Since headline inflation peaked in December of last year, one of the driving forces behind inflationary pressures moderating has been the drop in fuel prices. After peaking in June last year, fuel prices have been placing varying degrees of downward pressure on this consumer price index (CPI/0 component ever since.
But with that peak now in the rear-view mirror when it comes to the next quarterly CPI print, things are starting to look quite a bit different. Based on the average unleaded fuel price seen in the September quarter of 2022’s CPI, fuel prices so far this quarter are an average of 15 cents a litre higher than they were then, or 8.4 per cent.
Based on the weighting for automotive fuel in the CPI, if fuel prices continue to trade at similar range as to what they have so far this quarter, this would add up to 0.3 per cent to the next quarterly year on year headline CPI print.
Despite the weakening of the global economy’s growth prospects, higher oil prices may continue for quite some time to come.
With the possibility of a further Reserve Bank Australia interest rate rise still looming on the horizon and growing concerns about inflation staying high into 2024, its worth exploring why fuel prices are rising and the possibility they could continue to remain high.
The Great Distortion
In March of 2022, following the Russian invasion of Ukraine and the rapid increase in global oil prices, the Morrison government halved the rate of fuel excise tax from 44.2 cents per litre to 22.1 cents.
While this had the effect of significantly lower fuel prices for Australian consumers for the six months between late March and late September 2022, it also distorted inflation figures lower.
Now when the time comes for the CPI to contrast fuel prices between Q3 2023 and Q3 2022, the current high price of petrol will be coming up against the artificially low price due to the excise tax cut. While this has impacted previous CPI readings, up until the current quarter it hasn’t been a hugely significant impact to the upside.
The death of oil?
For decades there have been warnings from experts that the death of fossil fuels was on the long term horizon. But over time global oil consumption has generally continued to grow, with the only down years not seeing record highs in the past 25 years, being those impacted by the Global Financial Crisis and the pandemic.
Since the Australia government signed the Kyoto Protocol in 1998, global daily oil consumption has risen by 31.3 per cent and is expected to set a new all time record high in 2023.
Unlike the past instances where the predicted decline of oil did not come to pass, in the present day significantly more tangible progress is being made to shift away from the modern world’s reliance on oil. To what degree these efforts will be effective in reducing global oil consumption remains to be seen, but they remain a highly visible force pushing toward that goal.
As the drive to reduce carbon emissions continues, its perhaps understandable why oil producing nations feel they are in an increasingly precarious long term position. With many of the world’s largest producers heavily reliant on oil and other fossil fuels for revenue, its unsurprising that they are looking to maximise prices and make hay while the sun shines.
Take Saudi Arabia for example, during past energy price cycles the Saudi government accepted decades worth of budget deficits following the end of high oil prices in the mid-1980s. At the time this strategy made sense, the sun would eventually shine upon global oil markets once more, revenue would sky rocket and debt could be paid down. Between 1999 and 2014, the ratio of Saudi government debt to GDP dropped from 103.5 per cent to just 1.6 per cent.
Back in the present, the sun is certainly shining on global oil producers, but there are growing concerns about the future and how long this run of good fortune may continue until the push to ‘Go Green’ begins to undermine their future prospects.
For this reason, among others its perhaps understandable why the Organisation of the Petroleum Exporting Countries (OPEC) wants to pursue a strategy of keeping oil prices sufficiently high. This is a unique opportunity to press their leverage while they can and maximise revenues.
While we certainly don’t like the impact this has on the cost of Australian fuel prices up in lights every few kilometres on the nation’s major roadways, this strategy to maximise oil prices may be a sign of things to come from OPEC, if they can maintain a united front.
Given the state of global geopolitics, this is a rather big if?
Path of oil prices
Recently global oil prices hit their highest level since early November, up 44 per cent from the lows recorded in early March. Much of this move has occurred in recent months, with prices up 38 per cent since toward the end of June.
While the current headline price of oil is slightly higher than where it was this time last year, due to a weaker Australian dollar the price Australians pay at the pump is higher still due to oil and gasoline being priced in US dollars.
In recent days, analysts and major investment banks have been revising up their oil price forecasts. Citi and Goldman Sachs both raised their price forecasts for oil to hit $100 a barrel for the first time since July 2022.
Ultimately, the path ahead for oil prices and by extension Australian fuel prices is an uncertain one. Throughout much of 2023 oil prices faced downward pressure due to concerns over a potential US recession, which didn’t end up eventuating. Now amid a run of solid US economic data, there is a risk that prices could once again head higher as some investment banks are predicting. On the other hand, further signs of a global economic slowdown and signs of an overbought market may see prices come down significantly.
Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator