The largest oil producing nations around the world are cutting supplies and it’s about to make a dent in your pocket.

In the three months from March to June, petrol prices rose 8 per cent after lower supply and higher demand spooked traders.

Not only that, but the averaged unleaded pump price hit an 18-month high last week.

High oil prices obviously affect your wallet, but it can also have much broader implications on your day to day life.

Effect of high oil prices

Higher oil prices can increase inflation rates and potentially reduce the spending of consumers and businesses.

According to the ACCC’s latest petrol monitoring report, the average retail price for petrol across Sydney, Melbourne, Brisbane, Adelaide and Perth was 133.4 cents per litre.

That is 12 cents higher than December last year.

“What we are experiencing in Australia is a flow-on effect of higher international crude oil and refined petrol prices,” ACCC Chair Rod Sims said.

Retail prices in Australia are determined by international refined petrol prices, so the higher international fuel prices are the higher they will be for us.

“A large proportion of what consumers pay when filling up their car is fuel excise tax, and some of this, in effect, is used by the government to fund Australia’s roads,” Sims said.

Why are oil prices higher?

Well, for one it’s COVID-19.

Demand is lower because of a lack of travel, both international and just people no longer doing the daily commute.

You’d think a lack of demand would make prices cheaper because there would be an oversupply, but oil supply is controlled by a cartel.

The Organisation of the Petroleum Exporting Countries (OPEC) is an intergovernmental organisation of 13 countries. The biggest members by oil supply are Saudi Arabia, Iraq, Iran and Venezuela.

In addition to that, 10 more oil exporting countries, led by Russia, form the OPEC+ cartel, which agreed to cooperate in fixing the global crude oil prices alongside OPEC.

Essentially, the price of the petrol you put in your car is determined by Saudi Arabia, Iraq, Iran, Venezuela and Russia.

Chief economist at CommSec Craig James said OPEC+ has been keeping supply of oil tight while the members wait to see how everything pans out globally with vaccinations and opening up post-COVID.

“Then there is the debate amongst OPEC+ oil producers about whether to maintain production quotas or whether to lift production and thus prevent oil prices rising too far, too fast,” James said.

“And prices could go either way in the near future depending on how the OPEC+ disagreement is resolved. The United Arab Emirates is blocking attempts by other producers to lift output, disagreeing with the calculation of quotas.

“If OPEC+ was to splinter, countries may decide to lift production, driving down prices. But if the current agreement is maintained and OPEC+ doesn’t ease up on production curbs, oil prices could drive even higher than current lofty levels.”

Extracted in full from: Petrol prices jump 8%: Why it’s stoking inflation fears (