Petrol Prices: What Else Will Crash?

6 Feb 2015

Dirt cheap petrol prices are the unofficial icon of the recent Christmas holidays. Petrol prices in Australia have been consistently falling over the past few months, striking under $1 per litre. Australians are paying up to $15 less per car tank refill than they were six months ago.

This price fall is attributed to the recent crash of oil prices. In June 2014, oil cost $115 a barrel. In mid-November, the price dropped to $80, and by the end of January 2015, a barrel of oil costs $49.

The winners of this price crash extend beyond the average Australian motorist. Australian tourism is attracting Australian vacationers, who are choosing to explore Australia by car due to cheap fuel. The result is a sustained burst in business for regional Australia tourism.

Yet, not all stakeholders have emerged from this price drop intact. Countries that export oil, oil reserve owners, Organisation of Petroleum Exporting Countries (OPEC) and Australia’s federal government are losing profit.

“There is no single answer [to why oil prices have fallen]. World oil prices are driven by demand and supply,” Dr Barry Oliver of The University of Queensland’s Business School wrote.

From 2010 to 2014 oil prices were high due to two factors; China’s strong demand for oil and geo-political conflict in Middle-Eastern oil suppliers. High oil prices lured companies in the US and Canada to tap into their tricky shale-rock oil supplies.

Demand from Asian and European countries also slipped due to weakening economies.

OPEC countries provide 40 per cent of the world’s oil supply. Of this 40 per cent, Saudi Arabia is the world’s largest oil exporter, accounting for 13 per cent of the world’s supply, rendering them an influential member of OPEC. The OPEC countries met in November last year, yet failed to agree to curb oil production and exports.

Dr Oliver explained why OPEC failed to reach an agreement on halting supply.

“If the Saudis and their Gulf allies decided to curb production who would benefit? Well, they would lose market share – so why would they do that? Who would they lose it to?

“They would lose it to Iran and Russia - the Saudis are not really good friends with Iran and Russia. In addition, the Saudis have a lot of reserves. They can handle a price war. Their non-friends are in a much less viable position to handle a price war.

“The unanswered question is what are these countries going to do? Will they be more amenable to international pressure to change their behaviour or will they start a war in desperation?

Russia and Iran are significantly disadvantaged by the price crash due to their dependence on energy revenues. Economists predict that Russia’s GDP will shrink by 4.5 per cent in 2015 if oil remains at $60 a barrel. This is also bad news for the Ruble. As its value collapses, Russian consumers are witnessing the cost of imports balloon.  Iran requires oil prices to remain at $100 per barrel to balance their budgets. In addition, Iran is facing heavy sanctions from the West on oil exports.

Dr Oliver believes that these lower fuel prices may be absorbed by companies rather than passed on to the consumer.

“Will [airlines] pass on the lower costs? Unlikely to be much, as airfares are currently very cheap. It might be a way for airlines that are currently struggling to recover profits.

“Food and grocery items are transported to stores by trucks. Will they pass on lower freight costs? Unlikely. Some perishables like milk and bread might come down a little,” he said.

Historically, lower oil prices have toppled the uptake of renewable energy power sources. Yet, Dr Oliver doesn’t think this price crash will affect renewables.

“Many power stations are coal fired and rely considerably less on oil. In addition, there have been considerable reductions in costs of producing renewable energy power sources such as solar and wind generators.

“In addition to this there is a growing demand for renewables as being sustainable. The decision to invest in renewable energy is being driven increasingly by a sustainability argument rather than a purely economic one,” he said.

Though one is sure of this petrol glut’s duration, it is certain that Australians are enjoying petrol prices reminiscent of a decade ago.