OPEC has called a truce on its oil war, meaning Australian motorists may pay a few more cents at the pump this Christmas.
At a meeting in Vienna in the early hours of Thursday, the organisation of oil producers committed to cut overall output by 1.2 million barrels per day, for six months, from January 1, 2017.
“We have made great success today,” OPEC president Mohammed Bin Saleh Al-Sad told reporters.
The agreement was a “courageous” decision taken to benefit all oil-producing nations, as well as the “wellbeing and health” of the global economy, he said.
A very rough rule of thumb is that, about two weeks after a $US1 rise in the price of crude, Australians pay an extra cent per litre for unleaded in the capital cities.
Brent crude, the international benchmark, surged from about $US47 to almost $US51 on news of the deal. OPEC members say they hope the price will rise to $US55 or $60, which could mean a 10 cent hike for Australians.
OPEC’s price war was a misguided attempt to drive its competitors, mainly US firms, out of business by flooding the world with oil. It failed, at great cost to the economies of its members.
Australian motorists were the big winners.
Unleaded petrol sold for an average of 114.2 cents per litre in the capital cities between July and September, down 14 per cent from the same time last year, the Australian Competition and Consumer Commission (ACCC) reported this week.
Of the capitals, Adelaide had the cheapest fuel (113.1 cents) and Brisbane the priciest (115.2 cents), with Sydney, Melbourne and Perth all close to 114 cents over the three-month period.
Petrol prices: five major cities
Finally, after more than two years of plummeting prices, OPEC reached a preliminary agreement in September to cut production, its first since 2008. The meeting in Vienna was an attempt to formalise the arrangement.
The market expectation going into Thursday’s meeting was pessimistic, because of a rivalry between Saudi Arabia, OPEC’s top producer, and the next two biggest, Iran and Iraq. They all seemed reluctant to cut.
If the deal holds, and OPEC members adhere to it, then the price of crude oil, which has an influence on Australian petrol prices, may rise.
About 50 per cent of the price we pay at the pump is determined by the Singaporean price of unleaded petrol (MOPS95 Petrol), which in turn is influenced by crude oil, as reported by the ACCC.
The remainder reflects government taxes (about 45 per cent), the costs and profit margins of local sellers, the exchange rate, and other factors.
OPEC said it would exempt Iran, Libya and Nigeria from cuts, and Indonesia (which only rejoined in 2015) suspended its membership rather than curb production.
This would leave Saudi Arabia, Iraq, Kuwait, Venezuela, Algeria, Angola, Ecuador, Gabon, Qatar and the United Arab Emirates to shoulder the burden of the production cuts.
The good news
OPEC is notorious for breaking its deals, as Industry Super Australia chief economist Dr Stephen Anthony said last month, so we may not see any significant price rises.
“Historically those agreements have held up for a short period of time. It’s been a long time, over 30 years, since they’ve stuck,” Dr Anthony told The New Daily.
“Now there is much more non-OPEC oil production and much more incentives around for OPEC members and fringe members to cheat due to political sanctions and other factors.
“There’s also a much greater substitutability between shale gas, natural gas and alternative sources of fuels, which have a depressing impact on price. So good luck to OPEC in terms of enforcing its cartel behaviour, but on first blush you’d be sceptical of its capacity to do that.”
OPEC’s influence in the market is waning, especially in Asia, where importers are increasingly reliant on non-OPEC companies based in the US, Azerbaijan and the North Sea.
But if prices do rise, motorists should:
- Look for cheaper petrol stations by using the FuelCheck website for NSW motorists, and mobile applications such as those offered by the NRMA, Motormouth and GasBuddy; and
Avoid buying premium unleaded unless they drive a high-performance or older vehicle.