Everyone is talking about petrol prices in Australia, but how many of us actually understand what’s going on?
We know the Russia’s invasion of Ukraine has made the global oil market volatile, pushing prices up and prompting the Australian government to temporarily cut the fuel excise from 44 cents to 22 cents a litre to cushion the blow.
But how does that explain the fact that the petrol station around the corner from your house is charging $2.20 a litre, while one two suburbs over is able to charge $1.95? Are we being taken for a ride? And who gets to decide these prices?
This author is, admittedly, completely in the dark, so I decided to call someone who might be able to explain.
In short, he’s across the whole process that leads up to you filling your car with fuel at your local servo. Here’s what he told me.
How do service stations decide their petrol prices?
“There are two main factors that dictate petrol pricing: the wholesale price a service station paid for the fuel and, for capital city retailers, the nature of the market competition in their vicinity,” Mr McKenzie explains.
In regards to the first factor, that’s fairly obvious – service stations must sell their petrol for more than they paid for it in order to make a profit.
According to McKenzie, over the last decade, “the average difference between the wholesale price and retail price has typically been 15 cents a litre”.
Out of that 15 cents a litre, petrol stations have to cover staff costs, electricity costs, lease costs et cetera.
“Typically, petrol stations earn about two cents a litre of gross profit before tax, but the reason they survive is they sell so much – roughly 3.5 million litres over 12 months,” McKenzie says.
However, that second factor – the “market competition in their vicinity” – is where things start to get interesting.
This phenomenon is called the “petrol price discount cycle” and it describes the tendency for service stations in capital cities to voluntarily discount their fuel in order to attract customers away from the competition.
“Petrol stations compete with each other for volume – they play a game of discount leapfrog where they try to beat their competitor by a cent or two a litre at a time until they go below their wholesale price,” McKenzie says.
According to McKenzie, the cycle ends because, inevitably, the discount leapfrog goes so far that a volume seller starts to lose money.
“[The discounting] becomes a point of pain, they decide they’re going to run too much of a loss,” says McKenzie.
“So, they move the price up to recover what they’ve lost in the last week. That first retailer jumps straight to the top of the cycle and then others slowly follow and the cycle begins again.”
Are petrol stations price gouging right now?
If you see a particularly high price at a local service station, you might assume it’s taking advantage of all the hysteria and jacking prices up above the norm. But that’s not typically the case, says Ryan Felsman, Senior Economist at CommSec.
“As it stands, the [difference between the wholesale and retail price] is 12.36 cents per litre, which is a little bit lower than the long-run average,” Felsman says.
“It’s been volatile. If you took the margin for the week ending July 17, it would be 24.7 cents a litre, but that’s because the wholesale price fell 17.5 cents, which jacked-up the margin. It got as low as seven cents at the beginning of June. We prefer to take a smooth two-month average, and last week that gave us 12.36 cents per litre.”
As such, the numbers suggest retailers aren’t opportunistically gouging prices – but rather contending with higher wholesale prices.
“The notion that retailers are gouging motorists isn’t quite the case, it’s more the fact fuel prices are high because international prices are high,” explains Felsman.
“There’s no suggestion that the overall national picture is one of gouging but, of course, you’re going to get different results in cities – so it’s difficult to say blanket-wise they’re not gouging, but on a national level, I would say that [the retail margin] is broadly around the average.”
Why do service stations in regional or remote areas often have different petrol prices to the city?
While all retailers are affected by wholesale prices regardless of their location, regional petrol prices tend to be influenced by different factors than metropolitan retailers.
Firstly, regional petrol stations will often serve a dual purpose, like operating as a general store or restaurant.
“They will make a lot more money from their non-fuel products than they will from fuel, so it means they can afford to discount their fuel slightly because they’re earning more than others who are more dependent on fuel,” says McKenzie.
Additionally, the rate at which regional service stations sell fuel varies greatly.
“A truck stop on a highway in WA could turn over 10-12 million litres a year, whereas a country town might be turning over one million litres a year,” explains McKenzie.
“They both work with similar sized tanks, so when you’ve got the wholesale price moving, the high-turnover site will be replacing that cheaper fuel earlier than those turning it over more slowly at a low volume site.”
As a result, when the price is falling, low-volume sites are stuck with expensive fuel they’ve already bought, while high-volume sites can get the cheaper fuel in.
When the price rises, the reverse happens – the site with the higher turnover is more exposed to the higher price.
So, when is the best time to buy petrol?
You might have heard that this ‘petrol discount cycle’ is weekly, with some people suggesting Tuesday is the best time to fill up.
McKenzie says this notion is “just folklore”.
“Petrol price cycles are not weekly, they’re more like three to four weeks,” he explains.
In fact, the best way to tell if it’s a good time to fill up is to stay across petrol price apps, which receive live updates from the industry and state governments to ensure they have accurate data.
Another sign it could be time to fill up is if you see a large discrepancy in prices between two nearby petrol stations, according to McKenzie.
