Petrol prices are soaring.

They’ve hit record highs in Australia in recent weeks, and they’re one of the main factors driving inflation higher.

What’s behind the cost increase?

How do the price rises compare to the 1970s when Australia’s economy was a casualty of foreign oil crises?

Fascinatingly, part of the story has to do with a Coalition government introducing a de facto carbon price more than four decades ago.

Petrol prices hit record highs

Australia’s annual inflation is now running at 3 per cent (seasonally adjusted).

Fuel prices have been a key driver of the lift, jumping 36 per cent since April last year and hitting record nominal highs around the country this month.

According to the Bureau of Statistics, the automotive fuel component of its inflation index has hit its highest level in its half-century history.

Analysts say two major things are driving the price increases.

First, demand for fuel has picked up globally as economies have emerged from lockdowns and transportation and manufacturing has picked up.

Second, the global supply of oil has not been keeping pace with the surging demand — and that is being done deliberately.

Oil cartel the Organisation of the Petroleum Exporting Countries (OPEC) and its allies, called OPEC+, are restricting oil supplies at the moment.

They say they don’t want to produce too much oil because there’s a chance that further COVID outbreaks could derail the already-fragile global recovery, and that would undermine global oil demand again.

But why do Australian motorists have to worry about the actions of OPEC?

Well, because their fates were linked in the late 1970s by a federal Liberal treasurer called John Howard, and because Australia has seen declining domestic oil production since the turn of the century.

How does this compare to petrol price increases in the 1970s?

In the 1970s, Australia was hit by an economic crisis dubbed “stagflation”.

It saw the economy endure stagnant growth and rising unemployment, as well as high and rising inflation.

The crisis occurred, in part, as a consequence of severe oil price shocks in the decade, which stemmed from decisions by OPEC to severely restrict the global supply of oil (again).

In Australia, the first major global oil price shock of the era resulted in fuel prices jumping by 25 per cent in 1975.

It contributed to inflation hitting 17.7 per cent that year.

Then, a second oil price shock in 1979 saw fuel prices jump by nearly 50 per cent, which further fed into inflation.

The higher petrol prices and fuel shortage fears in the early 70s led to some important technological and cultural changes.

For example, the large Holden Kingswood was replaced by the smaller Holden Commodore, which was launched in November 1978.

But there’s another important event that’s often forgotten.

In the early 1970s, Australian motorists were partly shielded from global fluctuations in the price of crude oil because the country produced much of its own oil for domestic consumption.

However, that dynamic was changed — controversially — towards the end of the decade.

Australian motorists forced to pay international prices

In August 1978, the Coalition government led by Malcolm Fraser introduced a new tax on fuel that increased petrol prices significantly.

The plan was announced by then-treasurer John Howard (who became Australia’s prime minister in 1996).

At the time, Australia produced about 70 per cent of its domestic oil needs, and the maximum allowable retail price for premium petrol in Sydney was 21 cents per litre.

But Mr Howard said Australian motorists were getting petrol too cheaply.

He announced a plan that all Australian-produced crude oil would have to start being sold to local refineries at the same price as it cost to import crude oil from overseas.

It meant consumers would have to start paying prices based on world oil prices; they’d no longer be able to enjoy cheap oil from their own domestic supply.

“Since the OPEC countries quadrupled the world price of crude oil in 1973-74, Australians have continued to enjoy artificially low prices for crude oil,” he said.

“While the rest of the world was facing up to the inescapable fact that the days of cheap energy were over, Australians — even after the imposition in the 1975-76 budget of a $2 per barrel production levy — were continuing to pay less than half of the world price for Australian-produced crude oil.

“Subsidised indigenous oil prices encouraged a wasteful use of a key energy resource and inhibited the adoption of more energy-efficient processes and technologies. In recognition of this the government moved last year towards a more realistic pricing policy for Australian-produced crude oil.”

In a submission to Mr Fraser’s cabinet, Mr Howard said the “import parity plan” would ensure oil exploration remained economically viable in Australia, helping to secure future domestic supply.

On the night of the 1978 budget, he said the plan was necessary because, since the proportion of local crude oil production sold to refiners at less than world prices was about 70 per cent that year, it involved, in effect, “a subsidy to petroleum product users of some $800 million”.

He estimated the plan would net the government additional revenue in 1978-79 of $676 million.

“In the light both of the budgetary situation and the desirability of improving energy use and the allocation of resources, the government has decided that all Australian-produced crude oil should, from tomorrow, be priced to refineries at import parity levels,” he said.

(If you’re interested, a transcript of Mr Howard’s entire address can be found here, with the section on oil starting on page 45).

His plan would have material consequences.

It would immediately increase the production levy on oil produced in the Bass Strait from less than $3 per barrel to the “world price” of $10.26 per barrel.

Mr Howard estimated it would see petrol prices rise by 3.5 cents a litre. Given the maximum retail price at the time was 21 cents a litre, it represented an increase of 16.6 per cent.

But he said motorists would still enjoy much lower petrol prices than motorists overseas.

“For example, during the first quarter of 1978 consumers were paying 49 cents per litre in Italy, 44 cents in France and Japan, and 28 cents in the United Kingdom,” he said.

It was an historic policy shift.

From that moment, it meant Australia was deliberately connecting its petrol prices to the global price of crude oil, putting its motorists more at the mercy of international markets.

And no Coalition or Labor government has tried to change the import parity pricing regime in the decades since.

It has seen motorists experience episodes of dramatically low prices, such as last year, and periods of soaring prices, like this year.

It also complicates attempts to compare petrol price dynamics between the 1970s and today.

Cabinet papers released after 30 years

In 2009, after the 1978 cabinet papers were released under the 30-year rule, Mr Fraser stood by his government’s decision to introduce import parity pricing.

“Petrol is a finite resource,” he was reported as saying.

“Countries like the US, which artificially lower [the price of] their resources, are remarkably stupid. I don’t deny it was an important revenue raiser. But there was a good environmental reason to put the price as near as possible to the world price.”

At the time of Mr Fraser’s comments, the world was struggling through the global financial crisis and US car manufacturers were appealing to the US government for multi-billion-dollar bailouts.

“Perhaps if America did the same thing, General Motors and Chrysler would have stopped making gas-guzzling cars and made more environmentally friendly vehicles, instead of now begging for billions of dollars from the US government to stop going bankrupt,” Mr Fraser said.

Renewable energy could end reliance on global oil suppliers

At any rate, Australian motorists are now struggling with the highest nominal petrol prices on record.

And it’s refocusing attention on Australia’s over-reliance on global oil suppliers.

This week, NRMA spokesperson Peter Khoury said Australia’s slow transition to electric vehicles would cost Australian motorists.

He said Australia now had the second-oldest car fleet in OECD countries, and that meant drivers would have to keep riding global petrol price fluctuations for years.

“The transition to electric cars will be the inevitable outcome for Australia, so it’s important Australia prepares for that future,” he told the ABC.

Mr Khoury said he was looking forward to seeing Australia power its cars independently with renewable energy sources.

“We import our fuel from some of the most volatile parts of the world, and Australia is an energy superpower with an abundance of energy to allow us to generate our own electricity,” he said.

“So instead of importing expensive and volatile fuel from the most volatile parts of the world, we can rely on our own energy sources right here at home.”

Extracted in full from: Petrol prices are at record highs and a decision made in the 1970s begins the story – ABC News