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The record high cost of crude oil combined with limited availability of refined products (petrol and diesel) in the Asian region has driven up the cost of petrol and diesel from Singapore refineries. Increased regional prices have led to increased Australian wholesale prices which are based on a rolling average of Singapore refined product prices.
- Crude oil and product shipping rates are high due to strong demand for tankers and reduced supply of vessels.
- Indian diesel demand has increased by 10 per cent over the last fiscal year which is the equivalent of the diesel production of nearly three Australian refineries. Domestic supply has not been able to keep pace with demand and as a result imports have increased by the equivalent of the annual diesel production at one of the larger Australian refineries.
- An increase in Chinese diesel imports and a reduction in petrol exports have been driven by stockpiling in the lead up to the Olympics and increased demand for diesel as an alternative source of fuel for power generation following the earthquake at Szechuan.
updated 25 June 2008
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The price of crude oil is regularly reported in the news, but what impact does it have on the price of fuel in Australia?
Crude oil is distilled in a refinery to produce many refined products including diesel, petrol, jet fuel and fuel oil. The cost of crude oil forms a large part of the cost of manufacturing the refined product. However supply and demand for the individual refined products is the key factor determining their prices not the cost of crude oil.
For example, increases in the price of crude oil will increase the costs of operating refineries, however those increased costs may not be able to be fully passed on in the form of higher prices for refined product if there is excess supply of the refined product available in the region. On the other hand, if there is a shortage of refined products, their prices may increase sharply even without any increase in crude oil prices.
The prices of petroleum products from Australian refineries are based on their import parity prices, which are calculated according to the cost of importing the same products from Singapore refineries to Australia. They are not based on crude oil prices.
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Caltex does not explore for or produce any oil or gas and must buy crude oil and refined products on the open market.
The difference between the cost of crude oil and the price of a refined product is called the refiner margin. This refiner margin changes on a daily basis and can be negative, that is where the cost of crude oil is greater than the price of the refined product.
The benchmark crude oil used in the Asian region is Tapis, not the often reported West Texas Intermediate (WTI) crude oil which is the main benchmark used in the USA. The difference between the two benchmarks is mainly determined by supply and demand in the local region (eg Asia-Pacific, US, Europe) and the quality of the crude oil.
Crude oils are classified according to whether they are light (low density) or heavy (higher density) and whether they are sweet (low sulfur) or sour (high sulfur). Petrol and diesel derived from sour crudes are subject to costly processes such as hydrotreating to remove the sulfur.
Why is the price of fuel in Australia affected by international events like hurricanes in the USA, a cold European winter, terrorist attacks in Nigeria or refinery maintenance in Asia?
Events in other parts of the world that affect either the supply or demand of crude oil or refined products can lead to changes in the price of refined products in the Asian region and Australia. Around 25 per cent of petroleum products used in Australia are imported. Wholesale prices are based on import parity prices, which are a calculation of the cost of importing products to Australia.
The USA is the among the world’s biggest users of refined products, so if a natural disaster like Hurricane Katrina in 2005 affects a large number of the refineries that normally produce products for domestic use, more imports are needed which can be drawn from other regions around the world. This can reduce the supply of refined products available in the Asian region, pushing up prices.
Similarly, demand for refined products could increase in other parts of the world such as Europe caused by an unusually cold winter leading to increased diesel and heating oil consumption. This in turn could mean more imports are needed by Europe to supplement domestic supply or by countries normally supplied by Europe such as the USA. Either way, this could reduce the supply of refined products available in the Asian region resulting in higher prices.
Terrorist attacks in oil producing countries such as Nigeria can affect the price of crude oil as even if the incident doesn’t result in actual lost production of crude oil, speculators could perceive that as a result of the attack availability of crude oil may be reduced, thereby increasing the value of crude oil already in the market.
Closer to home, if refineries in the Asian region are undergoing maintenance they may require extra imports of refined products to meet customer demand while they are not refining, or they could cease or reduce exports of refined products. In both cases this results in reduced availability of refined products in Asia increasing the price of the available products.
