Australia’s fuel shock: The school-holiday petrol bill is only the beginning

Australians heading away for the school holidays are confronting extraordinarily expensive fuel. But the price displayed outside the service station tells only part of the story.

For families filling a car before a long school-holiday drive, the latest surge in petrol prices is immediate and obvious.

A tank costs considerably more. A long road trip costs more. For a family towing a caravan, driving a large four-wheel-drive or travelling thousands of kilometres during the holidays, fuel can again become one of the significant costs of the trip.

But Australia’s latest fuel shock is much bigger than the family petrol bill.

Look beyond unleaded petrol and the more consequential number may be the price of diesel.

Diesel powers the trucks carrying food into supermarkets. It powers agricultural machinery, construction equipment and mining operations. It moves freight between Australian cities and across enormous regional distances.

When diesel becomes expensive, Australia becomes more expensive.

And that creates a difficult new problem for an economy already struggling to contain inflation.

Fuel prices are climbing again

The Australian Competition and Consumer Commission reported on September 24 that average retail petrol and diesel prices had increased across Australian locations during the preceding week, driven by high international refined-fuel benchmark prices as the Middle East conflict continued.

The scale of the change becomes clearer when prices are compared with conditions before the present conflict.

Federal Fuel Plan data shows that on September 16 average petrol across Australia's five largest cities was around $2.24 a litre, while diesel averaged about $2.68.

Compared with February 20, before the present Middle East conflict, petrol was approximately 53 cents a litre higher.

Diesel was approximately 91 cents a litre higher.

That distinction matters.

Petrol hurts motorists directly.

Diesel can hurt almost everybody indirectly.

The diesel problem

The global diesel market has become exceptionally tight.

Reuters reported this week that global diesel prices had reached record levels as conflicts involving Iran and Ukraine disrupted supplies from major producing regions. Middle Eastern diesel shipments have fallen sharply and refineries elsewhere are already operating at or near capacity, leaving relatively little ability to compensate quickly for lost production.

Another Reuters analysis concluded that the global diesel shortage could persist into 2027 as inventories are depleted.

That changes the Australian discussion.

For motorists, $2.50 or $2.70 diesel is a fuel price.

For a transport company it is a business input.

For a farmer it is a production cost.

For a construction company it is a machinery cost.

For a supermarket receiving thousands of truck deliveries, it is part of the cost of getting goods onto shelves.

Eventually somebody has to absorb those costs.

Businesses can accept lower margins, improve productivity, reduce other expenses or increase prices.

Usually the adjustment is some combination of all four.

The inflation that travels by truck

This is where an international oil crisis begins to intersect with Australian inflation.

Consider something as ordinary as a box of vegetables.

Diesel may be involved in preparing the farm, harvesting the crop, transporting it to a distribution centre, moving it to a supermarket and, indirectly, producing or transporting the packaging around it.

The consumer does not receive a receipt showing a separate “diesel surcharge”.

The additional cost simply becomes embedded in the final price.

The same process can occur with building materials, furniture, appliances, parcels, manufactured products and countless other goods moving through Australia's supply chains.

Australia's geography makes this particularly important.

We are a large country with relatively small population centres separated by enormous distances. Road freight is not an optional peripheral activity. It is part of the circulatory system of the Australian economy.

That is why diesel deserves at least as much attention as petrol.

And then there is the RBA

The timing is particularly uncomfortable.

Reserve Bank Governor Michele Bullock said this week that the Middle East conflict had continued considerably longer than initially expected, oil prices remained elevated and the Bank was considering whether previously identified upside risks to inflation were now materialising.

She specifically declined to provide forward guidance on interest rates.

But her broader observation was important.

Bullock described increasingly pervasive supply shocks as a challenge for monetary policy. Unlike a temporary increase in the price of one agricultural product, a major energy shock can work its way across much of the economy.

That is precisely the danger posed by persistent expensive oil and diesel.

The Reserve Bank can increase interest rates.

It cannot produce another barrel of diesel.

It cannot rebuild a damaged refinery.

It cannot reopen a disrupted shipping route.

And it cannot resolve the conflict in the Middle East.

Higher interest rates suppress demand. They make borrowing more expensive and encourage households and businesses to spend less.

That is useful when excessive demand is driving inflation.

