KPMG economist Brendan Rynne says our standards of living are being eroded by higher power bills and rising petrol prices, and with wages increases few and far between, households and businesses are feeling the squeeze.
Only the oil, gas and LNG industries and those that sell petrol are seeing an upside.
“There are winners and losers with every movement in the oil price,” Rynne says.
The Royal Automobile Club of Victoria general manager of public policy, Bryan Prosser says, “fuel is essential, so these sorts of rises put household budget under pressure”.
“In many cases, people living in outer suburbs have fewer choices when it comes to public transport so the only option they have is a car. The petrol price hike will be an added burden for people facing cost of living pressures.”
Prosser adds that as the weekly price cycle is so volatile, it’s almost impossible for consumers to predict which way prices will head the next day.
NRMA spokesman Peter Khoury says people often forget rising fuel costs go beyond the household and have an impact on the entire economy.
“Australia is a road nation, many of our goods and services are still delivered by freight,” he says.
“These rising fuel costs are hitting their bottom line, and they are having to pass on these additional costs to customers.”
Australian Logistics Council interim chief executive Lachlan Benson agrees.
“Fuel costs are a significant factor for all businesses operating in Australia’s freight logistics sector – across all modes of freight transport. Those costs end up feeding into all parts of the supply chain, and ultimately, into consumer prices,” he says.
NRMA’s Khoury says it gets worse the farther out of the city you go.
Those in the country, particularly the agricultural industry, will be the worst off, “as there is no plan B for farmers.
“They just have to bear the brunt of the costs, it’s a real one-two punch for farmers also dealing with the drought.”
Farmers on the edge
Cotton Australia’s general manager Michael Murray says with the drought already pushing the agricultural industry to the edge, the rising cost of fuel is squeezing farmers budgets even tighter.
“Fuel is one of the major costs for our industry and for cotton farms, about 80 per cent of the energy used is fuel; it can easily be a cost of around $100,000 a year,” Murray tells Fairfax Media.
“At the price increases we’re seeing now we could certainly expect an additional cost of around $25,000.”
Farmers are being hit with a one-two punch as higher fuel prices add more costs to farms struck by the drought.
Khoury says one farmer he has spoken to in NSW says his fuel bills have leapt to about $7000 a week.
Murray says as crop sizes for cotton farmers have shrunk around 60 per cent compared with last year due to the drought, rising petrol and diesel prices are having a major impact.
“It’s a significant cost increase which is not in line with what is happening in the rest of the economy, so there is no ability to recover that cost.”
Why so high?
Australia has been hit with a perfect storm of high oil prices and a weak Australian dollar.
The oil price has been heading upwards following oil cartel OPEC and Russia’s decision to slash production rates in order to drive up prices from the decade lows of 2015-16.
The price was further boosted by US President Donald Trump’s sanctions on Iran’s oil exports, pulling about 1.2 million barrels a day out of global supply, and the collapse of major oil producer Venezuela’s economy, cutting another million barrels from the market.
OPEC and Russia’s decision on Monday not to increase production levels has now pushed the oil price even higher, as Brent crude prices spiked to a four-year high of $US82.55 earlier this week.
“These supply-side constraints alongside the evident inability or reluctance by OPEC producers to agree to significant output increases are leading to suggestions from a multitude of sources that oil could head back to $US100 in the coming months,” NAB analyst Ray Atrill says.
This could add at least another 20 cents to the petrol price.
This would not be so bad if Australia’s dollar wasn’t also sliding; it has dropped from US81 cents to US72 cents so far this year, widening the price gap even further.
Khoury says this is making a major difference at the bowser.
“We’re now at four-and-a-half year highs, and there’s a huge difference between filling up at $1.30 a litre and $1.60 a litre, it would be at least $20 each time,” he said.
The Australian Competition and Consumer Commission says while rising oil prices are playing a role, rapidly increasing retailer gross margins are pushing prices above reasonable levels, hitting their highest levels since the ACCC began monitoring the industry.
Fuel taxes also add 41 cents per litre.
The head of the Australian Institute of Petroleum, Paul Barrett, says while retailer margins are playing a role in higher prices, these can be partially justified.
“We’re undertaking research and have the suspicion it’s also partly due to an increase in investment by the retail sector.”
Barrett says the largest driver is global oil prices. “We understand the anger over high fuel prices but much of it is out of the industry’s hands.”
But it has done little to abate the impact.
As these rising fuel costs are unavoidable for logistics and freight companies, more firms are exploring electric vehicles as an alternative.
Woolworths and logistics firms are trialling electric trucks in order to slash fuel costs.
The Australian Logistics Council, which represents the nation’s largest transport firms, says there is a growing interest in electric trucks from the industry and it has even formed a working group that is linking up with the government to create a new regulatory framework.
“As fuel costs rise, business operators start to look for ways to reduce that cost burden. That is driving operators towards technologies that can reduce fuel consumption, as well as interests in high productivity vehicles that can carry larger loads,” Benson says.
“Fuels costs have also engendered significant interest about greater use of electric vehicles to meet our freight task. ALC has recently formed an Electric Vehicles Working Group, and many of the nation’s largest freight companies are represented in that group’s membership.”
Toll Logistics, one of the world’s largest transport firms, says fuel usage is one of the company’s highest cost areas, pushing it to invest in new technology.
“We’re investing heavily in new, more sustainable fleet that are more fuel efficient and trailers which can offer increased carrying capacity, resulting in fewer trips and less fuel consumption,” a Toll spokeswoman says.
KPMG’s Rynne says while parts of the country are suffering, some industries welcome higher prices.
Oil, gas and LNG export producers are seeing a greater return and with falling global supplies, demand is also rising, creating a much healthier market.
“LNG companies, who are tied to the oil price, are going to benefit out of this,” Rynne says.
Petrol stations are also seeing better returns.
Oil and gas firms are riding the high oil price towards increased returns.
Rynne says despite growing national concerns over rising fuel prices, there is little the government can do to stop it.
“Australians should recognise that the price of oil is set at a global level, so politicians really can’t influence it but these higher prices will put pressure on the cost of living and without a rise in wages this will see growing political pressure from electorates as they see their standard of living eroded,” he says.
The question many Australians are asking is “will prices come down?”
With Commsec analyst Ryan Felsman telling Fairfax Media $1.50 will be the new normal, the days of cheap petrol appear to be long behind us.
Khoury says the only thing Australians can do is watch the price cycle and wait for the low point, until then, “don’t fill up, just top up”.
Covering energy and policy at Fairfax Media.
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