“If you see a massive variation – around 20 cents a litre – between servos that’s a possible alarm bell to say it’s time to fill up before it goes through the roof. A small part of the market has moved, so it’s likely the rest of the market will follow.”
How does the oil price affect the petrol price?
The first thing you need to know is that there’s not just one oil price.
There’s a range depending on where it’s produced and where it’s being used, but the oil price most relevant to Australia is called the Brent Crude price.
The price of oil changes constantly – and lately, it’s been particularly volatile as the market attempts to guess the impact of Russia’s invasion of Ukraine.
Another important thing to note is that while oil is priced in US dollars, the Australian market pays for it in Australian dollars, meaning the price is also subject to the exchange rate, which rises and falls too.
How does all that make its way to the consumer? Well, it’s complicated.
“Most people seem to think that the same company takes the oil out of the ground, turns it into petrol, ships it and retails it to the service station – but in reality, oil is traded the same way shares are traded,” explains McKenzie.
Typically, a service station will have a contract with a wholesaler, who in turn has a contract with a fuel marketer, who employs traders who buy the oil.
“No government has control over the oil prices; you’re vulnerable to the world market. Service stations just have to pay what the wholesaler negotiates,” says McKenzie.
To put it in context, there are 7400 service stations in Australia – two thirds of them are small businesses operating with a franchise or branding arrangement like Shell or Caltex.
Those service stations have the choice of around 100 wholesalers, who have direct relationships with the marketing companies and importers.
And finally, there are five major marketing companies in Australia – they’re the ones actually buying the oil and importing it.
Why is the average petrol price different in each state?
Each state has a different average petrol price because the discount cycle in their capital cities is moving at different rates.
“Sydney doesn’t have to do what Melbourne does because they’re not competing,” McKenzie says.
“So if I look at the market today, the average price is $1.79 for regular unleaded in Adelaide, which has the cheapest fuel in the country (for a capital city), so Adelaide is at the bottom of the cycle, and Melbourne is coming off the top of the cycle and is 45 cents a litre more expensive on average.”
Additionally, you typically only see this petrol discount cycle in certain capital cities – with the exceptions being Hobart, Darwin and Canberra, which behave more like regional markets.
How are petrol prices policed?
“In every state and territory we have fuel price transparency laws where we are required to provide the government with real-time advice on price changes,” Mr McKenzie explains.
“That info is then collected by state governments and used to provide data to fuel price apps.”
Additionally, the Australian Competition and Consumer Commission (ACCC) can also compel businesses in the fuel industry to provide revenue, cost and profit information every three months.
“No one regulates the price, I could sell it at $5 a litre if I wanted, I just wouldn’t sell much – but what the ACCC does is look to see whether there’s collaborative behaviour on pricing and they’ve had those powers for 17 years.”
How often can a service station change its petrol price?
According to McKenzie, as often as they like – except in Perth, where there’s a law that petrol stations have to advise the government of the next day’s price by 6pm nightly.
“In a capital city like Sydney and Brisbane they can change it twice a day; on average it’s once a day, and if you start to go out into regional areas, it’s every couple of days or once a week,” says McKenzie.
Diesel prices have decoupled
Why is diesel so expensive at the moment?
“Traditionally the oil price has been a marker for what happens with the retail price: if it goes up by $5 a barrel, that typically sees the wholesale price go up by five cents a litre,” McKenzie says.
“We’ve seen something interesting in the last six months, where the finished production price of diesel has decoupled and is going up faster than the oil price.
“Diesel is cheaper to make than petrol at a refinery, but at the moment it’s 20 cents more expensive to buy per litre.”
Why? A whole lot of different reasons, but it’s mostly to do with tight supply.
“In Europe they’ve had problems with power generation from solar and wind, so they’ve had to use more diesel for power generation,” explains McKenzie.
Then you’ve got the Russia/Ukraine crisis, which has limited gas availability in general.
Additionally, the mining sector is producing more and using diesel to move their goods, plus the global agriculture industry has faced demand pressure and is using more tractors and diesel-powered vehicles to increase output.
In summary: “There’s more intense competition for diesel than for petrol and as a result it’s attracting a price premium,” states McKenzie.
Susannah Guthrie has been a journalist since she was 18, and has spent the last two years writing about cars for Drive, CarAdvice, CarSales and as a motoring columnist for several in-flight and hotel magazines. Susannah’s background is news journalism, followed by several years spent in celebrity journalism, entertainment journalism and fashion magazines and a brief stint hosting a travel TV show for Channel Ten. She joined Drive in 2020 after spending a year and a half at the helm of Harper’s BAZAAR and ELLE’s online platforms. Susannah holds a Bachelor in Media and Communications from the University of Melbourne and cut her teeth as an intern for Time Inc in New York City. She has also completed a television presenting course with the National Institute of Dramatic Art. She lives in Melbourne with her husband and her one-year-old son who, despite her best efforts, does not yet enjoy a good road trip.