Recent days have seen declines in the global price of crude oil, with the most significant being a 30% drop in the price of crude oil in a single day. This substantial fall was primarily attributed to the global trading market’s response to supply side factors associated with growing tensions between global oil producers – most notably Saudi Arabia and Russia – that threatens excess supply. Traders also appeared to be factoring a likely demand side impact associated with the Coronavirus pandemic that has some commentators predicting that global daily demand for oil will fall by about 1.5M barrels per day.

The fall was ‘big news’ in the national media with suggestions that the fall was timely as all Australians prepared for the adverse economic impact of the coronavirus. The Federal Treasurer, the Hon. Josh Frydenberg, went so far as to make a public statement calling on the ACCC to monitor petrol prices in Australia, to ensure that the associated cost savings were immediately passed on to motorists at the pump.

The following day, market commentators predicted that the lower crude oil price would deliver substantial savings at the petrol pump for Australian motorists. CommSec went so far as to suggest that the oil price could drop as low as $1 per litre in the near term.

The CommSec statement was gobbled up by the media and used by numerous, and normally sensible news outlets and capital city radio hosts, to attack our industry for continuing to charge a national average fuel price of around $1.44 per litre.

“Media and financial commentary predicting an imminent $1 price per litre retail price for petrol in Australia against this backdrop was simply bizarre”, said ACAPMA CEO Mark McKenzie.

“It is unclear whether this commentary was motivated by a deliberate and opportunistic desire by some commentators to ‘grab a headline’ in the face of intense media interest in the economic impacts of the coronavirus, or a reflection of a genuine lack of knowledge about the relationship between a daily trading desk movement in global oil price and average retail petrol prices in Australia” said Mark

Regardless of the cause, the commentary sparked a nonsensical national discussion about petrol prices that resulted in ACAPMA being called out by numerous news outlets to explain why Australia’s fuel retailers had not immediately fallen to $1 per litre.

“The first point made was that a change in the oil price on one day does not mean that petrol prices change the next day – there is generally a 1-2 week lag before retail fuel prices reflect a sustained change in crude oil prices”, said Mark

Put simply, crude oil is purchased at a given point in time. Once purchased, it is used to manufacture fuel products like petrol, diesel, jet fuel and other products. It is then shipped to Australia (if imported), unloaded at a fuel terminal, wholesaled to fuel retailers and trucked to service stations – all before it becomes available to motorists.

The second point made was that crude oil prices are inherently volatile. A single day fall in the price of crude oil, no matter how significant, does not constitute a sustained oil price trend. It is interesting to note that the 30% one day fall in the global (US dollar) price that occurred on Monday was accompanied by a 5% devaluation of the Australian dollar. The next day the global oil price rose by 7%.

“The combined effect of the lower Australian dollar and the subsequent oil price correction was to reduce the 30% net price fall of the previous day to 18% – all in just 24 hours”, said Mark.

It goes without saying that the inherent uncertainty of oil prices means that any assertion about future petrol prices is always highly contestable – regardless of whether it comes from industry or financial commentators. It therefore follows that for a price forecast to be considered credible – albeit never certain – it should be accompanied by a basic summary of the assumptions used to develop the forecast.

So, let’s take a quick look at what would need to happen if Australia’s average petrol price was to credibly fall to $1 per litre in the near term.

The percentage of the retail petrol cost that is attributable to the global cost of crude oil moves around a bit due to retail fuel price volatility – especially in capital city markets. That said, on average, the price of crude oil represents about a third of the retail petrol price in Australia – or about 48cpl at current average prices.

Given that current tax rates (i.e. Federal fuel excise and GST) represent around 57cpl at present, and that fuel supply chain costs (i.e. shipping, terminal, wholesale, land transport and retail costs) account for a further 25-30cpl, the global cost of oil (i.e. Tapis Crude) would need to fall by 30% three more times (i.e. in quick succession), for a $1 average retail petrol price to be probable in Australia.

In addition, the $USD-$AUD exchange rate would have to remain at its current settings (i.e. crude oil is traded in $USD) and the dramatic drop in oil prices would need to be sustained over a reasonable period.

“It cannot be said that the above scenario is impossible, but it is fair to say it is improbable unless there is a dramatic and sustained change in the global demand-supply balance”, said Mark

The only certain way of delivering a $1 per litre average petrol price at current market settings would be for the Federal Treasurer to reduce fuel excise from the current rate of 43cpl to around 13cpl.

 “It is interesting to note that Federal Fuel excise has quietly increased by around 55% over the last 14 years and the levy remains constant regardless of any movements in oil price”, concluded Mark.

Another option would be for the Federal Government to reduce Federal excise by a lesser amount – say the 28cpl that it was 15 years ago – and then exclude fuel from GST.

“In short, betting on global oil prices to deliver $1 per litre fuel in the face of the coronavirus is a ‘mug’s bet’ but the Federal Government has fiscal measures available to it that could be used if there is a genuine desire to lower petrol prices to this level”, concluded Mark.