Rising Energy Prices and How It Affects the Economy of the Household - Essay Example

Micro200 S2 2011 Name: Course: Lecturer: Date: Introduction Over the last four years there has been some dramatic increase in fuel prices, in 2008, there was an increase of over 80 percent of the initial prices. Consumers are the immediately hit in the shock and adversely change their spending habits (Capehart and Richardson, April 10, 2008). This paper looks at the rising energy prices and how it affects the economy of the household. It examines what will happen upon the increase in prices for the traditional fuel in consumption pattern for households in Australia. Lastly it analyzes the effect of increased subsidies on household budgets and how it will affect the, energy consumption patterns and economic wellbeing of the households in Australia. Effects of rising energy price The global oil depletion in is becoming a threat to the oil security in the country, this calls for the government to come up with an immediate solution to see the problem solved before it gets out of hand. According to.... The suggested option will be the Carbon price mechanism which is urged to as economically responsible and cost effective way to minimising carbon pollution in Australia. Introduction of this will be a great opportunity for Australia to take an active part in the reduction of global warming, (Capehart and Richardson, April 10, 2008). It is projected that the carbon price has a positive impact on enterprises, investments and innovation hence better technologies and better productions on land as a resource. I suppose carbon price mechanism will have another positive impact on the economy of this country because it will reduce the budgetary allocations for environment and pollution related controls. This is friendly to the economic reforms agenda of Australia, (Capehart and Richardson, April 10, 2008). Carbon price measure mechanism is claimed to be neutral on the budget this leaves out he pollution and climate issues untouched in the budget allocation and therefore does not affect the government budget and its strategy. If this is taken by the industries in Australia and continue giving out incentives for strategies aimed at minimising pollution, then it will have the desired results, (Robinson, Fleay and Mayo, 2011). Food production sectors are affected by increased energy prices as well; an increase in energy prices will leave no prices in foodstuff untouched. This is reason, fertilizer is a major input in food production yet fertilizers cannot be manufactured in the absence of natural gas; which is vital for drying. It also requires transport from the point of manufacture to the final consumer who will use in the farm; all both the increases in the value addition process will land on the farm and therefore definitely increasing foodstuff prices, (Robinson, Fleay and Mayo, 2011). To cut the long story short, the price increase for fuel will primarily increase, transportation cost from the manufacturer who will have met increased cost during processing of the product as well as the entire chain of distribution ranging from distributors down through wholesalers and retailers down to consumer. In the last few years, there has been a global economic recession. The most hit is the final consumer who is also a household, all this was as a result of rising fuel & energy prices. This left the household with no other choice rather than cut down spending on some other commodities to meet the fuel cost. Average households spend more than 15% of their income on transport costs in Australia, fuel being the most sucking taking up to 3% in every week’s budget for the households, (Australian Bureau of Statistics, 2005). The effects are far reaching and forces more households to go for mortgages. The increase in demand for mortgages increases pressure for inflation. This forces the banks therefore to raise interest rates for mortgages to discourage borrowing. This is also counter for the general price inflation resulting from fuel price increase. It therefore implies that for those households living in and around urban areas, will suffer for every cent increased on cost of fuel twice; first is due to increase of prices of all the other commodities due to fuel price pressure and the second is the bank policy of increasing the interest rates to counter the same. (Australian Review of Public Affairs, 2009). According to a research conducted by a senior economist, (CBA) a rise in a single cent in the cost of fuel will trigger the inflation to increase by 0.1% which is significant in analysing the long term trend. This is due to the fact that an increase in the price of fuel will force the price of other commodities to shoot up as well. However, the most commonly affected are all the household goods including: Foodstuff, clothing, groceries and all the materials used in building house among others, (Multi-Party Climate Change Committee. 2011). Effects of increased income for households It is evident that prices of energy are rising in cost; this adversely affects the consumption patterns of households. If a government chips in to subsidise the consumer by increasing the income to compensate on the high energy prices, the consumer will gain the financial power to be able to pay for the commodity. This will not only influence the market of the oil products directly but also indirectly; that is by both being able to pay for fuel for personal use and also to pay for the services that use the fuel like transport sector (Achim, 2008). Price increase in any commodity will tend to discourage consumption of such a commodity. Fuel is an exception in the system. It is not elastic to such effects, though sometimes elasticity can be realized but very low and short term in nature. The long-term effect will eventually be seen through the vehicles that people resort to as a result of seeking refuge from high fuel consumption rates, (United Nations. Sept, 2004). Provision of such grant by the government will have the effect of encouraging more energy usage and hence less concern to sparingly use energy or reduce efficiency in energy usage. If this happens, the country would be running at a loss and therefore will need and efficient means immediate reforms on price and more energy efficient equipment. This should not be given any room in a country which is looking forward to grow in economy any further, (Multi-Party Climate Change Committee. 2011). Increase in consumer’s purchasing power will automatically increase the income and returns on the production companies. Energy producing companies also equally benefit from the same. If individual are allowed to continue using the traditional sources of energy with their purchasing power kept strong, it will mean a continued pollution of the environment. This will inhibit investment in newer technologies which are effective and efficient, (United Nations. Sept, 2004). Continued cash handouts from the government will drain the government budget. It can even inhibit further development of the country due to pressure of the budgetary demand of a larger share all the time. This can drive the country to have budgets such as that of Indonesia where more grants are spent of fuel subsidies than more important things like education and health, (Robinson, Fleay and Mayo,2011). Continuous subsidization of oil prices may raise may drive the country to a state of shortage and demand rationing arrangements due to negative market clearing level. This is happening in Cuba where they are currently rationing oil products, (Achim, 2008). Increasing domestic consumption by increasing the consumer purchasing power may mean more consumption of the traditional petroleum products in the country and hence reduced exports. At times it may even require the importation of more fuel. This no doubt will affect the countries balance of payment and drive the country to depend on imports. Iran is a victim of such a problem. Where domestic consumers are encouraged to use a particular product, as for the case of the Australia now which wants to encourage usage of traditional fuel through increasing income to encourage consumption of more of traditional sources of energies, discouraging further development in technology used in the industry to come up with some better stuff(Robinson, Fleay and Mayo,2011).. It might lock in the other technologies from developing further. Conclusion To sum it up, we cannot evade the fact that the fuel prices are rising so first in the world today, but it is important to have the consumer face the reality. I won’t help much if a country tries to lift the burden from the consumer. The consumers might be reluctant all the time to accept the new fuel prices but all the same, they find themselves adopting the new prices with time. A deliberate government effort to intervene may always not bear desired results. References Achim, Steiner. 2008. Reforming Energy Subsidies; Opportunities to Contribute to the Climate Change Agenda United Nations Capehart, T and Joe Richardson, J. April 10, 2008. Food Price Inflation: Causes and Impacts: http://fpc.state.gov/documents/organization/104281.pdf Multi-Party Climate Change Committee. 2011. Carbon Price Mechanism. www.carbontradexchange.com/MPCCC-principles.pdf Robinson, B.W, Fleay B.J. And S.C. Mayo. 2011. The Impact Of Oil Depletion On Australia. Www.Stcwa.Org.Au United Nations. Sept, 2004. Energy Subsidies; Lessons Learnt In Assessing The Impacts And Energy Reforms. http://www.unep.ch/etb/publications/energySubsidies/Energysubreport.pdf Read More