Why is the price of fuel rising? Who gets our money when we fill up the tank? How can we save money on fuel? Will it ever run out? Leigh Robshaw finds out.
First it crept up to over a dollar a litre and now you can even expect to pay more than $1.10 per litre. But will it stop there? Even a rise of a couple of cents per litre can put a strain on the hip pocket for most Australians, so what can we expect from fuel prices?
Crude oil is an internationally traded commodity. It is in ever-increasing worldwide demand not only to fuel road vehicles, ships, boats and aeroplanes, but also in the manufacture of everything from bicycle helmets to fertilisers, computers, cosmetics, paints and even chewing gum.
The main determinant of fuel prices around the world is the price of crude oil per barrel in US dollars, which is set by the large oil companies like Exxon, Shell, Mobil, BP and Caltex. OPEC (Organisation of the Petroleum Exporting Countries) also has a significant influence on the price and often limits crude oil production in an effort to control prices.
The strength of the Aussie dollar against the greenback clearly plays a big part in our terminal gate prices and pump prices.
The terminal gate price is the wholesale price for the bulk supply of petrol or diesel from a fuel terminal. It includes the refiner’s cost of producing the fuel and delivering it to the terminal, as well as a profit margin.
The world is now seeing record highs in the price of crude oil, which is mainly why fuel prices have risen. At the time of writing the world price of crude oil was around US$55 a barrel and rising (there are 160 litres of crude oil in a barrel). So how does that affect us at the petrol pump?
The general rule of thumb is that when the world oil price rises by US$1 a barrel, the price of petrol here rises by about one cent per litre.
Other important factors are also at play in setting fuel prices. The ‘import parity price’ uses Singapore prices as a benchmark to ensure local refiners don’t sell offshore at higher prices and can compete with importers. Singapore was chosen due to
its close proximity and status as the largest refining centre in Asia.
The import parity price is a theoretical calculation based on what it would cost to buy petrol in Singapore, ship it to Australia and adjust it for any extra costs incurred should further refining be needed to meet Australian fuel standards.
Singapore’s prices are dictated by the price of Malaysia’s Tapis crude oil, the feedstock for refiners in Singapore and the benchmark for setting crude oil prices in the Asian region.
Supply and demand in Asia also affects Australian fuel prices. According to the Service Station Association, China’s economic growth spurt is partly responsible for recent price rises here. As China’s economy booms and it becomes an increasingly car-buying rather than bicycle-riding nation, the higher demand for Asian fuel results in a price increase that takes about one or two weeks to reach us.
Issues such as shipping costs, Federal Government excise, GST and State Government subsidies, plus the cost of storage, distribution, wholesaling, retailing and insurance, also influence the pump prices in Australia.
Even the weather affects how much we pay. If heating oil consumption increases in the United States during a particularly chilly winter, putting pressure on crude oil supplies, or if a good northern summer prompts people to hop in their SUVs and hit the road, thus increasing the demand for fuel, up go our prices.
With current fuel prices as high as they’ve ever been, are we going to see petrol reach two dollars a litre any time in the near future? According to David Thurtell, a commodity expert at the Commonwealth Bank, it would take decades for petrol prices to rise to two dollars a litre and by then we would hopefully be relying more on renewable fuel sources such as hydrogen fuel rather than fossil fuels.
“I think two dollars a litre is a very long way away,” says David. “If… terrorists hit the major Saudi refineries, for example, then oil could go to US$70 or US$80 [a barrel] and that would probably put 25 cents a litre onto the cost of petrol. But really we’re getting into speculative territory here.”
According to Richard Halstead, President of the Service Station Association: “Petrol is the most hated purchase of the family budget. [People] see a big hole in their wallet and say, ‘what did I get?’”
As petrol prices rise and that hole gets bigger, you might wonder what happens to your cash once you hand it over to the service station attendant. About half goes in government taxes, which is actually among the lowest fuel tax in the developed world — the British pay twice what we do.
Excise, a Federal Government tax, is 38.143 cents per litre for diesel, ULP (unleaded petrol), PULP (premium unleaded petrol) and LRP (lead replacement petrol) as well as ethanol and biodiesel blended with diesel. There is no excise on compressed natural gas, LPG (liquid petroleum gas), ethanol or 100 per cent biodiesel until 2011.
The Howard Government abolished automatic indexation of excise in 2001, so excise will remain at the level it is now. However, the Federal Government has been criticised for profiting from increased fuel prices while failing to spend a corresponding amount on improving roads.
In Queensland there is a State Government subsidy of 8.36 cents per litre, which reduces the pump price 9.2 cents per litre including GST. The NSW Government subsidises service stations in northern NSW so they can compete with Queensland retailers.
