Petrol prices rises go far beyond the pump

It’s hard to overlook the eye-watering prices we’ve been paying at the petrol pump in recent weeks.

According to the bowser data for Perth, the average price at the pump is close to 172 cents per litre for regular unleaded and more than 193 cents for premium unleaded, both record highs for Perth residents.

So, what is driving the price increases, and is COVID-19 to blame?

To some extent, COVID-19 has interrupted supply chains, both locally and globally, with workers falling ill or having to isolate.

This has created bottlenecks in global supply chains and price increases in fossil fuels and durable goods. This is also the reason behind our empty supermarket shelves.

But it’s only half of the story.

With the new Omicron variant forcing countries to enforce new sanitisation rules, and China having slowed production in energy-intensive industries ahead of the Winter Olympics, we could have reasonably expected fossil fuel prices to fall.

Yet this hasn’t happened.

Worldwide lockdowns and border closures at the start of the pandemic led to a slowdown in economic activity and a collapse in the demand for fossil fuels.

This caused crude oil prices to plummet to below $20 per barrel in April 2020, with OPEC producers reducing oil production and supply as a result.

However, crude oil and liquid fuels production has remained subdued over the past year despite the upturn in economic activity in most countries around the world.

Global production dropped 6.5 per cent in 2020, but only grew by 1.7 per cent in 2021; that’s 5 million barrels per day less than pre-pandemic levels.

This has a lot to do with the fuel price inflation we’ve been facing over the past year.

And it’s not only the price we pay at the pump that increases when fuel production doesn’t keep up with demand.

The cost of plastics, asphalts, industrial lubricants, fertilisers and many other petroleum-based products are all affected by fuel price increases.

Higher petrol prices will add to the pressure on freight costs, which is something the building industry can ill afford, given the constrained supply and rising costs of construction materials.

In turn, rising transport costs affect the price of food and other essentials, which is a particular concern for lower income households who spend a higher share of their income on groceries.

Natural gas is a substitute for petroleum, and LNG netback (export) prices have recently broken $39 per gigajoule, close to seven times the pre-pandemic price.

There are other factors at play for LNG, too.

The escalating tensions between Ukraine and Russia are contributing to rising natural gas prices, with the main pipes that connect Russian gas supplies to Europe passing through Ukraine.

So when can we expect oil prices to ease?

Demand for natural gas should fall with the end of the Northern Hemisphere winter, and there is some hope OPEC will respond to market pressures by lifting the supply of crude oil.

If this is the case, we should see energy and fossil fuel prices falling over the coming months.

In the meantime, buying an electric car might not be a bad idea.

• Dr Silvia Salazar is a Research Fellow at the Bankwest Curtin Economics Centre