Are petrol prices about to rise? What to look for

As my crystal ball is in the repair shop after an appalling lack of accuracy in the footy finals, I'll have to go back to basics.

The three key influencers of petrol prices across Australia are:

• the price of crude oil,
• the $A to $US exchange rate and
• the local market conditions.

Of these three factors the easiest to understand is the local market conditions. So let's tackle that one first.

Our company watches petrol prices all over the world and I can tell you that Australia has one of the most competitive petrol pricing markets anywhere - it is fierce! It is this competitive spirit which sees competitors continuously drop their prices to get below their opposition because over time we the public have taught them. . . that if you want my custom then I will give it to the cheapest seller.

This process of competitive undercutting gets the price down (at the bottom of the cycle) below long term economic cost.

Few companies can hold prices there for too long and so the company wanting (or needing) to restore margins to the positive the most, lifts its price. Others do something similar within a few days and the cycle starts all over again.

If we consider this price cycle as the "chop" or the waves on the water at the beach then what is affecting the tide . . . the base level.

That would be the other two key influencers - price of crude and exchange rate. There will be others that are better placed to speak on exchange rates but conservatively we could probably expect a top of about US80c and a low of US68c in the near future.

As for crude oil prices, we suspect it is likely to stay within the $US45 to $US55 per barrel range, due to an emerging belief that the oil producers will be keen to keep the cost of a barrel below the point where the US oil sands and fracking processes are economically viable. This is thought to be about $US60 per barrel.

The production cuts announced recently appear more about maintaining this higher end of the price range against over production pulling the price closer to the $US45 mark, or lower.

So let's look at bounding these effects. If we assume a $US45 a barrel price and a $US0.80 exchange rate then an $A per barrel of $A56.25 results. If we assume a $US55 a barrel price and a $US0.68 exchange rate then an $A per barrel of $A88.88 results.

Although not always an exact translation, there is a very rough rule that says that a variation of $A1.00 in the price of crude is 'worth' about 5 cents per litre at the pump.

So based on current low levels of pricing at the pump, a swing from $A56 to $A89 per barrel could see a swing up of 16 cents per litre at the pump. When you consider that the "chop" I referred to before can be as much as 20 cents per litre I can say only one answer to the question "Are petrol prices about to rise?" and that is a distinct "MAYBE".

The solution of course is to keep watching the information out there in the public domain on MotorMouth and/or the MotorMouth smartphone app and fill up when the price cycle is low and top up when it is high. Over a full year, for the average family this will save about $500 per year.

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