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Oil prices crash, why haven’t Aussie petrol prices followed?

Oil prices crash, why haven’t Aussie petrol prices followed?

With petroleum investment and the manufacturing sector sagging and the global stock markets in free fall, many Australians are questioning when they can expect to begin seeing the benefits of cheap oil.

Crude oil prices have plummeted by 70 per cent since since-2014, now sitting at just under $30 per barrel – the lowest level since 2004 – owing to a huge oversupply.

Meanwhile in Australia, wholesale petrol prices have dropped by around 25 per cent to the lowest level since February last year – but research from the parliamentary library shows that Sydney prices were still eight cents higher than usual retail margins.

In order words, the drop in crude oil prices hasn’t been fully filtered through to the prices Aussies are paying at the pump.

Also read: Petrol prices below cost despite scrutiny

So why the pricing disconnect?

The answer has everything to do with supply and demand dynamics for gasoline – oil refiners and petrol retailers are the ones that will benefit the most from the current environment.

Caltex Australia explains that supply and demand are a significant factor affecting any detachment between lower oil prices and cheaper retail petrol costs.

“Crude oil and petroleum products have their own commodity markets that reflect supply and demand and their prices can vary independently of each other.”

“While an increase in the price of crude oil will increase the costs of operating refineries, those increased costs may not be able to be passed on in the form of higher prices for refined product if there is there's an oversupply of those products in the region,” Caltex Australia said.

“Likewise, if there is a shortage of refined products in the region, their prices may increase sharply even if there has been no increase in crude oil prices.”

Similarly, as fuel products such as petrol are traded internationally, if the value of the Australian dollar compared with the US dollar goes up, then Australian fuel should become cheaper, and if the Australian dollar falls, when fuel should become more expensive.

Also read: Petrol prices to keep falling

The Australian dollar has been on a downward trajectory since the beginning of the year.

ACCC investigates

While some factors surrounding the disconnect in oil and Australian fuel pricing are clear, a recent investigation into petrol prices by the Australian Competition and Consumer Commission (ACCC) suggested that petrol retailers were taking advantage of the situation and pricing aggressively in order to expand their gross margin.

"The ACCC is very concerned that recently Sydney consumers have been paying much more for petrol than it appears they should have been," ACCC chairman Rod Sims said in a statement.

The figures show that as wholesale price rose in the past the cost at the bowser followed closely, but as it fell petrol companies reduced prices at a much slower rate.

"At the heart of this transaction is gouging by the fuel companies and it's a simple jedi mind trick to lower prices so consumers feel like they're getting a better deal but not enough to demonstrate the savings," Labor Senator Sam Dastyari said.

Price drop ahead

But good news may be on the horizon for Aussies.

Also read: ACCC pulls case against petrol retailers

This week Sims has vowed to crack down on inflated petrol prices, warning retailers that they need to trim up to 7 cents per litre at the pump, given the fall in the price of oil to a fresh 12-year low.

Sims said that he expects petrol retailers to cut prices in the next few weeks to more accurately reflect the cheaper price of crude oil.

“We have been concerned for a couple of months that the margins petrol companies are making are excessive,” Sims told Fairfax Media.

“They are probably 6 or 7 cents higher than they should be and we’ll be looking to see what those retail markets are actually coming down – we think petrol prices have some way to drop still.”