Bowser shock: Middle East war triggers surge as experts warn of brutal 45c a litre price hike

A drone attack forced Saudi Arabia to shut down its critical East–West oil pipeline on Friday (Saturday AEST), compounding an already volatile Red Sea shipping environment.

With Houthi rebels continuing to assert control over strategic points near the Bab el-Mandeb Strait and global oil markets reacting to the loss of a major pipeline bypass route, analysts warn that crude oil prices remain in what AMP Chief Economist Dr Shane Oliver has described as a “danger zone”.

IMPACT ON AUSTRALIAN FUEL PRICES

Because Australia imports the substantial majority of its refined fuel, domestic pump prices are heavily influenced by international benchmark prices — particularly Singapore refined product benchmarks for petrol and diesel — as well as by the Australian dollar exchange rate, domestic refining margins, and retail competition.

At the time of writing, the national average for regular unleaded petrol was $2.346 cents per litre, with diesel at $2.842 cents per litre.

Highlighting the immediate local toll, NRMA spokesperson Peter Khoury pointed to sharp wholesale and retail spikes: “The national average for unleaded has gone up 34c a litre since the start of this month – diesel slightly higher, just under 40c a litre.”

“The increases in the retail prices are on par with the increases in the wholesale prices.

“So there’s not much gap between the retail and the wholesale price, which is lucky because if the profit margins of the oil companies were as wide as they have been historically, we’d be paying even more.”

Mr Khoury added: “There have been periods this month when the retail price was lower than the wholesale price.”

Diesel price rises disproportionately affect the cost of freight, regional trucking, agriculture and supermarket supply chains, given diesel’s central role in the movement of goods across the country. Sustained increases in diesel costs tend to flow through to broader costs of living over time.

THE PIPELINE ATTACK: WHAT WE KNOW

On Friday (Saturday AEST), Saudi Arabia’s Ministry of Energy confirmed the shutdown of its East–West pipeline following a drone attack.

The pipeline, which runs roughly 1,200 kilometres and was designed to carry Saudi crude directly to the Red Sea port of Yanbu, exists specifically to allow oil exports to bypass the Strait of Hormuz.

According to Saudi authorities, the drones responsible for the attack were launched from Iraq, with Saudi Arabia’s Foreign Ministry pointing to Iran-backed militias as the source.

Satellite imagery reportedly showed significant damage to a pumping station along the pipeline route, with repairs expected to take several weeks.

The shutdown has been estimated by some analysts to remove close to four per cent of global oil supply from the market during the outage period.

BACK TO HORMUZ?

Due to the risks, Saudi Arabia is increasingly using the Suez Canal as well as Egypt’s Sumed pipeline from the Red Sea to the Mediterranean. Transits of Saudi crude through the canal approached 500,000 barrels per day at the end of July, compared with almost none in June, according to commodities data firm Kpler.

For crude bound for Asia, Saudi Arabia’s main export market, this route would also require sailing up to the Mediterranean and then around Africa, adding weeks on to any journey.

By combining the Suez and Sumed routes, up to 3.4 million barrels could theoretically bypass Bab al-Mandab each day, though this capacity has never been tested on such a scale.

WHAT IT MEANS FOR OIL PRICES

Reflecting on the volatility, Dr Oliver noted: “So our petrol price went from about $2.58 at the high point down to around $1.50 (at the) end of June. Then, of course, it’s all gone pear-shaped again, the world oil price has gone back up; we’re now around $105, almost $110 a barrel.”

Dr Oliver outlined his projections for motorists: “My base case would be, we probably do go up another 10 cents a litre, but we might go even higher. There’s that risk that it gets all the way to $150 a barrel thereabouts. And if that were to occur, it would add … something like 45 cents a litre onto our petrol prices.”

GOVERNMENT RESPONSE AND THE EXCISE DEBATE

In response to ongoing volatility in global fuel markets, the Australian Government has implemented the Strengthening Australia’s Fuel Resilience Package, a $14.8 billion initiative focused on long-term fuel security, featuring a $3.2 billion Australian Fuel Security Reserve and expanded Minimum Stockholding Obligations.

According to government sources speaking to The Australian, Prime Minister Anthony Albanese will review the reinstatement of the fuel excise discount in the coming weeks amid forecasts that the conflict in Iran will keep upward pressure on bowser prices.

However, debate remains over short-term relief measures like cutting the fuel excise.

Dr Oliver cautioned against relying on excise cuts: “The major problem for Australia is that it cost the Budget. And it’s not good economics, because the reality is that oil got a little supply shock globally, and if we’re just constantly offsetting that with lower fuel excise, then it delays the day of reckoning. It doesn’t really solve the problem … The reason we have a free market in Australia … is that the rising price discourages people from using fuel, conserves them. Whereas if you just lower your fuel excise, you blunt that signal.”

WHERE FUEL PRICES GO FROM HERE

As global markets navigate supply shocks, Mr Khoury reminded motorists that predictability is gone: “I don’t know anyone who can predict what’s going to happen. It’s just impossible. There’s just as much chance that by the end of this week, prices could drop as there is go back up again. It really just depends on what happens on the ground.”

Dr Oliver said while it was unlikely motorists would see $4 a litre at the bowser any time soon, he said $2.70 and beyond was not unreasonable: “There is a risk we could go above the level seen earlier this year in March.”

Amid the pressure, experts point out positive shifts.

Dr Oliver noted that higher prices are accelerating the transition to Electric Vehicles (EVs): “This is not 1973 or ‘79 when we had the first two oil shocks. People now have a choice. So those who can, are able to purchase EVs. So it’s accelerating the rise of the EV (now at) 25% of new car sales in Australia.”

Mr Khoury urged practical action at the bowser amid “insane” price swings: “You should always shop around before you fill up. Don’t fill up at the first servo you see, because there’s every chance you’re going to drive past one that’s cheaper.”

He also encouraged motorists to consider E10 petrol: “The ethanol in E10 is produced domestically in Australia … it’s a substitute for the oil we’re bringing in from some of the most volatile parts of the world.”

Mr Khoury added: “Australia is actually — and this is just crazy — in the middle of an oil crisis, Australia is actually exporting ethanol to other parts of the world. That’d be like draining the Murray-Darling and sending fresh water overseas in the middle of a drought.”