How Oil Romances Petrol

After yesterdays’ note, we received the following question. We’ll do our best to answer it. Hope it helps and keep the questions coming.

Hi there 5MF. 
Long time reader. First time asker! 
Today you spoke about oil. Can you explain how the price of petrol for my car fluctuates? How does that work? 

Great question. Let’s tackle it in three parts.

Part I: How oil and petrol prices are related
Remember from yesterday (see here) that petrol is just “refined” oil. Therefore, going from oil to the petrol pump is a three-step process.

  1. Oil company sells oil to a refiner
  2. The refiners refine oil into petrol and sells it to the petrol stations
  3. The petrol station sells petrol to you.

That all takes time. A pretty long time in fact. The petrol which you’re filling up with at the bowser today, was probably bought as oil by the refiners anywhere up to 6 weeks earlier.

And if it was bought 6 weeks ago, that’s the oil price which matters when thinking about what you should be paying at the petrol pump. Not the price of oil today.

Part II: What makes up the petrol price
In Australia, 40c in every litre of petrol you buy is a fuel exercise tax, charged by the government. Another 15c or so is GST and again, charged by the government. The petrol stations themselves make somewhere between 2-5c per litre in profit for themselves. The price of oil and the cost of refining it, determines the rest.

Just so you know, Australia is one of the cheapest countries in the developed world if you want to buy petrol. Don’t believe us? Have a look at this.

So, in the long run, the price of oil will have a big impact on what you pay at the pump. In the short term though….

Part III: Petrol Price Cycles – IMPORTANT
Here’s the weird one, and the part which will account for most of the day to day price changes you see at pump. Petrol stations change their prices in a somewhat predicable fashion, higher to lower to higher to lower. Yes, that sounds dumb, cause it was poorly explained. A better writer would have written “petrol prices move up and down in regular, predictable cycles”. If you’re a price conscious pumper, click here. This website, run by the ACCC, will tell you at what point in the price cycle your state is in. Seriously. They update it every other day. It’s pretty cool. And if you can time you tank top ups to coincide with the lowest points in the cycle, you can save yourself a pretty penny. True story.

FYI – according to the ACCC, Sydney is at its lowest point in the cycle right now (good time to fill up). Melbourne is on the way down, but likely to go lower still (so delay if you can). Perth, is at its highest point in the cycle (avoid filling up at all costs). Unfortunately, no data is published for Coffs Harbour.  

We don’t know why these cycles exist. We think it’s something to do petrol companies trying to rip us off, which every good company tries to do. But why they all seem to move together, baffles us. But regardless, they do. So mark this website in your favorites and take advantage of the cycles. You’d be silly not to.

So….In a nutshell?
The price you pay at the pump over the long term is determined by the price of oil. But changes in oil price won’t have an immediate affect as the petrol you buy, was made with oil bought about 6 weeks earlier. In the short-run, the price will change based on petrol-station cycles, so time your pumping days accordingly…

And that’s 5 Minutes. Hope it helps.

 

Got a finance question, but short on time? Send us an email at daily@5minute.finance and we’ll help you out

 

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Categories: Oil

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