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It takes about two weeks for changes in the international price of petrol and diesel to flow into Australian retail prices. This is because wholesale prices of petrol and diesel in Australia are generally based on a rolling average of the international refined product price. Rises and falls in wholesale prices lead to similar changes to the retail prices, however in the case of petrol, changes to the average weekly price can be masked by the discount cycle.
Why don’t all Caltex service stations sell fuel at the same price?
Service stations drive sales by pricing their fuel to match or beat their local competition. Generally their competitors are other service stations in that town or neighbourhood. As such prices at service stations are generally influenced by the number of potential customers and their likely sales volumes as well as the number of service stations in their immediate area and their prices.
For example, service stations on major traffic routes can increase sales substantially by reducing their prices by a relatively small amount – but only until competitors see what they are doing and drop their prices also. Service stations with less passing traffic would not find discounting as successful a way to increase sales.
Caltex sets the price at only about 170 service stations in its branded network. Most branded sites are franchised or operated by independent retailers. For example Caltex Woolworths and Caltex Safeway service stations are operated by Woolworths which independently decide its pricing strategy.
What will be the impact of FuelWatch?
FuelWatch is proposed to require all service stations to notify the government of their prices for the next day and the government will publish these prices. Discounting of the notified prices would be illegal. As with any regulation, the introduction of a FuelWatch scheme across Australia would likely benefit some and disadvantage others. Motorists who fill up weekly on Tuesdays at the bottom of the typical discount cycles could be disadvantaged if price cycles become flattened ie have lower peaks but more shallow troughs. Other motorists who fill up whenever their tanks are empty could benefit if the higher points on the price cycle are reduced. It is unlikely FuelWatch will reduce petrol prices as profits are already very low eg in 2007 Caltex profit was only 1.5 cents on a litre of petrol.
Caltex has operated successfully as a wholesaler and retailer in Western Australia for many years under the state FuelWatch regulations. The experience Caltex has gained in Western Australia will enable the company to continue to operate successfully under a national FuelWatch scheme.
Why are fuel prices generally on average lower in Queensland than the rest of the country?
The Queensland Government has a Fuel Subsidy Scheme where fuel retailers are paid an 8.354 cents per litre subsidy (excluding GST) for reducing the price of petrol and on-road diesel they sell by the amount of the subsidy. This reduces Queensland prices by 9.2 cents per litre (including GST) compared to the price without the subsidy.
To ensure NSW sellers of petrol and diesel south of the Queensland border are able to compete fairly with Queensland the NSW Government pays subsidies ranging from 8.35 to 1.37 cents per litre in five northern NSW zones.
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Why does the price of petrol constantly change when other goods like milk or bread don’t?
Many consumers buy petrol based on price and this drives service stations to constantly change their price to match or beat competitors to attract more customers which in turn drives non-fuel income such as shop sales. This competition is increased by price boards that allow customers to compare and make decisions on where to buy without even getting out of their car. Underlying this local competition, the Singapore benchmark price of petrol is highly variable over short periods of time and this directly affects pump prices.
Why doesn’t the price of petrol only change when a service station receives a new delivery of fuel?
Service stations generally don’t operate on the basis of adding a margin to the wholesale price and sticking with that price until the tanks run dry and a new delivery of fuel is needed. Instead in order to stay competitive service stations may need to change the price they charge for petrol several times a day. This can mean that at low points in the discount cycle you can buy petrol for less than the service station operator has bought it for. This is possible for some operators such as franchisees as they may be offered sales rebates by their suppliers to help them meet local competition. The rebates ensure franchisees maintain their small margin while still being able to offer competitive prices. Other operators rely on higher prices on some days of the week to offset losses on deeply discounted days.
How do customers know if they are paying a fair price?
Customers in most locations who just buy petrol when they need it are paying a fair price as the petrol market is highly competitive. Price cycles offer customers the opportunity to buy petrol for less than the average weekly price and often for less than the wholesale price if they buy at the bottom of the cycle. At the top of the cycle, which happens when discounts are withdrawn, prices generally go back to being above the wholesale price.
In locations where prices typically follow a weekly cycle, petrol is usually cheapest on Tuesdays, increases sometime on Wednesday or Thursday and then gradually decreases over the weekend and early the next week.
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Perth generally has a two week cycle and prices are generally cheapest every second week.
Why does the petrol price frequently peak on the same days each week?
