Rapid rise

The Australian Competition and Consumer Commission says changes in Singapore’s benchmark price for wholesale petrol bound for Australia “can take around 2 weeks to work their way through the supply chain in Australian cities” and longer in regional areas.

So why did prices jump so suddenly and sharply last week — within a few days of the US and Israel commencing their bombing campaign in Iran on Saturday a week ago, and well before any discernible movement in the benchmark Singapore Mogas 95 unleaded price?

Switched on motorists who still drive petrol vehicles will have noticed on their “Servo Saver” app in Melbourne — or similar price tracking apps in other states — that cheap local independents had hiked their prices by as much as 40 cents a litre, or about a quarter.

Average unleaded petrol across the five mainland capital cities tracked by the ACCC shows a more modest increase — from about $1.60 to $1.90 a litre from mid-February to March 5. But this was well in advance of any movement in the Singapore Mogas 95 price. (The Singapore Mogas price is a rolling average, so the effects are lagged.)

How oil translates to bowser prices

To the extent this question can be answered, it lies in the black box of retail petrol pricing in Australia, which the ACCC and others have attempted in vain to explain to the satisfaction of ordinary motorists over many decades, with a generous garnish of opportunism — AKA charging what the market will bear — thrown in for good measure.

Petrol and its co-derivative diesel are critical inputs to many industries, including farming and food production, as well as ordinary households. The Energy thought it useful to explain how crude oil prices typically translate into retail petrol prices, and how and why last week’s movements might differ from typical cycles.

We are not trying to predict what will happen to prices over the coming weeks and months after crude oil traded up and down almost US$40 a barrel — nearly 50% — from Saturday to Monday amid the fog of war and the US President’s running social media commentary.

That volatility has triggered further spikes in petrol prices at the bowser, angst among motorists and industries reliant on road transport. So much so that the federal government convened a high level industry meeting on Tuesday and sought to reassure everyone the situation was under control.

Petrol price cycle

Retail petrol prices are typically influenced by the wholesale benchmark prices, changes in the Australian dollar relative to the US dollar, and the “petrol price cycle” from trough to peak to trough, which takes five to six weeks in Sydney, Melbourne and Brisbane and one to two weeks in Adelaide and Perth.

The Australian dollar has been strengthening against the US dollar, which works to moderate price increases at the bowser, all other things being equal.

Allowance also needs to be made for operating costs for fuel wholesalers and retailers — such as wharfage, freight, insurance, transport, storage, salaries, rent, power and other utilities, and not least profit margins.

The Australian Institute of Petroleum likes to point out that profit margins on petrol sales are only about 2 cents a litre — or less than 2%. The AIP notes in a fact sheet that taxes make up 37% of the retail price, operating costs and margins 16% and “product cost” 47%.

This is not all hard luck for retailers such as Ampol, Viva Energy, BP and ExxonMobil. They’ve traditionally used low margin petrol sales to entice customers into their forecourt convenience stores to sell them higher-margin items.

On top of these more or less predictable factors is the petrol price cycle, the regular patterns under which retail petrol prices can “increase sharply over a short period, then decrease gradually over a longer period before the process repeats," the ACCC says.

These cycles “are the result of pricing decisions made by various petrol retailers”. These include assessments of what the competition is doing, how that will affect traffic through their forecourts, how they’re tracking against budgeted sales and so on.

They also include decisions about "what the market will bear" amid wall to wall reporting of the bombing of Iran and the closure of the Strait of Hormuz, a vital shipping lane for oil and LNG bound for Asia.

Silver linings

Thanks to the low taxation of petroleum products in Australia relative to other rich nations, no Australian can really claim they are being overcharged for them, infuriating as the current price spikes may be. (Scarcity due to shortages is another, potentially more critical problem).

As the next chart — from the Australian Institute of Petroleum — shows, Australian petrol and diesel prices were among the advanced economies’ lowest before the recent crude oil price spike. There’s no reason to believe the batting order has changed, though the relativities might change as the tax share of total price decreases.

A few more countries have cheaper diesel than have cheaper petrol, and they tend to be rival natural resources and food and agricultural producers, so those sectors might well complain. They will certainly complain if the federal government takes the opportunity to chisel away at generous (and costly) fuel tax and fringe benefits tax exemptions in the budget, but there has been no indication these are in Treasury's sights.

Switching to electric

Electric vehicle (battery and plug-in hybrid) sales were already on the increase before last week's petrol price spike and there are predictions this will spur further acceleration.

Excluding commercial utes and vans, battery EVs were 15.8% of new vehicle sales in February — a record — and plug-in hybrids another 6.4%, a total of 22%, according to Mike Costello, head of corporate affairs at Cox Automotive-Manheim, an auction house.

Costello expects another all-time record for battery EVs in March. "Automotive brands are finally selling EVs on their most important attribute: lower running costs. Everything else, all that feelgood stuff, is secondary.

"With bowser prices leaping and footage of people hoarding fuel amid widely reported shortages, more people will have a very clear, immediate and personal reason to be envious of their neighbour's BEV," he said in a LinkedIn post on Tuesday.

The Electric Vehicle Council cites advice from Pickles Auctions that searches on their website for electric vehicles have jumped 30% in the past week (visits to their dedicated EV page are up 15%) and studies from China and Scandinavia showing a positive correlation between petrol price increases and increases in EV sales.

Charging group JETCharge modelled a prolonged (6-18 month) petrol price spike and concluded it would increase EV sales "modestly", or by 6-8% above underlying sales increases, but incentives such as the FBT exemption would remain the primary driver.

Unsurprisingly, EV Council CEO Julie Delvecchio doesn't think the push to cut the EV exemption is a great idea. "Electric vehicles already deliver much lower running costs, particularly when petrol is above $2 a litre. Removing the Electric Car Discount would make it harder for households to access those savings and protect themselves from rising fuel prices."

For what it's worth — though we forswore predictions — stockbroker Ord Minnett expects to crude oil prices to moderate to average US$75 a barrel in the current half year and US$70 in the second half, implying the current price spike might not be prolonged. But the memory might be.