With travel restrictions easing, it has become more noticeable that petrol prices have risen significantly this year. For example, the average petrol price in Melbourne in late November was around $1.80 per litre according to the Australian Competition and Consumer Commission. This article briefly discusses some of the factors underpinning higher petrol prices.
The following chart shows the quarterly average price of unleaded petrol in Australia. When COVID-19 first emerged in early 2020, the price of petrol collapsed and the average price fell to around $1.10 for a short period. Since then, there has been a recovery in prices and they have recently exceeded the early 2020 prices.
While there are a range of factors which impact petrol prices, the oil price is a key driver. In April 2020, around half of the world’s population was in some version of lockdown. Oil demand suddenly dried up.
Chart 2 shows the global demand for oil and gas, according to the US Energy Information Administration. It shows a dramatic fall in oil demand in March and April 2020. This resulted in the oil price falling sharply as there was excess supply. Oil supply reacted with a lag and was cut back materially. There was a subsequent sharp rise in demand as some countries began opening their economies. That said, demand remained below the level immediately before the emergence of COVID-19. From mid-2020, demand and supply progressively recovered, with demand exceeding supply, putting upward pressure on the oil price. The International Energy Agency (IEA) expects oil demand to reach the pre-pandemic level in 2022.
Another factor contributing to the rise in oil demand has been large increases in the natural gas price. Stronger natural gas demand has reflected a colder and earlier than expected start to winter in Europe, a dry winter in China (i.e. less hydro-power) and the world moving away from coal. This has made oil more attractive as a substitute fuel, pushing its price higher in the process.
Less investment in the fossil fuel industry over recent years has also been a factor underpinning higher oil prices through less supply. Climate change policies have promoted a shift to clean energy. The chart below shows investment in oil exploration/production (i.e. upstream) in 2020 was materially lower than the average investment in either the 2010-14 and the 2015-2019 periods.
Another factor driving higher petrol prices this year has been the fall in the Australian dollar (AUD). Since oil trades in U.S. dollars, the strength of the AUD will affect oil price from an Australian’s perspective. From its peak for this year in February, the AUD has fallen by around 10%, increasing the cost of oil in Australian dollar terms.
So, in summary, recent high petrol prices mainly reflect factors such as a strong recovery in global economic activity boosting oil prices and a fall in the Australian dollar. Less investment in oil exploration/production over recent years has also been a factor.
This information is general advice which does not take into account your personal financial objectives, situation or needs. Before making a decision about Vision Super, you should think about your financial requirements and consider the relevant Product Disclosure Statement and Target Market Determination issued by Vision Super Pty Ltd ABN 50 082 924 561 AFSL 225054 at www.visionsuper.com.au