Oil prices have jumped. Do you need to run to the petrol station?

Despite our concerted attempts to unstick ourselves from the stuff, oil is still a fossil fuel we can’t function without. That means anytime its price jumps, we notice – and it tends to freak us out.

The first place most of us notice it flowing through is when filling up the tank – or while smugly driving an electric vehicle past the many petrol price signs that punctuate our daily commutes.

The cost of petrol in Australia will probably rise over the next few weeks.Credit: Matt Davidson

If it seems like petrol prices reflect oil price surges more quickly than they do falls, you’re not just imagining it. It’s true we tend to notice price increases more than decreases (a hangover of our instincts to fixate on the tiger in the trees over the nice patch of sunlight glimmering through).

But we also know prices increase faster than they fall in response to sudden changes in costs – such as oil prices – in the petrol market.

The latest oil price scare has come from an intensification of the war in the Middle East. Last week, Israel unexpectedly launched an attack on Iran, a country that produces a lot of oil.

It’s still unclear how badly Iran’s production facilities have actually been hit (and of course, the human cost is the immediate worry). But it was enough to spook the world and cause big surges to flash on market monitors – and probably heart monitors – across the globe.

Petrol is the single biggest weekly expense for most households, and it affects transport and energy costs for nearly all our businesses.

Politically, it’s also a worry. Treasurer Jim Chalmers and Reserve Bank governor Michele Bullock have probably only recently started sleeping without the inflation dragon flapping around in their nightmares.

Now, their dreams of slow and steady price growth might become just that again: dreams.

Chalmers has spent the week spruiking his latest plans to boost our living standards – but oil prices have clearly trickled to the front of his mind. This might have consequences for Australians at the petrol bowser, he told ABC Radio on Thursday, but there’s also a lot of concern about what it might mean for inflation, and it’s a “dangerous time” for the global economy.

But how much of a worry should it really be?

Well, first, it’s important to remember just how much we rely on oil.

In 2022-23, oil was our most important type of fuel, making up nearly 40 per cent of Australia’s energy use. That’s not even accounting for the other ways we use it: to produce plastics, chemicals, lubricants and the sticky stuff we use to pave roads.

Petrol is the single biggest weekly expense for most households, and it affects transport and energy costs for nearly all our businesses. Basically, changes in the price of oil ripple through nearly every crevice of the country.

A shortage of oil makes business harder – and in some cases, impossible – to do, strangling the supply of many goods. If Iran decides to shut the Strait of Hormuz – a key shipping route that carries tens of millions of barrels of oil every day – the delays and additional costs of taking longer routes will drive up costs further.

Those costs will probably be passed on through higher prices by businesses – and not just those directly dealing the stuff through petrol pumps.

The price of oil itself is determined, like most things, by the forces of demand and supply. But it’s also affected by expectations of supply and demand.

Most of the time, the physical product doesn’t even change hands. Instead, the market is largely made up of buyers and sellers who enter into “futures” contracts, which are legal agreements to buy or sell something (in this case, oil) at a particular price and time in the future.

It’s a bet of sorts: buyers are hoping the price they lock themselves into will be lower than it will be in the future, and sellers are hoping it will be higher.

OPEC is in the middle of reversing production cuts.Credit: AP

When Brent Crude Oil and the US West Texas Intermediate (WTI) – two types of oil futures – surged 13 per cent last week, that reflected worries, not just about a short-term dip in supply, but concerns that the conflict could worsen.

But even so, the oil market hasn’t moved as crazily as we might have expected.

As Dr Adi Imsirovic points out, Iran itself only accounts for about 2 per cent of the world’s oil supply, shipping most of it to China, and while a sudden drop in Iranian oil exports would usually trigger stronger panic, there’s a few factors keeping it in check – for now.

First, Iran is part of a big group of oil exporters known as the Organisation of the Petroleum Exporting Countries (OPEC), which produces about 40 per cent of the world’s crude oil. OPEC, because of the huge share of oil it produces, tends to co-ordinate the amount of oil its members supply to the world to keep prices from falling through the floor (and profits from slipping too much).

It just so happens that OPEC is in the middle of reversing production cuts it imposed early in the COVID-19 pandemic, leaving it with an unusually large spare capacity of roughly 4 million barrels a day – mostly held by Saudi Arabia and the United Arab Emirates.

And although there are worries about the Strait of Hormuz being closed, Imsirovic says there are alternative supply routes.

That’s not to say we won’t feel anything here in Australia.

The increased risk of wider conflict in the Middle East means oil prices – and especially oil futures – have jumped. And shipping costs have sailed higher, including the cost of insurance for ships travelling through the Strait of Hormuz which has climbed 60 per cent since the start of the war.

We don’t import our oil directly from Iran, buying most of it from countries such as South Korea, the United Arab Emirates and Singapore.

But the cost of petrol in Australia will probably rise over the next few weeks because Australian fuel prices are pegged to international benchmarks.

And because Australia doesn’t exist in a vacuum, the slowdown in economies worldwide – from the uncertainty, higher costs and delays – will undoubtedly have a knock-on effect for our economy.

Slower growth and higher inflation will challenge the Reserve Bank, which next month must decide which way to take the country’s interest rates. If the US central bank’s decision this week is anything to go by, the Reserve Bank will probably keep rates on hold to see how things play out.

The panic in oil markets has seemed to wear off a little since Israel’s attack on Iran, but it will only last so long as the conflict doesn’t escalate.

There’s no crisis in oil markets yet, but your bill at the bowser might come in a little higher over the next few weeks. As long as the global economy is stuck in limbo, don’t be surprised if our economy isn’t running like a well-oiled machine.

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