What's the relationship between petrol price and oil price?

Oil prices are where manic-depression and dollar signs collide.

We should all be thanking our lucky stars that the Aussie dollar has surged against the Greenback – because it’s the only thing standing between us and paying about $1.60 a litre for petrol.

Luxuriating in this commercially insulated cocoon could be ill-advised; prices are going north some time soon. The specific question is: When? Diesel could well lead the charge, if the Chinese and other Asian economies continue to inflate. (There’s an unpleasant thought.)

Remember when the world economy was heading to hell in a handbag recently? Does the date July 10, 2008 mean anything to you? That was when the average price of unleaded hit $1.68 per litre, according to the Australian Institute of Petroleum. Talkback radio and tabloid TV didn’t have to dig too deep for content on that day…

It happened in line with skyrocketing oil prices – in this case $US147 a barrel. OPEC, the Organisation of Petroleum Exporting Countries was very pleased; we weren’t.

(If you’ve ever been confused about this whole ‘barrel of oil’ concept: A barrel of crude is 159 litres. It yields about 75 litres of petrol. If you want one, it no longer ships in actual barrels. The minimum order quantity for West Texas crude on the New York Mercantile Exchange is 1000 barrels. And, no, you can’t get it home-delivered. Coincidentally, 1000 barrels of oil is roughly the same as the global consumption of the stuff – per second, 24/7.)

Five months after that all-time high, the price had fallen 70 per cent to under $US45 a barrel while the world economy went into the freefall of the GFC – despite shenanigans by OPEC including partly turning off the taps to artificially constrain supply. Here, petrol prices went back to normal – and remained on their meds for the best part of the next two years.

But that all looks like it’s about to change. See, the high Aussie dollar makes imports – including petrol – relatively cheaper. However, the rise in the price of oil has been out-stripping the rise in the Aussie dollar. Meaning a price rise is on the horizon. The dollar has come up from about $US0.85 to $US1.01, a rise of over 18 per cent, whereas oil has come up about 20 per cent to two-year highs – and more rises of the latter are likely, while the dollar isn’t really tipped to go any further north.

Maybe you’re wondering how the oil price affects the petrol price? If the currency remains stable, oil price and petrol price aren’t exactly directly proportional. This is because petrol is a manufactured product, whereas crude oil is basically the raw material. If we crunch the numbers on petrol at $1.22 a litre (because petrol is hovering around that today, and it makes GST easy) you find that 11 cents is GST, and 38 cents is Federal fuel excise. The petrol itself (Singapore MOPS95) costs around 55 cents a litre – only about half of the total cost of the fuel at the bowser. Loading, shipping and decanting the petrol costs about 10 cents a litre. That leaves only about only 8 cents a litre for the entire retail end of the business.

All times 20 billion to keep Australia in petrol for a year.

This might not explain everything about petrol pricing, but at least is clears up the greatest mystery of the modern age: Why the servo attendant really needs to sell you those two-for-one Kit-Kats…

MORE INFO:

Check out pre-existing posts on this topic HERE and HERE.

These posts put the country's (and the world's) obsession with crude oil prices into perspective.

For more posts on this issue, review the index HERE.