To give an example of where each cent of your money per litre goes, the Sydney petrol price published on the Shell website in early April was 106.2 cents per litre. Of that, 47.8 cents went in tax (Federal Government excise and State Government GST). The refinery price was 56.9 cents per litre and the remaining 1.5 cents went to wholesale and retail margins to cover storage and distribution costs and service station costs like wages, utilities, maintenance and rent.
Apart from the abovementioned market forces, a weekly discount cycle also affects the cost of petrol in metropolitan areas. The cycle starts when independent service stations with fewer overheads than the majors start to drop their price each day, usually by one or two cents.
The oil companies exaggerate their prices to their franchisees, like Shell and Caltex, and then give them rebates so they can lower their prices and compete with the smaller petrol stations. Later in the week, a retailer will break ranks and raise the price to peak cost again and the others will follow suit. It’s possible for prices to vary by about 10 cents per litre during the cycle.
In Sydney, the lowest prices are usually found on Monday or Tuesday. Jack Haley, NRMA Vehcile Policy Adviser, suggests you keep an eye open for the areas with the lowest prices. And if you’re stuck in one area, keep a watch to see how the price cycle moves.
Try to refuel when prices are low, rather than when the tank is empty. You can monitor daily terminal gate prices and average weekly petrol prices at the Institute of Petroleum’s website and find the lowest price in your area at motormouth.com.au.
To calculate your fuel consumption, record how many kilometres you travel and how many litres of petrol you use over a period of at least three fill-ups. Then use the following calculation: litres used x 100/distance travelled = litres per 100 km. View tips on fuel consumption.
Shopper dockets are the latest way to save money on fuel and it’s not just Coles and Woolworths offering discounts. Servo Savers is a network of businesses offering higher fuel discounts than the few cents a litre offered by Coles and Woolworths. It’s not a supermarket-driven scheme and small businesses all over Australia are now in on the act, from local hardware stores to pharmacies, newsagents, beauty therapists and even the local butcher. The minimum amount you need to spend varies from $10 to $50, as does the size of the discount. Servo Savers predicts that families can save over $500 a year on fuel and will find the ‘Servo Savers’ sign at increasingly more independent service stations around Australia.
Diesel is in much less demand than petrol so it isn’t part of the price cycle, which means service stations don’t discount it like they do petrol. It used to be cheaper than petrol so many motorists wonder why it is now more expensive. First, supply and demand in the Asian region influence the price more than production costs, and the Singapore price of diesel determines the price here. Second, the Federal Government’s fuel standards for lower sulphur diesel now require a more complex refining process, which means it’s no longer as cheap to produce.
The fuel discount cycle doesn’t occur in the country. This is because of the lower volumes of fuel sold, less competition and the lack of convenience stores associated with garages, which subsidise the petrol price. This, combined with the extra freight and distribution costs, accounts for fuel prices being higher in the country.
The Fuel Sales Grant Scheme, which was intended to compensate for the higher price of fuel in the country by offering subsidies to retailers so they could lower their prices, will be phased out in 2006 as it has failed to achieve its objective. The Federal Government has said it will instead redirect the funds into improving country roads as a way to compensate rural motorists.
The various fuels we use today, such as petrol, diesel, LPG (liquefied petroleum gas) and kerosene come from crude oil (also referred to simply as ‘oil’). Millions of years ago, prehistoric marine plants and microscopic animals were buried in ancient seabeds and converted by heat and pressure to produce crude oil.
Crude oil and gas make up petroleum, which is Greek for ‘rock oil’. It is obtained by boring into rock and pumping it out.
Different types of oil are found in different places. The Middle East produce a heavy black crude oil high in sulphur while Asian oil is lower in sulphur and brown or black. Western Australian oil can be honey-coloured and oil from the North Sea is often greenish-black.
The Middle East has the bulk of the world’s oil, the mother lode in Saudi Arabia. Russia, Africa and Venezuela also produce plentiful amounts, with smaller volumes from other Latin American countries, Canada, Europe, Asia and Australia.
Thirty-six per cent of crude oil was sourced domestically in 2004.
The rest is imported, mainly from Asia because our crude oil is generally light and heavier crude oils are needed to make products like diesel, lubricating oils and bitumen. Australia relies on Asian oil due to the cheaper freight from Asia to Australia, as well as its lower sulphur levels.
In 2004, we sourced the largest volume of oil from Vietnam, followed by Malaysia, Indonesia and the United Arab Emirates.
The world’s oil fields have produced some 650 billion barrels of oil to date and the trillion-dollar question is, when is it going to run out? Even the experts disagree, but the world currently consumes 82 million barrels a day and most believe we have enough to keep us going for the next 20 to 30 years, though environmental concerns should be paramount in the equation.
