Finance Your Budget Advisor: how the Iraq conflict will affect petrol prices

Advisor: how the Iraq conflict will affect petrol prices

Petrol, fuel, bowser, oil
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Australian motorists could be paying two to three cents extra per litre of petrol over the next fortnight, as the situation in Iraq causes the international oil price to rise.

According to CommSec’s weekly report on petrol prices for June 15, recent movements in world prices following the turmoil in Iraq led to Australian’s paying more at the pump.

CommSec said an increase in the per barrel cost of light crude oil to around $US106 – the highest since September 2013 – as fighting worsened in northern Iraq over the last week.

Militants were able to seize massive territory in the north of Iraq and also the second largest city in the country known as Mosul, along with Tikrit.

Following the blitzkrieg-style offensive by a group known as the Islamic State in Iraq and the Levant (ISIL), reports of the group’s intention to march into Baghdad and onto Basra, began pushing oil prices higher. Iraq is responsible for producing 3.3 million barrels of oil per day, or about 4 per cent of the global total.

Last week, Australia was able to shield itself from the drastic rise in petrol prices due to the rising Australian dollar. It acted as a shield to the market fluctuation, said CommSec.

Shiite tribal fighters raise their weapons against the al-Qaida inspired ISIL. Photo: AP

Aussie fuel prices

The question now facing Australian motorists is how will events in Iraq continue to affect pump prices over the coming weeks and months?

In the short term, experts are predicting prices rises. Prices in some capital cities surpassed $1.60 over the weekend. That means motorists should watch the cycle and buy when prices dip during the week.

In the longer term, however, the picture is less clear.

According to John Freebairn, an economics professor at the University of Melbourne, the market’s reaction to continued developments in Iraq, will be a major indicator of the potential for further rises in petrol prices at your local servo.

“We are a net importer of petroleum products and our price of petroleum products is set by the world price. If Iraq production falls, prices will rise,” Freebairn said.

Long term problems

The unfortunate news for Australian motorists is the situation in Iraq doesn’t seem to be getting better as Shiites take up arms in the south following a call to arms by senior Shia cleric Grand Ayatollah al-Sistani.

The call came amid increased threats by the ISIL to march onto Baghdad and into Basra, as well as threatening to destroy prominent Shia holy sites in Samarra.

This translates into the potential for the conflict moving in the south, which produces around 2.7 million barrels of fuel coming out of Iraq.

In a report with CNBC, Vice Chairman of IHS, a major oil and gas company in the US, Daniel Yergin, said, “If it (battles going on in north of Iraq) spreads to the south or threatens the south, I think anxiety is going to be reflected in the oil market. Absolutely.”

The risk of a full-blown civil war between Sunnis and Shiites in Iraq is now a reality following the recent call to arms by the major Shia cleric.

Potential for a country wide civil war in Iraq, could spawn the negative market instability Freebairn said could determine the rising costs of petrol throughout Australia.

This means local petrol prices are at the mercy of the market, because of a situation it has no control over.

But even with conflict in Iraq, petrol prices will edge higher this year after Treasurer Joe Hockey said he would march on with the reinstatement of the indexation of the fuel excise tax, despite rising costs of oil.

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