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The facts about petrol pricing in Australia
Crude oil and refined petroleum products are bought and sold daily between hundreds or thousands of different parties on open global and regional oil commodity markets.
The global/regional price of petrol and other fuels is impacted by a number of factors:
- the price of crude oil;
- the supply and demand balance for different petroleum fuels (including elements related to weather and other seasonal supply/demand changes, refinery shutdowns and maintenance schedules, etc);
- fuel quality specifications and transportation costs;
- local state and national government regulations, taxes and excise;
- the costs to transport fuels to and around Australia;
- A$ to US$ exchange rate and local wholesale and retail market competition further influence the price.
Change in any of these fundamentals can and does significantly affect the price of fuels.
Over the last few years, demand for crude oil and many refined products, particularly diesel and jet fuel, has been growing at very high rates, largely driven by substantial economic growth in developing countries, and speculation about impending shortages led to record high prices during the first half of 2008. More recently, the global financial crisis has significantly reduced demand for petroleum products and prices have returned to more traditional levels.
Domestic refineries in Brisbane, Melbourne, Perth and Sydney currently supply around 75% of Australia's demand for petrol with the balance being imported, mainly from Singapore.
How are wholesale fuel prices established?
The Singapore market provides a benchmark for crude oil and product pricing (set in US$) in the Asia Pacific region, of which Australia is a part. The Singapore price of unleaded petrol (MOPS 95 Petrol), established by the independent reporting agency, Platts, is the benchmark commonly used for setting wholesale petrol prices in Australia.
Other factors which go into determining Mobil's wholesale price include transportation costs to Australia, costs associated with typically higher fuel quality standards in Australia, port and terminal charges, government excise and the exchange rate, plus marketing costs and profit/return on capital where that is competitively achievable.
How is it that retail pump prices can rise by over 10 cents per litre within a matter of hours?
Competition in Australia's major metropolitan markets is among the most intense in the world. This competition has historically given rise to frequent pricing cycles where retailers increasingly discount their prices (typically over a week) to try and gain additional sales volume.
Competitors respond to protect their sales volumes and prices spiral down until they reach unprofitable levels - at which point the market corrects itself by ceasing or reducing the discounts. This "normal" pricing has tended to hold only for a short while until someone starts the discount process again.
As a result of this intensively competitive environment at both the wholesale and retail market levels, Australians enjoy among the lowest petrol prices (both before and after tax) in the developed world.
Do we pay too much for petrol?
Australians enjoy among the lowest petrol prices in the developed world. Government taxes (excise and GST) make up a substantial part of the retail pump price - around 50 cents or over 40% of the total at a pump price of A$1.20 per litre.
Discounting driven by retail competition provides Australian consumers with the opportunity to buy cheap petrol on a regular basis.
The price of petrol is linked to global/regional prices through the Singapore benchmark. If government was to stipulate a lower price in Australia than that set by the regional market, then imports to meet Australian demand would become unsustainable, while local refiners would have an incentive to export their product to more profitable overseas markets.
Why is there a gap between city and country prices?
The market for petrol in country areas differs significantly from metropolitan areas. Country prices are generally higher and more stable than city prices for the following reasons:
- Higher distribution costs to country areas; in some instances product has to be shipped in and/or double-handled through regional bulk fuel depots
- Lower volumes sold through country sites, resulting in higher unit costs and therefore requiring higher margins (prices) for the sites to be sustainable
- Generally smaller local customer base and less passing traffic means that there is little or no incentive for country retailers to discount price in order to grow their sales volumes
- Much less opportunity for shop sales and other sources of revenue, e.g. carwash, etc, to supplement earnings from fuel sales
- Generally less competitive pressure from major supermarket chains and other low cost fuel retailers
Further information
The Australian Institute of Petroleum website contains additional information on Australian and international fuel prices.
