Why China’s lockdowns could cause Australian fuel prices to plummet

Petrol prices in Australia may plummet thanks to the brutal Covid lockdown in China — and certain Aussies could benefit the most.

In the battle for the votes of the Australian electorate, few recent issues have consumed as much airtime and political oxygen as high petrol prices.

In relatively short order the issue prompted action from the Morrison government, a 50 per cent cut in the federal government’s fuel excise tax, which was supported by the Labor opposition.

When contrasted with the generally slow pace of policy making in Canberra, action on high petrol prices was lightning fast. With the price of fuel up in lights for all to see every few kilometres in all our major centres, it is perhaps the most ever present reminder of the challenge we all face with a rising cost of living.

If like many Australians you feel like the cost of living has rocketed even higher in recent months, the recent release of ANZ’s retail price index is further confirmation that the current pressure on household budgets is the worst in decades.

In the first quarter of the year, retail prices rose by a record high 3.7 per cent. A truly striking figure considering that broader inflation as measured by the CPI is currently 3.5 per cent for the year.

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A brief respite?

Amid the challenges Australians face in 2022, there may be some tentative signs that we may enjoy some further relief at the petrol pump in the coming months.

While the impact of the Morrison government’s fuel excise cut is a major driving force in the recent drop in fuel prices, there are several others that may provide support for lower prices at the fuel bowser.

In China, the widespread lockdown of cities and provinces has impacted oil consumption significantly, as commerce and travel grind to a halt throughout much of the country.

In the mega metropolis and key economic hub of Shanghai, 26 million people are currently experiencing arguably the strictest lockdown in the world.

That is the equivalent of the entire population of Australia being in lockdown and the vast majority of our demand for fuel and other oil based products ceasing to exist.

According to a report from the Wall Street Journal, since mid-March Chinese cities and provinces that account for 40 per cent of the nation’s economic output have been placed in some form of lockdown.

If these lockdowns and restrictions continue for months to come, as Beijing remains committed to its policy of Covid-Zero, that is a lot of oil and fuel consumption that will either be deferred or not occur at all.

As the world’s second largest consumer of oil, going through more than 14.1 million barrels per day in 2021, a significant reduction in Chinese oil demand over a protracted period has global implications.

American oil to the rescue?

When the administration of US President Joe Biden announced that it would be releasing 180 million barrels of oil into the market over the next six months, some saw the move as too little, too late for an oil market already undersupplied prior to the war in Ukraine.

On paper its understandable why, one million barrels per day is just 1 per cent of global oil consumption and a fraction of the roughly five million barrels a day that Russia exports.

But with cities and provinces accounting for 40 per cent of Chinese economic output now in lockdown, all of a sudden this additional source of oil from US reserves may ironically form an excess of supply, potentially placing downward pressure on oil prices if Chinese lockdowns continue.

In an ironic twist of fate the release of reserves that was called a “band-aid” solution by some experts, may actually end up achieving its rather lofty goal.

Oil prices recently hit almost $130USD per barrel, before briefly dropping to as little as $92USD

A fragile state of affairs

While oil markets may currently be seeing lower prices, the respite from rising American supplies and falling Chinese demand is a fragile one.

The current fall in prices is partially underpinned by Chinese demand continuing to be significantly impacted. If that were to change due to Beijing abandoning its policy of zero tolerance of Covid or by finding a better way to contain the spread of the virus, demand for oil would rapidly roar back to life, swiftly putting upward pressure on oil prices.

Ironically, the domestically driven policy actions of the Chinese Communist Party and the Biden administration have seemingly combined at exactly the right time to deliver lower fuel prices during the election campaign.

But with EU nations discussing targeting Russian oil exports and the possibility of the expansion of sanctions on Moscow amid yet unproven allegations of Russian usage of chemical weapons, it’s possible that oil prices could rocket back toward their recent highs in an instant.

Petrol prices and the Australian election

With the Coalition still trailing 47-53 in the latest Newspoll, the prospect of a continued period of lower petrol prices in the run up to the election comes at an opportune time for the government.

Where just a few weeks ago a row of petrol station price boards was enough to make one’s internal wallet cringe, for now at least there is a measure of a sense of relief that at least it isn’t as bad as it was before.

A long election campaign remains ahead us and there is plenty of time left for all manner of twists and turns. While an ironic series of circumstances may combine to come to the aid of the government today, with a highly uncertain global outlook on the horizon it’s entirely possible it could become a detriment tomorrow.