The price of petrol generally goes up on the same day each week because of competitive discounting over the previous week. Because discounting increases sales for a short period until competitors react, some service stations will continually move prices downwards in small steps. It takes about a week to reach the point where petrol is being sold close to or below cost, which is unsustainable. Consequently, at different times on Wednesday or sometimes Thursday, other petrol retailers independently increase their prices at some or all of the sites where they control the price. Competitors are carefully watched and if their prices don’t increase to similar levels, retailers may reconsider their price increases.
Price increases are not timed to coincide with pension or pay day.
Some regional areas don’t have a price cycle – does this mean they don’t have discounted petrol?
While retail margins (pump price less wholesale price) are typically higher in the country compared with the city, service stations still offer their most competitive prices to gain customers, although competition may be less intense than in the city. Larger retail margins than in the city are often necessary for the viability of regional service stations which may have lower petrol volumes and non-fuel income such as shop sales.
Do petrol prices increase because of long weekends?
No, petrol prices follow a very similar cycle most weeks whether there are public holidays or not. Where prices cycle, petrol is generally cheapest early in the week, increases mid-week and is already declining by the weekend. Once the peak of the cycle is reached, prices decrease over the following week, including over a long weekend. A mid-week price jump is often misrepresented in the media as a pre-long weekend or holiday price increase.
How much tax do you pay on petrol?
Over 50 cents tax is levied on every litre of petrol sold for $1.40 (up to 35 per cent of the pump price). This includes excise of 38.143 cents plus 10 per cent GST on the total price including excise. In comparison Caltex’s profit on petrol in 2007 was just 1.5 cents per litre.
The bulk of the pump price is made up of the cost of refined petrol (around 55 per cent of the pump price at $1.40 per litre).
Retailers achieve very small gross margins on petrol, typically around 3 cpl in the city. Shop sales may account for about 70 per cent of gross margins at larger service stations, making them convenience retailers far more than fuel retailers.
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To calculate the amount of tax on a litre of petrol, divide the pump price by 11 to calculate the amount of GST then add 38.1 cpl excise (29.8 cpl in Queensland).
Why is Australian unleaded 91 octane petrol benchmarked against Singapore 95 octane petrol?
Octane is only one of the many parameters that define the quality of petrol and all of these parameters need to be considered when choosing a benchmark price. Australia has very strict fuel quality standards which are generally higher than countries in Asia. This is part of Australian Government policy to reduce air pollution and greenhouse gas emissions from vehicles.
The Australian wholesale price of petrol is typically based on a rolling average of MOPS95, shipping from Singapore to Australia, insurance, wharfage and conversion from US dollars to Australian dollars. MOPS95 is the daily average Singapore price for 95 octane petrol. While Australian regular unleaded petrol has a minimum octane of 91 it substantially exceeds the quality of petrol included in the MOPS95 price by having tighter quality specifications for sulfur, benzene and MTBE (methyl tertiary butyl ether). MOPS95 is closer to Australian specification petrol than MOPS92 so is a better benchmark for Australian prices.
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Diesel used to cost less than petrol – why does it now cost more?
It has been more than ten years since diesel was slightly cheaper than petrol and in that time there has been a huge increase in the demand for diesel around the world, particularly in Asia which has pushed up the price of diesel from refineries so it is now higher than petrol.
With new highly efficient diesel engines becoming available in more and more cars, diesel is shaping up as the fuel of choice for hundreds of thousands of private motorists and smaller commercial vehicles. For many years, diesel has been the dominant fuel for larger trucks and many commercial vehicles. The biggest growth in demand for diesel in Australia is coming from the mining and transport industries, mainly in WA and Queensland, as a result of the China driven commodities boom. Without diesel Australia's mines simply couldn't run. It's used everywhere – in trucks, diggers, tippers, trains, fixed and mobile power plants.
Growth in transport, agriculture and industry is the main driver behind the strong Chinese and Indian demand for diesel. Seven out of ten cars sold in India are diesel powered and with less than reliable power supplies in both countries many industries rely on diesel generators.