It is considerably more complicated when an essential commodity becomes expensive because global supply has been disrupted.

The second-round problem

Central banks nevertheless cannot simply ignore an oil shock.

A temporary increase in fuel prices is one thing.

A prolonged increase that begins affecting wages, transport charges, business costs, consumer expectations and the prices of other goods and services is another.

This is the distinction between the initial shock and its second-round effects.

If Australians come to expect prices to continue rising rapidly, behaviour can change.

Workers seek larger wage increases. Businesses become more willing to increase prices. Suppliers renegotiate contracts. Transport operators introduce surcharges.

An external energy shock can gradually become domestic inflation.

That is the scenario the Reserve Bank must guard against.

And it creates an uncomfortable possibility for Australian households.

They can be squeezed once through higher petrol and diesel prices — and again if persistent inflationary pressure contributes to tighter monetary policy.

Even cheaper crude does not solve the problem immediately

There has been some encouragement in international oil markets.

Oil prices fell about 2 per cent on Friday amid renewed discussion of a possible pathway towards ending the US-Iran war.

But recent trading illustrates just how unstable the situation remains.

Only a day earlier oil had risen around 3 per cent after a Houthi missile attack on Saudi Arabia renewed concerns about supply.

The direction of oil prices can therefore change dramatically with a missile strike, diplomatic announcement, shipping development or change in production.

And cheaper crude oil does not necessarily translate immediately into dramatically cheaper Australian diesel.

Australia buys refined fuels in international markets. Refining capacity, diesel availability, shipping costs, exchange rates, wholesale prices and normal distribution lags all sit between an international crude-oil quotation and the number eventually displayed at an Australian service station.

There is some evidence of easing at the wholesale level.

Australian Institute of Petroleum terminal-gate data shows diesel wholesale prices declined during the latter part of last week. In Brisbane, for example, average diesel terminal-gate prices moved from 279.1 cents a litre on Tuesday to 271.9 cents on Friday.

But those are still extraordinarily high wholesale prices.

School holidays make the problem visible

School holidays provide an unusually clear demonstration of the fuel shock.

Australians drive.

Families head for beaches, regional towns, caravan parks and holiday destinations. Four-wheel-drives tow caravans. Parents make journeys that might ordinarily have been postponed.

A 60-litre fill at $2.30 a litre costs $138.

A large four-wheel-drive or tow vehicle can consume considerably more, particularly when pulling a caravan over long distances.

The holiday itself has not necessarily become unaffordable.

But another component of it has become noticeably more expensive.

And households already facing high food, housing, insurance, electricity and other living costs notice another $30, $50 or $100 disappearing at the bowser.

Governor Bullock made another important point this week: reducing inflation does not mean reversing all the price increases Australians have already experienced.

Lower inflation means prices are increasing more slowly.

It does not mean the old prices return.

That distinction helps explain why Australians can hear that inflation is being brought under control while simultaneously feeling that life remains extraordinarily expensive.

Oil is no longer just an overseas story

For months, developments involving Iran, shipping routes, refineries and Middle Eastern oil production could easily have appeared distant from everyday Australian life.

They are distant no longer.

The transmission mechanism is becoming visible.

It begins with geopolitical instability and constrained energy supply.

It moves into international crude and refined-fuel markets.

Then into Australian wholesale fuel prices.

Then onto service-station signs.

And from there it moves onto trucks, farms, construction sites, mines and supply chains.

Eventually, some of it arrives in the price of the things Australians buy.

That is why the present oil crisis should not be regarded simply as another episode of expensive petrol.

It is potentially an inflation story, a business-cost story, a household-cost story and ultimately a monetary-policy story.

The Times View

Australians can see the oil crisis illuminated in enormous numbers outside the local service station.

The more important consequences may be considerably harder to see.

Diesel does not remain at the bowser. It travels.

It travels in the truck carrying groceries to a supermarket, the machinery building a house, the equipment harvesting a crop and the vehicle delivering a parcel.

Every kilometre potentially carries part of that additional cost further into the economy.

Australia cannot control the war in the Middle East or determine the international price of oil. But we should understand what happens when expensive energy persists long enough to become embedded in the price of ordinary Australian life.

The price displayed outside the service station is no longer merely the cost of fuel. Increasingly, it is a price being carried through the Australian economy.