Volatile Price of Oil

Readers Question: Dear Economics Help. Why is that when the petrol price comes down the prices of other commodities and services stay the same?

Oil Price 1987 -2008

The price of petrol is closely linked to the price of oil. This year the price of oil has been very volatile. In the summer it reached over $140, but, has now fallen very sharply to under $50. With this big fall in the price of oil, it is natural the price of petrol will fall. In fact a good question is why doesn’t the price of petrol fall by a bigger amount.

Part of the reason is that in the UK, petrol prices included a significant tax. The cost of oil only represents about 20-30% of the price of Petrol (that is a guess)

The price of other commodities and services are more likely to move at the annual inflation rate of about 4%. However, oil isn’t the only commodity which is falling in price. Many metals such as copper and aluminium are falling in price due to the global recession.