Rod Myer, 14 January 2016

Oil prices are on the skids with Saudi Arabia flooding the market to beat off the Americans. And Aussie motorists could be big winners.

Australian motorists could benefit if the current fall in oil prices continues, with petrol prices expected to drop below $1 a litre.

World oil prices have fallen 40 per cent from $US50 a barrel 12 months ago to around $US30 now.

But Aussie petrol prices have only come down from $1.30 a litre to around $1.14, a fall of about 13 per cent. Much of the difference in those falls is accounted for by the fact that the Australian dollar has dropped from US80c to US70c, eroding Australian purchasing power in the oil market.

Another reason prices have not fallen further is that the oil companies have been shoring up their profits by increasing the margin of retail prices over the wholesale price.

That margin, says Caltex spokesman Sam Collyer, is usually 1.35 cents a litre.

“Sometimes it is less than a cent and sometimes it’s close to 2 cents, but the long-term average is just over a cent.”

But the graph below from motoring services group RACV shows that margin is closer to 8c a litre and the oil companies have been holding it above the declining wholesale price.

Usually the price at the pump is forced back to the wholesale price by competition on a monthly cycle. But for the last two months petrol sellers have been holding onto their margin.

Nonetheless, that situation is not likely to last and some heavy hitters in the finance world are predicting the oil price to fall further.

US investment house Bank of America Merrill Lynch says crude prices could dip to as low as $US20 levels and British group Standard Chartered is tipping $US10.

If those prices are reached and the Aussie dollar stays at around US70c then it’s a fair bet the bowser price will fall below $1.

The last time Australians enjoyed prices that low was in early 2004 when oil prices were higher than now at $US44 and the Aussie dollar was a shade stronger at US72c.

But don’t expect those prices to hold. Bank of America Merrill Lynch is tipping weakness in the first half of the year but prices should then recover to average US$46.

Graham Bethune, a principal of Adelaide-based Energy Quest, agrees: “I’d expect an average of $US40 to $US45 for the next couple of years, not $US60.”

There are a couple of factors pushing the oil price lower at the moment. The high prices of recent years have been driven by strong demand from China. But just as with coal and iron ore, that Chinese demand is weakening pushing down prices.

There is also a battle royale going on in the international oil market.

“The question is does OPEC exist any more?” asks Mr Bethune. What he means by that is the oil cartel is not playing its usual role of cutting production when prices fall to hold up the market.

Many of OPEC’s smaller members have called for that but the team heavy hitter, Saudi Arabia, is refusing to play ball. Instead, it is manning the pumps and flooding the market.

Why? It’s all about protecting their market position.

In recent years the market dynamic has changed with lots of shale oil producers from the US and elsewhere coming into the market using newly developed “fracking” technology.

The Saudis are responding by trying to squeeze them out. Many of those producers are said to need $US80 a barrel to keep the wolf from the door and the Saudis are trying to send them broke.

It’s a high-stakes game with the low oil prices severely damaging the Saudi budget.

-with Tony Kaye

Extracted in full from The New Daily.