Surging oil price fuels fresh inflation fears as petrol stays above $2 per litre

Surging oil price fuels fresh inflation fears as petrol stays above $2 per litre
  • PublishedSeptember 14, 2023

Surging fuel prices are igniting fresh inflation fears, as production cuts by the global oil cartel heap yet more pain on consumers. 

Average petrol and diesel prices are at their highest levels since the aftermath of Russia’s invasion of Ukraine, trading above $2 a litre in Australia’s five major capital cities for the fourth week in a row.

Economists say much of the increase has been driven by a group of major oil-producing countries that have deliberately cut back on output to generate higher prices.

But they say prices are also being propelled by stubbornly high demand and the weak Australian dollar, which is making Australia’s substantial fuel imports more expensive.

Ryan Felsman, an economist at CommSec, said the resurgence of fuel prices was likely to lead to an “inflationary pulse” that washed through the Australian economy.

Oil surge triggers ‘pain point’

Mr Felsman said this could make it harder for the Reserve Bank to fight inflation, which was running at 4.9 per cent in July but had been as high as 7.8 per cent in February.

“Certainly petrol prices flow through to higher headline inflation,” Mr Felsman said.

“So, that’s where the pain point for the Reserve Bank is going to be and a lot of the central banks.”

Oil pump jacks work as the sun sets behind them turning the sky orange.
Despite repeated predictions, the world is still yet to reach peak oil demand.(Reuters: Jessica Lutz)

Mr Felsman said it was “early days” but if the oil price shock lasted long enough and there were enough other inflationary forces it could put pressure on central banks around the world to act by lifting interest rates.

He said much would depend on how events panned out in China, which had the world’s second-biggest economy and was a huge user of imported oil.

In all likelihood, however, he said beleaguered Australian consumers were in for a tough time.

“China is the biggest importer of oil globally,” he said.

“And the economy, particularly the property sector and the malaise it’s in at the moment, certainly may be a weight on demand for oil going forward.

“Really, in the near term we’re expecting to see petrol prices remain around these levels, around $2.20 to $2.30 a litre, and that is not going to improve any time soon.

“Unfortunately, it looks like we’re in for a period of higher petrol prices, at least for the next month or so.”

‘What OPEC+ wants, it gets’

The comments were echoed by Mukesh Sahdev, the head of oil trading and research analysis at Rystad Energy.

Mr Sahdev noted crude oil prices were hovering above $US90 a barrel but he suggested these could go higher as the year wore on.

Central to this was the decision by a group known as OPEC+, which is led by Saudi Arabia but also includes Russia, to extend production cuts by more than a million barrels a day until the end of the year.

He said the group, which controlled anywhere between 35 per cent and 40 per cent of the world’s oil production, was putting the screws on supplies.

“They have the instrument called supply cuts, which they can any time bring to the market and increase the oil price,” Mr Sahdev said.

“In simple language, they want the oil price to be up, they want to generate higher revenues and they have the instrument to do it.”

Warren Clark, the boss of the National Road Transport Association, said the breakout of oil prices was a fresh blow to an industry that had been doing it tough.

Mr Clark said fuel typically accounted for about a third of a trucking company’s annual costs, so any material increase in the price was a major shock.

He said many trucking businesses had the ability to pass through fuel price increases, although they could often only do so on a monthly basis and had to wear the immediate hit to their cashflows.

Some truckies facing ‘fatal’ blow

Mr Clark said others had no contractual protection and any big rise in prices could prove fatal.

“There are still many, many businesses out there in our industry that are really struggling with the cost of fuel,” Mr Clark said.

“It’s their biggest cost and there’s just no way around it.

“If they can’t pass it on, then they’re basically going out of business.

“If they can pass it on, it’s hammering the small business and it’s hammering the consumer.”

For third-generation truck driver Lee Pavlovich, who helps run the family company Southern Haulage from Mount Barker, 370km south-east of Perth, rising fuel prices were hardly welcome.

Mr Pavlovich said that while the family firm was one of the lucky ones able to shield itself from the increases, they were still costs that had to be paid by someone.

“It filters down to the end of the line,” the 32-year-old said.

“So it gets reflected in the price of everything because nothing really gets anywhere without oil being involved.”

Young man with long hair wearing a puffer vest and blue shirt standing against a red prime mover
Third-generation truck driver Lee Pavlovich says transport companies are caught in the middle.(ABC News: Daniel Mercer)


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