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Not only do today's diesel powered vehicles use less fuel, they are more environmentally friendly thanks to innovations like diesel particulate filter technology that eliminates soot from exhausts, changes in fuel standards which have reduced the amount of sulfur in the fuel and technological advances in diesel engines. Today’s new diesel trucks must emit over 50 per cent less oxides of nitrogen (NOx) and 90 per cent less fine particulate matter (PM) than in 1995. For new diesel trucks, allowable NOx emissions will be cut 40 per cent.
One of the greatest advantages of modern diesel engines, which ignite fuel by compression rather than spark, is their inherent efficiency. While diesel engines traditionally were made for heavy duty vehicles like buses and trucks, in the past decade they've become much sportier, often with performance similar to their petrol counterparts.
Isn’t diesel a by-product of petrol refining?
Traditionally diesel required little additional treating after distillation with sulfur levels of 1000 parts per million or more. Today Australia’s fuel quality standard dictates that sulfur levels should not exceed 50 parts per million (moving to 10 parts per million from 2009). These much lower sulfur contents mean diesel requires additional processing in the refinery to remove the sulfur, for example through diesel hydrotreating units.
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Caltex is currently building an additional diesel hydrotreating unit at its Lytton refinery with the final cost anticipated to by around $320 million, which when commissioned will increase Caltex’s ability to produce extra low sulfur diesel from the refinery by 40 per cent.
Why doesn’t diesel follow the same weekly cycle as petrol?
The vast majority of diesel in Australia is sold in bulk to companies in industries such as mining and transport. While retail sales of diesel are growing, for many service stations diesel is still less than 10 per cent of their fuel sales and discounting does not lead to increased fuel sales and shop sales to the same extent as discounting petrol.
Why does diesel cost much less in New Zealand than Australia?
The level of tax applied to fuel is one of the biggest determinates of differences in retail prices between countries. Australia has the fourth cheapest diesel pre tax of OECD countries, post tax it is the sixth cheapest. Pre tax the price of diesel is similar in Australia and New Zealand, but due to the low New Zealand diesel tax rate, diesel is cheaper in New Zealand post tax.
The gap between petrol and diesel prices at the pump seems to be increasing so is it worth buying a diesel car any more?
When it comes to analysing the difference in fuel costs it is not the gap in cents per litre that matters, it’s the difference once you take into account the lower fuel consumption of diesel. A typical diesel car uses 25 per cent less litres of fuel per 100 kilometres than the equivalent petrol car. For example, at a diesel price of $1.80 per litre, petrol would have to be 25 per cent less or $1.35 per litre to be cheaper per 100 kilometres of travel.
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Doesn’t Australia sell gas to China very cheaply – why isn’t LPG priced this low?
LPG is often confused with Liquefied Natural Gas (LNG). Australia is a major exporter of relatively cheap LNG due to abundant resources of natural gas.
Automotive liquefied petroleum gas (LPG) or Autogas is a combination of propane and butane which both occur naturally in natural gas fields and are separated out when the gas is processed. Propane and butane are also produced from crude oil in the refining process.
Australia exports about the same amount of LPG as is used domestically with the largest markets being Japan, the Republic of Korea and China. Pricing for exports is based on the Saudi Aramco Contract Price, which is the same benchmark as used in Australian LPG wholesale pricing.
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Natural gas is primarily methane extracted from underground reserves and either piped to the point of use or compressed as compressed natural gas (CNG) or chilled as liquefied natural gas (LNG) for transport and storage.
Why doesn’t autogas follow the same weekly cycle as petrol?
Just like petrol and diesel the retail price of autogas is primarily influenced by local competitive factors. In some capital cities, particularly Melbourne where relatively more LPG is sold, strong competition for market share can lead to discounting. However as for diesel, LPG is a small proportion of a service station’s fuel sales and discounting LPG does not lead to increased fuel sales and shop sales to the same extent as discounting petrol.
The wholesale price of LPG is based on the Saudi Aramco Contract Price, shipping, insurance, wharfage and the Australian dollar. At the retail level 10 per cent GST is added (LPG is more expensive to transport than petrol as it is transported in pressurised tanks) as well as small wholesale and retail margins.
Excise is currently not applied to LPG however it will be from 1 July 2011 at a rate of 2.5 cents per litre increasing in five equal annual steps to 12.5 cents per litre from 1 July 2015.
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