Petrol prices are in the news again. The federal government’s decision on the weekend not to extend the fuel excise discount is already being felt at the bowser.
The price rises may be tempered by news this week that a peace deal in the Iran war will be revived.
But if a deal is reached, there is no guarantee it will last or end the chaos in the Strait of Hormuz. The oil price disruption isn’t going anywhere.
On The Fin podcast this week, senior resources writer Angela Macdonald-Smith and energy and climate reporter Ryan Cropp discuss the reasons we all stopped freaking out about the oil price and why that was premature. This is an edited transcript of the conversation.
At the start of the Iran War, we were all bracing for one of the biggest oil price shocks in history. Why did we stop worrying?
Angela Macdonald-Smith: When this war broke out in late February, we heard forecasts of $US150, $US200 a barrel of oil, or even higher, but the reality is Brent peaked around $US126. That’s well below the 2008 all-time high, and more recently prices have been trading below $US100, below $US90 even, despite the disruptions in the Strait of Hormuz lasting much longer than anticipated. Some people initially were saying the effect of this would be worse than the disruption when the Ukraine war started in 2022, and the twin oil shocks of the 1970s. Back in the 1970s, oil prices quadrupled during that first shock, and then more than doubled in the second oil shock later in the ’70s. But there have been a few factors that have actually come into play here. On the supply side, although the Strait of Hormuz closure takes about 20 million barrels a day of oil out of the market – about 20 per cent of global supply – there’s still about two-to-three million barrels a day getting through in this dark fleet operation. And then there’s another four-to-five million barrels a day getting out to global markets through alternative routes, such as through the Red Sea. We’ve also seen an increase in oil exports from other countries. The US, Canada, Norway and Brazil have all upped exports, and the easing of US sanctions against Venezuela earlier this year also allowed more exports to come from there. And then on the International Energy Agency initiative, we had a record 400 million barrels of strategic reserves released under that initiative.
Several things on the demand side have also helped us better balance the consumption of oil with what’s actually available. The biggest factor here has been China, which dramatically cut back oil imports as it preferred to draw from its own huge stockpiles of oil rather than buy even more at high prices. There’s also been a pullback in consumption in some more price-sensitive countries, particularly in Asia, and then just generally softer demand from the aviation sector. It’s all really meant that on the global market, this imbalance between supply and demand hasn’t been nearly as stark as initially feared, and that’s really taken some panic out of the market.
Ryan Cropp: The Australian government at the start of this crisis basically made a decision that they would pay anything to stop this becoming a major political issue. The biggest and most expensive response was a cut to the fuel excise, which is the tax you pay the government on every litre of petrol and diesel you buy at the service station. Now that cut – 32¢ a litre – cost the government about $3 billion over three months. They also set up a mechanism that allows the government to underwrite purchases of fuel on international markets. So that gave big refiners like Ampol and Viva the ability to pick up cargoes, even if the prices were uneconomic, so Australia was just picking up cargoes on the spot market, making sure we weren’t going to run out. The government didn’t put a precise figure on this one, but it could end up costing another several billion dollars.
And then at the budget, they announced it’s building up a new nationally owned supply of diesel and jet fuel, like a reserve stock, and the idea behind this was to raise our minimum stock levels to 50 days, up from around 29 days pre-crisis. And all of that, and particularly the fuel excise cut, has had the effect of basically neutering this as a first order political issue. Everyone seems to have forgotten about it because the one touch point for this at the petrol bowser has faded away as a problem. People have just stopped thinking about it. Now that may change. On Sunday we saw the government basically let this fuel excise cut roll off, so you know prices are coming back up. There are predictions that we’re going to be paying around $2.20 a litre for petrol, $2.60 for diesel. You know, and interestingly, actually on Saturday, at Chris Bowen’s weekly press conference, there were a few more questions than usual. I think this is coming back onto the agenda.
You reported this week there are ships waiting offshore to unload some of that fuel because there is no storage.
Cropp: The government’s plan to subsidise fuel was always about bringing in additional supplies of petrol and diesel. So that’s over and above what we would ordinarily import. So think of that as a kind of insurance policy against another major supply shock like the one we saw in March and April. But over the last 15 weeks, it’s underwritten 19 shipments of additional fuel cargoes. And that’s actually done what it was intended to do, which is to ease the panic and bring down prices. But it’s also brought in a lot more fuel than Australia actually has the capacity to store at any one time. And we reported this week that one vessel has been anchored near Queensland’s Sunshine Coast for several months, with at least some of the huge costs of those delays being picked up by the government. There’s another vessel near Geelong, for example, that’s been on the water for 86 days. So it looks on the surface like the government may have slightly overdone its response here and that taxpayers are picking up the price. But I guess from the government’s perspective, they would argue that that’s actually quite a small price to pay to ensure that our fuel supplies are really rock solid, and they’d actually rather have too much fuel than not enough. So given the risk of fuel shortages are showing few signs of abating, they’ll be thinking that was probably a pretty good bet.
