Factors that set the price of fuel

Pump fresh fuel into your vehicle is a weekly ritual for most and one you might not give much thought to other than what your fuel costs per litre.

However, Australian fuel prices are affected by a wide range of factors, underlined by both domestic and international influences.

Here, we explain the factors that influence Australian petrol prices and diesel prices per litre, ranging from production costs, to transport and taxes, and even marketing and geopolitical factors.

Being aware of these influences will not only boost your understanding of Australian fuel prices, but will help you find significant savings at the bowser as a result. 

Before we begin, it’s worth downloading the My NRMA app which can help you find the best deal on fuel in your area and benefit from savings of up to 13c per litre at Ampol Foodary. 

Crude prices

Before petrol can flow from the pump at the fuel station, it has to be refined from crude oil. Crude oil is a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials.

Crude oil is an internationally traded commodity and part of the reason fuel prices are so volatile is that regular fluctuations in global crude oil prices directly impact the base cost of fuel. This mostly comes down to supply and demand. If global demand for crude oil is high, prices will go up. If demand drops, like it did during the Covid 19 pandemic, the price will drop.

These ‘international benchmark prices’ for fuel have the largest impact on what you pay at the pump here in Australia. It takes around two weeks for global price shifts to be felt at the pump in Australian cities and even longer in regional areas.

The benchmark price of refined petrol in the Asia Pacific region is known as the Singaporean MOGAS 95 and it is bought and sold in US dollars. Changes in the value of the Australian dollar relative to USD, therefore, can also impact fuel prices.

As a loose rule, average MOGAS 95 prices account for 49 per cent of the cost of fuel across Australia’s five largest cities.

Similarly, crude oil is the primary input for diesel, making its price the largest determinant for the price you pay at the pump for diesel in Australia.  

Fuel transport costs

Australia doesn’t have large fuel reserves so the vast majority of our crude oil is imported, with Malaysia being a primary provider. Once petrol is refined from crude oil, it is transported from refineries to distribution terminals and then to retail outlets. In Australia, this involves shipping, pipelines, and trucking.

Transportation costs are influenced by factors such as distance, fuel prices, and logistical considerations. Generally, petrol prices tend to be higher the further the fuel must travel to reach the pump.

These greater transport distances, plus less competition from retailers, helps to explain why fuel is often more expensive in country areas.

Fuel Excise

The Australian government imposes a fixed excise on petrol and diesel, which is indexed twice a year to the Consumer Price Index (CPI). At the time of writing, the excise rate is approximately 52 cents per litre. 

This tax is a significant component of the retail price of fuel and is justified by using the money to help fund infrastructure projects and other government expenditures.

Wholesale GST

In addition to the fuel excise, the Goods and Services Tax (GST) is applied at a rate of 10 per cent on the final retail price of petrol. This means that GST is calculated not only on the base price of the fuel but also on the excise component, effectively taxing the tax. 

The GST contributes to the overall cost paid by consumers at the pump.

Retail Markup

The retail markup covers the operating costs and profit margins of service stations. This includes expenses such as wages, rent, utilities, and other overheads associated with running a retail fuel outlet.  

The level of competition in a given area can influence the retail markup, with higher competition often leading to lower margins. Retail prices in capital and larger cities typically follow a discounting cycle set by retailers, influenced by local competition and consumer behaviour. 

Understanding these components can help you decide on the best time to fill up.

Other global factors

Petrol and diesel prices in Australia can be readily impacted by a suite of different global factors that you might not even think of. 

For diesel, there are tangible seasonal influences, such as an increase in heating oil use during the northern winter, which can lead to higher prices for diesel and other distillates. 

Because diesel is a middle distillate, and the refining process can be adjusted to produce more or less of it, supply availability and ultimately price also fluctuate depending on the demand for other products like jet fuel or heating oil.  

Natural disasters, global conflicts and civil unrest can also affect petrol and diesel prices. Even strong global economic growth or demand spikes can drive prices up.

How can I save money on fuel?

As well as macro factors like the international cost of crude oil, the local fuel price cycle also impacts the price of fuel in Australia. This cycle is largely influenced by competition between retailers who attempt to beat each other on price. 

This fuel cycle can vary across different suburbs in Australia’s capital cities and also coincides with school holidays and public holidays, as retailers look to increase their margins over popular periods on our roads. Again, the principles of supply and demand apply. 

To help track your local petrol cycle, download the My NRMA app which provides valuable information on the best time to fill up. NRMA members can also benefit from fuel discounts of up to 13 cents per litre. 

Keeping your car well maintained through regular servicing and ensuring your tyre pressures are set correctly can also help improve fuel economy, which will save you money at the bowser

Making Cents of Fuel

The price of fuel and the cost of running a car are at the top of the list of issues that affect motorists. The NRMA believes it is important that motorists understand how and where Australian fuel is sourced, and how fuel prices are determined. This knowledge will enable a more informed and productive discussion about what is likely to happen to our fuel sources in the future. 

Read our full report: Making Cents of Fuel