Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn


Why you’re paying more for petrol (and it’s not just Russia)

Lewis Jackson  |  22 Apr 2022Text size  Decrease  Increase  |  
Email to Friend

Exxon-Mobil shareholders revolted last May. Spurning management, they elected two board directors in a bid to push the oil giant in a greener direction. Just over a year earlier in the Southern District of Texas, former star of the US shale oil industry Chesapeake Energy filed for bankruptcy.

High profile corporate busts and irate shareholders are part of a global story spanning thousands of kilometres and almost a decade. It reached Australia last month when Federal Treasurer Josh Frydenberg splashed almost $3 billion to cut fuel costs for Australian drivers.

When Frydenberg unveiled the budget measures last month, petrol prices hovered above $2.00, having risen roughly 30% in only three months.

Understanding why requires going back before Russia’s invasion of Ukraine or even the pandemic, says Anthony Doyle, head of investment strategy at Firetrail Investments.

“Lots of threads have culminated in today’s record prices,” he says. “The roots of today’s ills were born almost a decade ago.”

In the second instalment of our series on the rising cost of living, we’ll retrace those threads and see what the future holds for petrol.

Drill baby drill?

Oil wells are demanding. Keeping the black goop flowing requires constant investment as old wells dry up. Output from a shale oil well can fall 80% after a single year.

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

But investment has been steadily falling since 2014, says Doyle. Then drillers and extractors forked out US$1.3 trillion in capital expenditure on exploration and development. Last year it was closer to US$0.8 trillion.

Part of the reason is environmental, he says. Oil companies worried about the shift to renewable energy hesitated over outlaying tens of billions on rigs and wells that could become relics in a solar age.

There were also prosaic concerns over profitability. After roughly three and a half years above US$100 a barrel, oil prices suddenly halved between June 2014 and January 2015.

A revolution in US shale oil was to blame, says David Meats, Morningstar director of energy research.

Controversial techniques like fracking combined with hundreds of billions borrowed from Wall Street ignited a boom in US shale oil production that helped the country unseat Russia as the world’s largest oil producer.

“[US shale oil] Companies were throwing every dollar of cash flow they generated back into the ground creating new production,” he says.

Then prices collapsed, shale producers went bust and the oil industry became reluctant to greenlight new projects. Belts were tightened—“too far”, according to Meats.

Covid and Russia

Enter the pandemic. Cars sat in driveways, factories locked gates and sent workers home. Oil use virtually stopped and city smog lifted. To stay alive, producers slashed investment and slowed production. Prices briefly dipped below zero in April 2020, with producers paying buyers to take oil.

As restrictions eased and economies began to rebound, oil producers hesitated, says Meats. Oil cartel OPEC only slowly reversed pandemic-era production cuts. Members Angola and Nigeria can’t hit their quotas because of--you guessed it--underinvestment.

Shale producers held off too. Burnt by 2015 and high-profile bankruptcies like Chesapeake Energy, they funnelled cash to long-suffering shareholders. Revolts over climate action piled up. Engine No 1’s win at Exxon came as a Dutch court ordered Shell to cut emissions.

As a result, prices were rising long before Russia invaded Ukraine. Brent crude oil, the global benchmark, nearly quadrupled between May 2020 and February this year.

It matters because roughly half the price at petrol stations in Marrickville or Logan is determined by global fuel prices.

War in Ukraine threw already tight oil markets into turmoil, says Meats. Russia produces roughly 5% of global oil and the “spectre” of losing it behind a wall of sanctions sent prices zooming upwards.

Australian petrol prices sailed past $2.00 as Brent crude oil hit a little over US$130 a barrel in early March.

What’s next?

Both analysts see little reason for optimism in the short term. Oil and petrol prices have eased from March peaks, but oil remains at its highest level in almost eight years.

Some portion of Russian production is being disrupted despite willing buyers in China, India and elsewhere, says Meats. At the same time, other producers aren’t ramping up output.

“OPEC is essentially shrugging and saying we’re good, we’ll take the high prices and stick with the increases we’ve already planned,” he says.

Old enemies could bring relief. Negotiations are underway with oil majors Iran and Venezuela over lifting US sanctions. That could see millions of barrels of oil flood back into markets.

Longer-term, Meats suspects Russia’s oil won’t be “permanently offline”. If the war resolves by year-end, incremental increases from shale oil and OPEC could get oil markets back in balance. That should eventually translate into lower prices at the pump.

Doyle is more pessimistic. Underinvestment combined with rising demand are tailwinds for the oil price.

“Any relief from the end consumer is some way off,” he says.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

© 2022 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend