petrol - Economics Help

Source: World Bank

This shows the price of petrol per litre around the world. Varying in price from $0.02 a litre in Venezuela to Eritrea with a price of $3.33. Generally Western European economies have the highest price of petrol due to higher petrol tax.

Out of 217 countries listed by the world bank.

Most expensive place to buy petrol in the world

Eritrea $3.33
Norway $2.27
Netherlands $2.15

The UK is the 12th most expensive country at – $1.92
The US is one of the cheapest countries – ranked 199/217 on list – $0.76

The cheapest places to buy petrol

Venezuela – $0.02
Saudi Arabia – 0.16
Kuwait – 0.22

Reasons for variation in the price of petrol around the world

Oil producer/importer. Countries which produce oil Saudi Arabia, Venezuela and Kuwait unsurprisingly have the cheapest prices. The one exception is Norway – which despite being a major oil producer has one of the highest prices. By contrast, countries which import oil and petrol have higher prices.
Tax levels. In the UK fuel duty is £0.5795 per litre. In addition, VAT is charged at 20%. Approx 60% of the fuel price motorists pay in the UK is tax. This compares to China which has no fuel tax. Malaysia has even had a fuel subsidy.
Wage costs and renting. The other significant cost for petrol is the rent for a petrol station and wages of workers. Wages and costs in Western Europe are higher than in the developing world – explaining part of the price differential.

Petrol consumption per capita

petrol-consumption-per-capita

The US has the highest petrol (gasoline) consumption in the world by quite a long way. This is due to

US has one of the world’s highest living standards,
A transport system geared towards the motorist, long distance car journeys are more common with extensive highway network and more limited public transport systems.
Relatively low price compared to countries with similar living standards.

As China experiences economic growth, its per capita consumption is likely to grow rapidly.

In the post-war period, consumption of vehicle fuel (petrol / diesel) increased dramatically as car ownership rose and more journeys were made by car. However, since 2007, there has been a significant drop in vehicle fuel consumption, with demand falling over 20%

Many factors affect demand for vehicle fuel, including price, income, fuel efficiency, quality of alternatives (public transport) and general preferences.

consumption-of-fuel

If we ignore all the income effects, social effects and changes in consumer preferences (which admittedly is very significant) we can make a very rough estimate at the price elasticity of demand for vehicle fuel.

Between Q3 2002 and Q3 2012 households consumption of vehicle fuel fell by 18% per head. During this period the annual per litre price of petrol increased 85% and diesel 88%. Department of Energy and Climate Change

This gives a (very rough) PED for petrol of (-18/85) = – 0.21

It is what we would expect – demand for vehicle fuel is price inelastic, but higher prices do reduce demand somewhat.

Factors affecting demand for fuel

Cost of Fuel

Due to rising costs of fuel, households are still spending more on fuel. In 2002, we spent £89 per head on fuel. In 2012, this had increased to £129. Given the rise in the fuel burden, it is not surprising people have sought to reduce consumption. (see: fuel poverty)

Income effects

The graph shows that air fuel is much more sensitive to income effects. During the start of the recession from 2007 to 2009, demand for airline fell almost 30% in a short space of time. This indicates that airline fuel is income elastic – sensitive to changes in income. Airline fuel has not really recovered from 2009. The recession will also be having an impact on demand for petrol. The biggest decline for vehicle fuel has occurred during this period. Faced with rising prices and squeezed real wages, people have been cutting back on vehicle fuel. When the economy recovers, we can expect a renewed increase in demand for vehicle fuel.