Australian household budgets, already under strain from weak income growth and higher utility bills, have just taken another hit with petrol prices soaring to the highest level in two years last week.
According to Commsec, using data from the Australian Institute of Petroleum, the average price of unleaded petrol jumped by 9 cents to 136.4 cents per litre last week, the largest increase on record going back at least 13 years.
“The lift in the pump price is more an ‘alignment of the planets’, ending of discounting cycles in Sydney, Melbourne and Brisbane, than a reflection of global oil market changes,” said Craig James, Chief Economist at Commsec.
“Since the start of September, regional gasoline prices have lifted 4.5 cents a litre while the domestic wholesale prices has lifted 3 cents a litre.
“In contrast the retail or pump price has soared by around 10 cents a litre.”
The contrast between wholesale and retail petrol prices is shown in the chart below. It comes courtesy of Commsec.
Helping to explain the lift in the national average, the Australian Institute of Petroleum said that prices in Sydney, Melbourne and Brisbane jumped by 11.4 cents, 13.9 cents and 17.3 cents respectively last week.
Pump prices also rose by 8.1 cents, 1.6 cents, 2.3 cents and 0.7 cents in Canberra, Hobart, Darwin and Perth respectively.
Adelaide was the only capital city to register a fall, dropping 9.4 cents over the week.
Mirroring the broad-based gains across the capitals, prices in metropolitan areas rose by 9.7 cents over the week, outpacing a smaller 7.3 cent increase in regional areas.
Looking ahead, James says that while motorists may receive a short-term reprieve with prices starting to fall, it’s unlikely to be good news for motorists over the medium-term.
“On Friday, Saudi Arabia and Russia pledged to support the production agreement into 2018. And, as a result, the key Brent crude benchmark price hit the highest levels for over two years,” he says.
“So while relief lies ahead for east coast motorists, it may not be long-lasting.”
OPEC and non-OPEC members have capped crude oil production since late 2016 in an attempt to improve supply-demand imbalances that led to a sharp decline in oil prices from the middle of 2014.
A possible extension of production limits beyond March next year, at a time when global economic conditions are strengthening, has seen sentiment towards the outlook for crude prices improve in recent days.
While good news for energy producers, higher petrol prices are unlikely to be welcomed by Australian households, says James.
“Filling up the car with petrol is the single biggest purchase for most Aussie households. So the recent lift in petrol prices is something to watch, especially with higher power prices and sluggish wage growth,” he says.
Australian retail sales have fallen in the past two months, coinciding with a sharp lift in Australian gas and electricity prices at the start of July.
Some have put the weakness in retail spending down to households diverting money away from discretionary areas to pay for these increases.
Higher petrol prices, another essential item for many Australian households, is unlikely to assist a recovery in discretionary spending, particularly at a time when wage growth is barely keeping up with inflation.