International Influences

Gaining an overview of how oil is produced from the "well to the wheel" helps to clarify why fuel prices rise and fall. The three steps in the fuel supply chain begin with the exploration and production of crude oil; followed by refining the crude oil into various fuels such as petrol, diesel and heating oil; and finally, marketing and distributing these refined products. Each of these product markets are independent and highly competitive.

In this section we look at the crude oil and refined product markets as the primary international influences of Australian wholesale prices.

The crude oil market

The price of crude oil, can fluctuate greatly and is ultimately driven by supply and demand for oil on a global scale, meaning that demand or events in another country can affect prices in Australia.   Factors affecting the price of crude oil include: the weather, stock levels, political events and market sentiment (just like the stock market). This influence is due to the potential influence of these factors on the supply of crude available to/in the market.

The refined product markets

The factors affecting the refined product markets are similar to those affecting the crude oil market, as refined products are also internationally traded.   Whilst there is a link between crude oil as a refinery input and the refined products as refinery outputs - ultimately the respective markets set the price.

Increasing demand for crude oil and refined product

As nations develop so do their demands for energy, notably oil and refined products. China and India’s continued economic growth and development has helped increase the overall demand for crude oil and refined products and this increased demand puts upward pressure on the overall price.

Market speculation

Crude oil and refined product are traded on the open market and are therefore subject to market speculation, which impacts prices. In recent years, there have also been new entrants and increased interest in the oil commodities market, mainly from investment funds and hedge fund managers. It is widely believed that this has added to the volatility of oil prices.

Refining capacity

Supply from refineries is limited. In order to try and meet the growing demand for refined products (particularly in China, India, US), refineries around the world are now running at near full capacity.   Looking to the future, new refineries will need to be built to continue to meet demand, but these are long-term, capital intensive investments that will take time to come on stream - hence supply from existing refineries is limited. A key factor in the development of new refineries is the significant investment required to build and operate them, which is also increasing due to more stringent environmental standards globally, both in terms of environmental performance at refineries and cleaner fuels.

Currency fluctuations

The world's major crude oils and refined products are traded in US Dollars.  Therefore, any change in the exchange rate with the US Dollar will have an impact on the cost of purchasing crude oil or refined product.