Mat Spasic, 27 January 2016

Australian motorists are being urged to fill up at the bowser today before prices spike again. Yet before we start dreading petrol at $1.60 again, some perspective wouldn’t go astray.

If you live in Sydney or Melbourne, you’ll have noticed petrol prices hovering around the $1.00 mark of late. Both cities have seen fuel prices fall to their lowest level in 12 months this January.

This morning, the average price at the pump in Melbourne was $1.02 a litre. You could even find some selling for $0.99 a litre. Sydneysiders have it even better. Average prices per litre are sitting at $1.01, bottoming out as low as $0.96 a litre at some stations.

These prices are stretching the limits that Aussie motorists have become accustomed to. According to the NRMA, were prices to fall any lower, they’d be trending at seven year lows.

Well, it’s about time!

Where were these low prices for most of last year? Crude oil prices have plunged by 70% since August 2014, to US$30 a barrel. This didn’t happen overnight. It was a steady decline. And yet we were still paying between $1.20 and $1.60 a litre for much of that time. What gives?

Why didn’t petrol prices ease sooner?

The Aussie dollar’s decline against the US greenback is partly to blame. And it’s the explanation you most often hear talking heads bring up.

According to our in-house analyst, Daniel Ryan, here are some other factors to keep in mind when you’re at the bowser:

IMPORT: We import refined fuel (around 40%) from Singapore and Asia. This means we’re more dependent on the price of refined fuel as opposed to the direct oil price.

It takes the same amount of labour to get oil refined and to market at US$100 a barrel as it does at US$30. Those things are built in as a base cost, whereas the rest can shift.

TAX: Taxes on fuel in 2013–14 worked out to around 52 cents per litre. Made up of a fixed excise 38.143 cents per litre, plus 10% GST, on final retail price. In 1999, we didn’t have the GST and the fuel excise was 37.48 cents per litre.

INFLATION: According to the Reserve Bank Inflation calculator, $1 in 1999 is equivalent to $1.55 in 2014 (they don’t calculate for 2015 yet). Per the Australian Institute of Petroleum:

Since 1983, the increase in retail fuel prices paid by consumers has been less than the increase in the Consumer Price Index (CPI) and the price increases for other major household items (when fuel taxes are excluded).

All these factors help explain why Aussies pay more at the pump than we think is fair. Even so, oil prices have sunk so low that something had to give in the end. Market forces pushed oil prices so low that we had to see tangible results at the pump. And now we have.

But will it last?

Well, it doesn’t matter one way or the other.

Right now, there’s an upward price cycle (higher prices) taking place in Adelaide. Analysts believe that suggests we’ll be paying more at the pump soon around the rest of the country.

But even this upward cycle isn’t likely to last. According to the NRMA, a positive cycle will follow that. In other words, even if prices at the pump go back up, they’ll come down again in due course.

The key thing with this is that it’s the service stations themselves that are passing on these cuts. They could have done this much earlier, that’s true. But the fact they’re doing now at least shows a willingness to pass on low prices to consumers. According to RACV, unleaded petrol in Melbourne is down 17% since December. But the amount that petrol stations are paying at the terminal gate is down only a few cents. In other words, we know that it’s the petrol stations that are behind lower fuel prices.

Again, this should have happened at least six months ago. It’s not as if the Aussie dollar was trading much higher against the greenback for most of last year than it is now. But, considering what our analyst had to say about it, maybe that’s too harsh on retailers.

Either way, if you’re looking to take advantage of low prices now, you better hurry. Such price cycles, as we’re seeing now, typically last no longer than two weeks. Yet it’s been almost five weeks since prices at the pump tanked. So it’s possible you could see prices rise by $0.20 overnight at some point in the next week or so.

Anytime the retail prices falls to the level of the wholesale price (as it’s done), it means we’re close to the end of the cycle.

From that perspective, you may as well fill up today. If it’s empty, why not? But if your tank is full, don’t worry. You’ve already brought in at the right time. Quite frankly, it doesn’t matter one way or the other. The best advice is to continue doing what you normally do.

Aussie motorists already put up with double standards more than most. We’re used to it. We’ve been stung by high oil prices for so long, the next upward cycle won’t make much difference to us.

On a few occasions, we get treated like the rest of the world. It lasts for a bit, and then goes back to normal. At this point, we’ll enjoy it while it lasts. But we’ll never get too comfortable because we know bad news is just around the corner.

Mat Spasic,

Junior Analyst, The Daily Reckoning


Extracted in full from the Daily Reckoning.