Why are oil markets now on edge?
Macdonald-Smith: There’s definitely been a bit of a tick up in nervousness in the market. People have really realised that the peace deal signed back in June really doesn’t mean that much. Just in the last few weeks, we’ve seen these renewed Iranian attacks on tankers in the Strait of Hormuz and American strikes in Iran. We’ve also seen Yemen’s Houthi rebels seek to block the Saudi-linked shipments passing through the southern end of the Red Sea at the Bab el-Mandeb strait, and that’s forced some shipments instead to go northwards through the Suez Canal, despite the much lengthier shipping timetables that that involves. And then even at the end of last week, we saw that attack on a port in Egypt near the Suez Canal, and that’s pretty worrying because it’s the first strike on Egypt, and it also suggests that that waterway is also really vulnerable if this conflict escalates.
At the same time, we’ve got the ongoing war between Russia and Ukraine, so increasing strikes by Ukraine over the past several months against oil processing capacity in Russia, and that’s caused Moscow to extend restrictions on exports of petrol and diesel. You know, this has all just dragged on. Strategic fuel reserves that we spoke about earlier are just being worn down, and that’s reducing the protective buffers that we have in the market.
Australia is down to its last two oil refineries, and both are calling for more government support. Should the government subsidise domestic refining?
Macdonald-Smith: It already is to a certain extent, but I think we’re going to see that rise to a totally new level. Remember, we had eight refineries in the early 2000s, but that’s now down to just two, operated by Ampol and Viva. So there’s been a massive reduction in our ability to refine oil here. That means we’re dependent on imports now for more than 80 per cent of petrol and more than 90 per cent of diesel, which is a fuel that’s just critical for our economy for so many areas: defence, agriculture, mining. Not to mention cars. And basically the reason for those closures was economic. Those plants were just really small, old, and inefficient, and there’ve been so many big new refineries built in regional Asian markets – in India, Singapore, Korea, huge plants with much better economies of scale. So the two refineries that are left here are really just hanging on a lifeline of this government support package. But that really only guarantees their operations for the next couple of years. And so, under discussion at the moment, we’ve got the second phase of a refinery fuel security package that should be finalised by the end of the year, and it looks as if it’s going to mean a big increase in the actual support. It is quite odd because this push for more support is coming as profits from oil refining have soared with the disruption of oil flows through the strait. But those two refiners say that much more certainty is needed on returns from refining in order for them to invest in the plants. A closure of Ampol’s Lytton refinery in Brisbane or Viva’s Geelong plant would put Australia really at the mercy of overseas suppliers in what’s become a tremendously volatile and tight global market for petrol, diesel, and aviation fuel. That really gives the refineries a pretty strong bargaining position in these discussions with government. Last week, we also heard this talk about a potential new refinery in Western Australia. It would be the first refinery built here in six decades. But as to how realistic that is, I’m not sure. It would take years to build, and estimates of how much it would cost have ranged from about $7 billion to as much as $15 billion.
What will be the impact of this oil crisis?
Macdonald-Smith: There’s a real risk that prices could shoot higher again if those alternative transit routes, like the Suez Canal, are blocked, or if there’s really some sort of major damage to actual oil production infrastructure in the Middle East. It’s hard to compare what’s happening now to oil shocks in the past. There’ve been so many other ways of mitigating what’s happening in the market and adapting that we just didn’t have back in those 1970s oil crises. So we’ve just got a much more sophisticated market, an interconnected market now. We’ve been able to work around a lot of that. But I think in terms of the ongoing impact, we might just be at the start of this. No one is expecting things to go back to what they were in January and February, so it just looks as if we’ve got these extra costs and extra risks really baked into the market now.
Cropp: I think it’s worth noting that this is probably what a major oil crisis actually looks like in the 21st century. It’s going to be a slow burn that’s going to wash through the economy over time, and its effects will be incremental, but they will be significant, especially the inflationary effects. Everything’s going to start costing more.
There’s been this lurch back towards economic sovereignty as a result of global crises like this one, and the COVID pandemic, and the global financial crisis. All of that is well and good, but it does add cost. And if we think about globalisation as a cost-lowering exercise, then it stands to reason that renationalisation will go in reverse. The thing to watch in coming months will be these cost pressures.
Extracted in full from: https://www.afr.com/companies/energy/did-we-stop-worrying-about-the-oil-price-too-soon-20260803-p60l0h
