What’s up with petrol?

One topic that regularly features on the evening finance news is the price of petrol. If you own a car, you’ll understand why. It can be expensive. And how much a tank costs from week to week can have a pretty big impact on your budget. But there’s a bit more to it than that. Let’s dive into the details.

The price of petrol

Petrol is an important staple in most Aussie household budgets. In fact, CommSec economists argue that filling up the car with petrol is the single biggest purchase that many families make each week. That estimate is based on a survey of household spending made by Australia’s Bureau of Statistics every five years and assumes that the average family purchases 35 litres of petrol each week.

If petrol prices are at high levels or are lifting sharply then it has obvious implications for what else we choose to spend money on. And it especially has implications for so-called ‘discretionary’ or non-essential purchases.

For instance, some people might cut back on visits to their local cafe or restaurant, or delay buying a new outfit because they’re paying instead to keep the car running. More generally, some people may feel the need to budget a bit harder in order to make ends meet.

Now, if we think about such a scenario in the context of the sharemarket, companies in the consumer staples and consumer discretionary sectors may see a drop in sales because of the higher cost of fuel.

Of course, it’s not just putting petrol in the car that matters when prices are rising but also higher costs of transportation for business; costs that may be passed on to consumers.

But, on the other side of the equation, energy producers and fuel marketing groups could benefit from high and rising prices for energy commodities.

What affects petrol prices?

It comes down to demand and supply. If global economies are growing strongly, demand for transportation may rise and therefore demand for gasoline or petrol. Then it’s a case whether suppliers can meet this higher demand. If they can’t, the relatively scarcer commodity may rise in price.

Weather events like cyclones as well as wars, disruptions to production and terrorist attacks may also affect oil supplies. Groups of oil producers such as OPEC can also act in concert to restrict global oil supplies.

Australian consumers rely on these global oil supplies. That wasn’t always the case, but oil production in Australia has been in decline since 2009. We’re now a net importer of oil (and refined petroleum), which means we import more oil than we export. And with Australia importing most of its refined product needs, fluctuations in the Aussie dollar relative to the US dollar can affect domestic fuel prices and importation costs.

Movements in the global oil price – which impact local petrol prices – are also important because of the impact on inflation. And, as we’ve already covered, it’s not just the price we pay at the pump that matters but also the impact on transportation costs for a raft of items, and therefore the pass-through effects to the broader economy.

When energy and transportation costs are rising sharply, the Reserve Bank may be worried about the ‘stickiness’ of higher prices, meaning that inflation remains sustainably high. While other factors may also be at play, high and rising petrol prices could be a factor that causes the Reserve Bank of Australia to lift interest rates.

So, as well as what you pay at the pump, rising petrol prices potentially have far broader impacts, affecting business costs, profitability, inflation and even interest rates.

If hefty prices at the pump have got you down, check out real-time fuel apps like MotorMouth or try shopping around for the best deal at your local servo.