If you’ve had to fill up your car lately, you’ll no doubt have been horrified at the price of fuel. In some metropolitan cities, unleaded is hitting as high as $2.30 a litre and there are expectations that the price could rise to as much as $2.50 in the coming weeks. This is the highest they’ve been in eight years and there is little sign that it could change any time soon.
At this rate, cycling or driving an electric vehicle looks like the more attractive option. But what exactly is behind the rise in fuel? The war in Ukraine, which has sparked a massive global sanctioning of the Russian economy, is widely cited, including by the PM, as the main driver in this change.
Russia is one of the largest oil producers in the world, creating over 10 million barrels of oil each day. 75% of this is exported, working out to about 4.5 million barrels of crude oil. It satisfies around 10% of the world’s demand for oil, which makes it an incredibly important player in the global market.
However, Australia doesn’t really buy oil from Russia. Last year, we imported just 1.2% of our total oil from the country currently being hit by global sanctions, including a block on oil and gas purchases.
Therefore, the war in Europe shouldn’t really have a massive knock-on effect on the price of our petrol. So just what the hell is going on and why can’t we afford to drive anywhere anymore? Here’s what you need to know.
Where Does Australia Get Its Petrol From?
Australia is almost entirely reliant on overseas imports for its fuel. Although we do produce some crude oil here, around 350 barrels a day at last count, much of this is exported. Around 90% of what Australian refineries use to convert crude oil into petrol, diesel, LPG and other fuels is imported.
So, we get most of our fuel from Asia, with around a quarter of it coming from Singapore. The rest comes from South Korea, Malaysia, China, and a host of other nations including the US, Japan, and Thailand.
Petrol is either produced at one of our two remaining oil refineries or imported directly to a fuel terminal and shipped from there to storage facilities where it is moved to petrol stations as and when it’s needed.
20 years ago, we had eight refineries that virtually met all of our domestic demand for refined fuel. With the collapse of these, we have become more and more dependent on foreign imports and therefore more exposed to global supply issues.
How Is Our Fuel Price Determined?
Australia is the only country in the 29-member International Energy Agency that has not fulfilled its obligation to hold at least a 90 day domestic supply of fuel. However, we do have offshore oil supplies held in other countries plus imports heald by domestic industry which works out to around 89 days worth of crude oil, including stock on the way to Australia. Currently, we’ve got about 21 days of diesel and 25 days of petrol if supply stopped coming in.
This, again, makes us a seriously volatile market and beholden to price changes worldwide. While the government has recently been investing in shoring up our fuel security, after being accused of doing “bugger all” in 2019, we’re a long way from being safe from the turbulence of international movements.
This means that we’re affected by big swings in fuel prices. In metropolitan areas, close to where the fuel comes in from abroad, prices can move dramatically in response to supply. In regional areas, where fuel has to travel further to reach, prices are generally higher but more consistent.
The thing is, the government does not regulate the price of petrol, diesel or automotive LPG. It used to, however, the industry was deregulated in 1991 for LPG and 1998 for petrol and diesel. This has allowed wholesalers to set their own prices and the market to determine the cost of fuel. The ACCC however does monitor the price of fuel and will investigate and take action in places where they believe price gouging is occurring.
All of this means that our prices are generally set by the international market, with a 10 day knock-on period between the price tag we see globally and the domestic price.
While fuel is generally considered not to be a highly lucrative game in Australia because of its exposure to the global market, retailers try to capitalise on this with something called the ‘petrol price cycle.’ This is a uniquely Australian approach to fuel, whereby metropolitan retailers will fluctuate the price of fuel by around 30-40 cents per litre in response to basically nothing.
The ACCC typically don’t interfere with this as they see it as a way for the retailers to make money while also allowing consumers to time their purchases to get close to the market rate.
What’s Causing the Surge in Price?
While fuel is relatively expensive right now, Australia actually has some of the lowest cost fuel in the world for a non-producing country.
44.2 cents per litre of our fuel is pure tax. This is much lower than most other countries, like the UK’s $1.04 per litre and the Netherland’s $1.22 per litre.
17% of the price is in industry operating costs and profit. This means that 41% of our fuel comes from production cost.
When production cost goes up, so too do our fuel prices. We’ve seen a steady increase in prices over the past few years after global fuel costs crashed during the pandemic. While Russia is certainly a factor, it’s not the only thing driving it.
The global ‘wake up’ after the pandemic, in which many people are commuting again and global shipping and transport has resumed, has led to lead to an increase in demand, driving fuel prices higher.
While fuel prices have climbed in response to the European conflict, they’re more market-driven than supply based. The global economy had anticipated a shart-fall in fuel production, increasing demand, before the US, the UK, and Australia placed a ban on Russian oil. The actual sanctioning of Russia, now in effect, is likely to send global prices even higher as those countries seek to get their fuel from elsewhere.
Although the price of a barrel of crude oil is still below historical records, the Australian dollar is not worth what it was during those record highs. This means our purchasing power is weaker and we’re paying the price because of it.
What Can We Do About It?
Well, we could make more to cover the Russian shortfall, however, that takes time and it’s not something Australia is in a position to do without opening new oil fields such as the proposed one in the Great Australian Bight that saw fierce resistance in the past few years.
Internationally, the production of oil is controlled by the Organisation of the Petroleum Exporting Countries, or ‘OPEC’. This is largely a group of Middle Eastern nations that control much of the world’s supply of oil and work together to keep fuel prices as high as the market will tolerate. Increasing production is not economically attractive to them and, again, would likely take longer to do than the current upset would last.
Other suggestions have been cutting the tax Australians pay on fuel, which Morrison has said that he is open to. Doing so would reduce the amount we pay a the pump in the short term and increase the amount we can spend in other areas of the economy.
However, the government makes around $11 billion each year from fuel taxes and doing so could mean higher taxes elsewhere to make up for it. It also increases our reliance on fossil fuels as it makes transitioning away from them less attractive, making it not a good idea in the long term.
Ultimately, there is little the average consumer can do to avoid the high cost of fuel. In the short term, it’s best to use fuel tracking apps like Petrol Spy, which will tell you where the cheapest fuel is in your local area, as well as cut down on journey’s as much as possible. Trying to time the petrol price cycle is another good way of ensuring you get the best price.
In the longer run, looking to make your next vehicle an electric one will mean being free from the constant worry about increasing prices. Cycling is also a good option if you live close enough to work to make this viable.
In the meantime, we’re likely to see prices continue to rise and remain high for the next few months.
Read more stories from The Latch and subscribe to our email newsletter.
