Now that we have established that our ability to pay more for fuel will keep imports flowing and bowsers full, we should probably talk about the real cost for Australians.
Higher diesel and petrol prices create more than just a one-off sting at the petrol pump. They add more price pressure into an economy already battling an inflation problem, put more pressure on the Reserve Bank of Australia to hike interest rates and keep them higher for longer, and make it harder for business to reinvest in productive growth.
How much? It all depends on how much more we pay for oil or refined petrol and diesel, which is a function of the import/wholesale price and retail margin. The import price is the main one – and it’s been left deliberately opaque in the past fortnight as the government focused on shoring up supply via Export Finance Australia and left the price worry for another day.
Citi economists have been brave enough to take a stab. They say Australia is paying $US15 to $US25 a barrel above the Brent Crude price – “the premiums that Australian importers must pay” – which makes our effective oil price today about $US112 a barrel. That is about 70 per cent more than it was at the start of the year.
That’s a hefty cost. If it stays that way – and who knows what’s going to happen to oil prices in the near term let alone when the Strait of Hormuz will truly open and restore the 10 million-plus barrels of Gulf oil a day missing from global markets – Australia’s economy could be in for a rude shock.
Citi says a $US112 a barrel effective oil price would wipe 0.4 per cent off Australia’s GDP growth this year (about one-quarter of the growth tipped by the RBA in its February statement on monetary policy) and increase inflation by 1.2 percentage points (the RBA was tipping 3.6 per cent).
Both are chunky moves in the wrong direction. The longer the Strait of Hormuz is closed, the more likely this scenario becomes.
If it plays out, it would be right to expect both monetary and fiscal policy responses – likely in opposite directions. The RBA would have to lift rates to get on top of inflation and likely keep lifting them, while governments (state and federal) may have to stimulate the economy with targeted or broad cost-of-living relief.
Citi considered better and worse scenarios; the effective price at $US82 and $US135 a barrel. Its scenarios are probably as good as anyone’s – investors and sell-side analysts are struggling to play through the oil price shock and how it will impact the economy, and we’d argue the investment banks have been slow to get these sorts of walk-throughs in front of investor clients.
Their base case – the $US15 to $US25 a barrel premium – fits with the blow-out in the Singapore crack price, which has gone from about $US5 a barrel to $US22. It is consistent with feedback from fuel wholesalers and other sources involved in the government/Export Finance Australia’s imports, who stress Australia and its consumers will not run out of fuel because it can (and will) pay more than other countries.
That’s the bit we think the market has missed; just because pumps are not dry does not mean we have escaped the worst of this. We’re paying what we have to for oil and fuel, and that cost will have to pop up somewhere. Downer EDI boss Peter Tompkins shared his fears about a hyper-inflation cycle late last week.
What Citi’s talking about – and we think investors should also be talking about – is a step-change in the premium Australia has always had to pay for its energy imports. Normally, it is “low and manageable” as Citi puts it. “However, given the current crisis is not just a price shock but a physical supply shock, we believe the premium could be higher for Australian producers than historic averages,” Citi says.
Remember, the government has Viva Energy, Ampol and others paying almost whatever is required to pick up loose supply, and guaranteeing they will not lose money on getting it back to Australia and into the domestic distribution chain.
This premium and how long it lasts has to be a hot topic inside the RBA, as it prepares board materials for the next monetary policy board meeting on May 4 and 5.
When the board last met in March, RBA staff told them $US100 a barrel oil would lift headline inflation in Australia to about 5 per cent in the year to the June quarter, or about 75 basis points more than expected. Citi’s analysis is not far off that, and it expects two more interest rate rises this year.
Extracted in full from: https://www.afr.com/chanticleer/why-whatever-it-takes-on-fuel-will-break-the-rba-s-back-20260421-p5zpst