However, since much of the oil is in the politically unstable Middle East, we can’t assume those supplies will continue. Saudi Arabia supplies about 10 million barrels a day, making it the world’s largest oil exporter and says it can continue production for another 50 years; but scientists are questioning this and are yet to see any proof of these claims.
“Some experts say we have already reached the ‘roll-over’ point, where we are using oil faster than we are finding it,” says Jack Haley, NRMA Vehicle Policy Adviser. “Others say that as the price rises it becomes economically feasible to look elsewhere, such as deep water. Of course, if the price goes up substantially, it makes alternatives such as hydrogen and biofuels more economically feasible.
“It is also possible that the impact of global warming due to the greenhouse effect will force us to stop using fossil fuels, although coal-fired power stations would also be a target as they produce 40 per cent of the CO2 in Australia compared with 16 per cent from transport.”When oil production does eventually dwindle, products like plastics and pharmaceuticals would take priority as there are no alternative sources from which they can be derived and the age of sustainable motoring might finally become not only viable, but unavoidable.
“Most major vehicle manufacturers already have practical pre- or limited production hydrogen-fuel cell vehicles on the road,” says Jack. “The challenge in moving to a hydrogen economy is producing, transporting and storing hydrogen efficiently. The optimists say this will start to happen by 2010, the pessimists by 2020.”
LRP has been phased out because the number of older cars that require it has diminished to the point where it has become unviable for fuel suppliers to produce, store and distribute. However, you don’t have to send your older car to the scrap heap just yet. Some pre-1986 cars will run on ULP (unleaded petrol) but others require PULP (premium unleaded petrol) and an anti-valve seat recession (AVSR) additive to be mixed with the PULP, which you can buy at service stations or auto shops. NRMA recommends motorists purchase additive that has been shown to meet the requirements of Australian Standard AS4430.1. Some pre-1986 cars don’t need AVSR protection. For more info, call NRMA Technical Advice on 1300 655 443.
Around 500 million litres of lubricating oil is sold in Australia each year and disposing of used oil incorrectly can be an environmental disaster. It takes only one litre of oil to contaminate one million litres of water, and a single oil change can produce four to five litres of used oil. Used oil collection facilities are being established throughout Australia as part of the Federal Government’s Product Stewardship for Oil Program, with over 450 sites already operational nationally.
To get more details on used oil and find your nearest used oil collection facility, visit www.deh.gov.au/oilrecycling, email oilrecycling@deh.gov.au or call the Department of the Environment and Heritage’s Community Information Unit on 1800 803 772.
| Status: Married, five kids & five grandkids | Occupation: School secretary | Car: 1991 Mazda 121 |
“I use my car every day. I live and work in Aranda but I’m still very reliant on it. You can’t get anywhere in Canberra without a car. There are buses but they only go certain routes. I’ve got children and grandchildren and to get to them I need a car.
If petrol rose to $1.30 per litre] it wouldn’t have much impact because I live close to work and only fill up every couple of weeks, but I worry about my children because most families in Canberra have two cars. They have to. I save all my shopper dockets to give to the kids. I just don’t know how the younger generation will cope.
My husband is an environmental architect and he has a Toyota Prius [Hybrid]. It’s great, he loves it. We go to Sydney often and we use half the amount of petrol than we used to use. It’s the way to go in the future.”
| Status: Married, four kids | Occupation: Manager | Car: Nissan Navara Ute & Nissan Patrol 4WD |
“It’s only about three kms to work but I [need my car] to get the kids around. There are buses [but] I’ve never had to rely on them. The only train is to Sydney and back and taxis are too dear.
[A rise in petrol prices] has gotta hurt. You couldn’t just take the kids where they wanted to go, you’d have to plan things. You’ve also got to wear the costs with work. We run vehicles which all use diesel. I’ve noticed a five per cent increase on the bill for the higher cost of fuel. I’d consider a hybrid car if it suited our lifestyle and was big enough but there are no six-seaters.
We used to have a petrol car but bought a diesel car because diesel was cheaper. But now diesel is dearer than petrol. I can’t get my head around it, not when petrol is a more refined product than diesel.”
| Status: Married, two kids | Occupation: Business analyst | Car: Volvo 850 |
“I need to pick up or drop off my children at childcare, and then go to a train station so I can get to work, so I rely heavily on my car. My husband also uses his car to pick up the kids and go to and from work; public transport isn’t an option where he works. There’s also the extra running around required with having kids, doctors appointments and birthday parties, etc.
[If petrol rose to $1.30 per litre], the impact would be on our lifestyle as we still have to take the kids to childcare and get to work. Our budget would change to accommodate the extra money needed for fuel, as we couldn’t use alternative methods of transport with two kids. We may change our social outings and cut some items from the weekly grocery shop. I’d consider a hybrid car if it met the safety needs of our kids and budget requirements.”
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