies not destroyed in the conflict. This reduction in the global supply oil causes the supply curve to shift to the left, raising global oil prices which then feeds into higher fuel prices given that oil is the major ingredient in the production of fuel.
  3. Global recoveries, such as those referred to in the question, by nature means that there is growth in aggregate demand for goods and services, which raises real GDP and results in a higher demand for productive inputs – which of course includes crude oil. This is equivalent to shifting the AD to the right and raising demand inflation. However, given that crude oil is a major input for many businesses, it also raises the costs of production, fuelling cost inflation.
  4. Given that during this time there was strong production in both the USA and Russia, together rising the global supply of oil, the decision by OPEC to maintain production levels ensure that the stronger global supply led to lower prices. Ordinarily, OPEC would restrict supply of oil to global markets when there is an increase in the supply of oil from non-OPEC suppliers.
  5. Exploration and investment in new oil fields will typically result in the discovery of additional oil supplies which, like any increase in supply, contributes to downward pressure on (oil) prices.
  6. If the government decides to extend the fuel excise cut then this is likely to contribute to downward pressure on prices. IF OPEC decide to restrict its supply of oil to global markets then this is likely to contribute to upward pressure on oil prices. If the price of renewable energy falls significantly, then this will contribute to downward pressure on oil prices (as the demand for fossil fuel energy sources fall in response to the lower relative price of renewable energy).