Why Aren't Petrol Prices Falling As Much As Oil?

17 February 2016
Global oil prices have plunged over the past year and a half, but suspiciously, Australian petrol prices have been quite stubborn.

Petrol is cheaper, but is it as cheap as it should be?

With the fall in oil prices dragging down share markets, disrupting economies and hurting investors the world over, as a consumer, you might look on the bright side – “at least petrol prices are cheaper, right?”

Well, yes. According to RACQ, the average price of unleaded petrol in Australia’s capital cities in June 2014 was 156.1 cents. In January 2016, it was 118.8 cents – an almost 25 per cent drop. As demonstrated in the table below, for a standard 55 litre car, this represents a saving of just over $20 per tank.

Month Price (AUD/litre) Cost to fill a tank (55L)
June 2014 1.561 $85.86
January 2016 1.188 $65.34
Savings (per tank): $20.52
Source: RACQ

But don’t you feel like we should be saving a little more? Considering the fact that the Dated Brent crude oil price (one of the key oil pricing benchmarks Australian petrol prices are set against) has fallen over 60 per cent (in $A) since June 2014, you’d think petrol prices might’ve declined almost as much.

Yet in the interactive graph below, you can see how the percentage fall in the monthly average unleaded pump price (since June 2014) in capital cities has failed to keep up with the percentage fall in the Dated Brent crude oil price. Despite the oil price in the graph being represented in Australian dollars to take into account the fall in AUD against the USD (which would have lessened our oil price fall), it has still fallen much more than our petrol prices.

Sources: RACQ, IndexMundi

So what’s going on? The Australian Competition and Consumer Commission (ACCC) is keen to know.

ACCC wants an explanation from Australian petrol retailers

ACCC Chairman Rod Sims said the high gross retail margins of petrol retailers in Australia have played a part in keeping local fuel prices high relative to crude oil prices.

“The ACCC believes that retail prices have been unreasonably high in the second half of 2015 and in early February 2016 wrote to the major petrol retailers seeking an explanation for the high retail margins,” Mr Sims said.

In their September quarter report into the Australian petroleum industry, the ACCC noted that the quarterly average gross indicative retail differences (GIRDs) – which are indicative of the margins achieved by retailers on the sale of fuel – were at their highest level in the five largest cities (11.8 cents per litre) since the ACCC began monitoring in 2002.

But in the more recent December quarter report (released on the 15th of February 2016), they noted that the GIRDs increased even further to 12.4 cents per litre!

Other reason petrol prices are stubborn

Before you pick up your pitchfork and join an angry mob march towards your local servo, it’s actually not all the fault of the petrol retailers.

According to Mr Sim, while the price of crude oil has a strong influence on refined petrol prices, these prices are also determined by their own global supply and demand conditions.

“As global demand for petrol was relatively strong in 2015, prices remained high relative to crude oil prices,” he said.

“These high refiner margins are outside Australian control.”

Why have oil prices fallen?

You may be wondering why oil prices are falling in the first place. You’d think that as a limited resource, it could only go up in value.

Well in case you didn’t know, the oil market is currently extremely oversupplied. There’s a range of reasons for this, but in a nutshell, it’s because Iran (who recently had their sanctions lifted) and the US (with their new Shale oil extraction method) have joined the oil production market whilst existing oil producers have maintained their levels of production. This has resulted in a flooded market.

It’s almost a game of brinkmanship whereby the older oil producers have refused to back down to the new entrants and give them market share; hoping to deter them away with lower oil prices.

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