27 September 2023

Australia doesn’t buy fuel from Russia so, why are prices so high?

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Jake Evans* breaks down what’s behind the current high price of petrol.

If your eyes are watering at petrol prices rushing past $2 a litre, you have probably asked what the federal government can do to bring the cost of fuel down.

The high petrol prices are painful for the government too, because the short answer is that there’s not very much they can do about them.

It has one lever at its disposal to quickly cut down the cost of petrol: taxation.

But cutting taxes on fuel also means taking a heap of money out of government revenue.

With an election coming, the government will not be eager to tighten its belt.

Just days ago, Prime Minister Scott Morrison and his colleagues were saying it would not be wise to hurt the budget for a bit of relief at the pump.

However, as war and instability threaten to push prices even higher, it’s now a live option.

The government is under pressure to cut its fuel excise: a 44-cent charge on every litre of petrol used for transport.

But, even if it does, analysts warn it may not make much difference.

So what is behind the high petrol prices, and where is it heading?

What is behind the current high price of petrol?

Petrol prices might change daily, but they aren’t as mysterious as they seem.

The price you pay at the pump is ultimately made up of a few things:

  • The international price of oil on the market
  • Costs to wholesalers to import, refine, store and transport fuel
  • Costs to retailers to operate service stations
  • Taxes
  • And wholesaler and retailer profits

Between December and March, the cost of refined petrol and taxes on it made up 86 per cent of the final price you paid at the pump.

The Australian Competition and Consumer Commission says across Australia’s five largest cities, the average price of petrol over the past quarter was 162.8 cents per litre — 56.9 cents of that was tax on fuel and 80.9 cents was the international cost of refined petrol.

Nearly all the rest was the cost of getting it into your car — you might have felt you were getting robbed, but the profit margins for importers and retailers were small and actually fell over the past quarter.

The Australian Institute of Petroleum says oil company profits over the past decade have been about 1.8 cents per litre on average, and retailer profit about 1.35 cents per litre.

So while there may be small variations in the big cities as retailers compete on prices, almost all of the recent changes in price come from the cost of oil on the international market.

A weakening Australian dollar over the same time didn’t help.

Even though Australia doesn’t get its fuel from Russia, when the world’s second-biggest crude oil exporter is cut off from international markets, that has a flow-on effect that hits every country.

Russia’s invasion of Ukraine and subsequent decisions to ban oil imports might appear to be the obvious cause behind the rise in fuel prices.

But the Australian Competition and Consumer Commission says the current pain is also due to an international recovery in demand from fuel consumption falling during the pandemic because local and international travel was shut down.

The big problem, according to the ACCC, is that recovery in demand hasn’t been matched by oil producers in the Middle East and elsewhere, who have refused to increase production and soften prices.

So what can the government do about petrol prices?

There isn’t much Australia can do about the price of oil.

Australia only has two oil refineries left, after two closed in recent years — leaving about a tenth of Australia’s fuel refined onshore.

So for both crude and refined fuels, Australia is highly dependent on the international market.

But the government does have the option to cut taxes on fuel.

There are two taxes applied to fuel: a 10 per cent goods and services tax and the fuel excise.

That second tax is currently priced at 44.2 cents per litre and is adjusted twice a year after former prime minister Tony Abbott tied the tax to inflation again in 2014 (John Howard cut it ahead of the 2001 election, after the introduction of the GST).

The federal government is being asked by state premiers and some MPs from within its own ranks to cut the fuel excise temporarily to offer some relief.

If the federal government did that, it would be the first cut to the excise in two decades.

The problem is that would also punch a hole in the government’s federal budget, as $20 billion of its annual revenue comes from the fuel excise.

That money, in principle, is meant to be reinvested in road infrastructure, so an excise cut would likely mean less funding for roads.

The head of the Australian Automobile Association, Michael Bradley said as the country exits the COVID-19 pandemic, it should be looking to spend more on its roads, not less.

“Nobody likes high petrol prices and nobody likes paying tax but fuel excise is the thing that enables the government to invest in the infrastructure we need,” Mr Bradley said.

“A short-term cut of a couple of cents could cause some long-term pain.

“If we want the safe network that we need, if we want the efficient network we need, somebody has to pay for it and at the moment, it is fuel excise that pays for that.”

Nationals senator Matt Canavan also warned that once the excise is cut, it would be hard to undo.

“If we cut it today, we’re just making a tough decision for a future government — almost impossible — to put it back up at some point, can you imagine a government trying to do that in the future?” he asked.

Australia already has one of the lowest tax rates on fuel among developed nations.

But a cut on fuel taxes has suddenly become a real possibility as government ministers refuse to rule out an excise cut in the upcoming budget at the end of this month.

Economist Chris Richardson from Deloitte Access Economics said any cut in the excise would be all about politics, not good policy.

“Putting a bandaid on a tax in Australia to address the effects of a war in Europe, that is a true bandaid, that is not a solution,” Mr Richardson said.

“In 2022, if the political debate of the day is what our governments should do to cut the price of fossil fuels, you know there is an election in the offing.”

Tax cuts could mean little as $2.50 threat looms

NRMA’s Peter Khoury says even if the government were to cut the fuel excise, people might not notice.

“Even if you were to halve the excise and cut average prices today by 20 cents a litre, the likelihood is that 20 cents will get eaten up and then some in the coming days and weeks — that’s how bad the forecasts for petrol prices are,” Mr Khoury said.

However, Mr Richardson said if crude oil prices hold steady, we may have already felt the worst of the pinch.

“If oil prices hold where they are today, then across the next fortnight, prices at the pump will drop more than 10 cents, probably 15 cents a litre,” he said.

The worry is what will happen in Ukraine in the months to come.

Stockbroker CommSec is predicting petrol prices could rocket up if the Russian invasion becomes protracted.

Its analysts forecast Brent crude oil will average around $US110 a barrel in the back half of this year, similar to now.

But if the war is prolonged or escalated, CommSec analysts say that price could be driven up to as high as $US150 a barrel, which would push prices here to nearly $2.50 a litre.

The petrol pain may not be over for a while yet.

*Jake Evans is an ABC News reporter in Canberra.

This article first appeared at abc.net.au.

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