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Frightening $2.50 petrol warning as Aussie dollar drops

Increased petrol prices will keep inflation higher for longer, giving the RBA less leeway to cut interest rates.

The Australian dollar is falling again; at the same time, the oil price is rising. Petrol is not going to be giving us any relief anytime soon.

In fact, the price of petrol at the pump could be headed back towards $2.50 a litre, a frightening prospect for the economy overall.

As the next chart shows, global oil prices have been unable to fall in the past few years as conflicts, piracy and strong growth in the rich world have driven supply down and demand up.

Petrol price story illustrated with chart on oil price movements
Petrol prices are creeping back up. (Source: Supplied) (Jason Murphy)

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The most recent swing in prices is upwards, delivering great benefits to global oil companies and big pain to businesses and households who buy fuel.

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The price of a barrel of oil has been higher in the past than it is right now but the price of a barrel of oil is expressed in US dollars.

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To understand how that affects us, we also have to consider the exchange rate between the US dollar and the Australian dollar.

As the next chart shows, previous periods of high oil prices have usually corresponded with a higher Aussie dollar.

Back in 2014, when oil was $100 a barrel, our dollar was worth almost as much as one US dollar, and we bought oil on global markets easily. Even in early 2022, when the oil price shot up to record highs, our dollar was well over 70 US cents, preventing the price effect from hitting too hard.

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Chart showing price movement in Australian dollar
(Source: Supplied) (Jason Murphy)

At the time of writing, our dollar was buying just over 65 US cents, far lower than its average over the past decade.

A weak Australian dollar makes exporting lucrative (you get more Aussie dollars every time you sell something for US$1) and importing expensive (you spend more Aussie dollars every time you buy something for US$1).

The situation now is very similar to late 2023, when the oil price was high and our dollar was weak.

At those times, the terminal gate price – the price of fuel being unloaded from ships - was high, as the next chart shows.

Chart showing movements in terminal gate price of oil
(Source: Supplied) (Jason Murphy)

The price of fuel at the servo takes time to respond to the price of oil, but the recent swings in global markets are likely to show up at the pump in a few weeks. That’s bad news for household budgets.

A high level of imported inflation is also bad news for the Reserve Bank (RBA), households with mortgages, and the economy overall.

Also by Jason Murphy:

Higher petrol prices will keep inflation higher for longer while giving the RBA less leeway to cut interest rates and provide some cost-of-living relief.

Cutting rates while petrol prices are rising increases the possibility that higher inflation becomes entrenched.

But leaving rates alone also raises the risk of a deeper economic downturn. A rise in petrol prices is the last thing Australia needs.