Why are fuel prices rising and when will they go down?

Since the middle of July 2023, fuel prices in Australia have been increasing at an unusually fast rate from an average of 165 cents per litre (cpl) for regular unleaded petrol (ULP) up to 220 cpl in early October.

After each recent trip to the service station, motorists could be forgiven for scratching their heads and wondering: “When will fuel prices in Australia go down?”

To answer this question, we will look at the factors that have caused fuel prices to increase over the last few months and then look at whether they are likely to change in the near future.

Why are fuel prices high?

There are several current factors in play, which can be broadly categorised into two categories:

1. A constrained supply market due to:
   1. OPEC+ and other allied producers are cutting production quotas. Recent commentary suggests that OPEC+ will deliver supply cuts in the order of 1.3 million barrels per day for the remainder of 2023.
   2. A series of planned and unplanned refinery shut downs in Asia over the past few months.
   3. Geopolitical factors including the Russia-Ukraine conflict.
2. Other economic factors causing price increases:
   1. Rising wholesale costs through the petroleum supply chain, for example - higher transport distribution costs
   2. A slowing global economy – with the Chinese economic slow-down directly impacting Australia as a major trading partner – China is buying less volume of commodities
   3. A falling $A against the $US. Every 1 cent fall in the $A adds about 0.8 cents per litre to the price of fuel to Australian motorists. Exchange Rate

Exchange Rate

The average price of fuel has risen 4.6 cents per litre since early July due to a 5.7 cents fall in the $A against the $US. Since 2 February the $A has fallen 8.3 cents against the $US.

How have benchmark prices for regular unleaded and diesel behaved in the Asia region?

The benchmark prices of regular unleaded and diesel fuel in the Asian market are known as Mogas 95 and Gasoil.

The regular unleaded price: Mogas 95 has risen from 86.8 cents per litre (cpl) in June 2023 to 108.0 cpl in September: An increase of 21.2 cpl or 24.4 per cent. The monthly price for mid-October has fallen 11.9 cpl.

Diesel price: Gasoil has risen from 86.3 cents per litre (cpl) in June 2023 to 122.8 cpl: An increase of 36.5 cpl or 42.3 per cent. The October monthly price has fallen 5.8 cpl.

Sydney price movements

Regular Unleaded

Diesel

Selective price movements in regional NSW

Regular Unleaded

The monthly average regular unleaded prices for June to September 2023 and monthly movements for July to September

Diesel

The monthly average diesel prices for June to September 2023 and monthly movements for July to September

Looking back over the last few years

Global oil prices have become more volatile in response to various global factors.

We have had higher than normal prices now for about two years. During the pandemic, oil prices plummeted when the whole world went into lock-down, and demand for oil nosedived. Once lock-downs ended, demand bounced back prior levels.

When Russia invaded Ukraine in February 2022 - with Russia being the second largest producer of oil through the global markets - prices skyrocketed and have not settled down.

Rather than respond to these higher prices by increasing production, oil-producing countries decided to cash in by restraining supply. The cuts were too steep for too long, however, and demand for oil retracted. This led to prices falling in October.

However, the dynamic has shifted once again with the conflict in the Middle East also now weighing on financial markets. How oil producers, central bankers and other key players respond is still to be determined.

When will fuel prices drop?

Unless unforeseen economic factors lead to global prices starting to fall, there will continue to be upward pressure on fuel prices as oil production cuts take effect.

Any seasonal increases in demand for fuel will result in a tighter fuel market leading to higher prices.

Given existing market factors, Australian fuel prices are unlikely to drop this year.