Petrol on the rise for Christmas but OPEC’s power not what it used to be

OPEC’s recent decision to cut oil production and raise the price of crude oil was something of a return to form from the once all-powerful oil cartel but any impact on the price of fuel at the bowser may not be particularly big or long lasting. That’s because OPEC is far from the monopolistic cartel it once was.

Non-conventional oil

Its price-fixing prowess has been greatly weakened in recent years by a flood of non-conventional oil from American shale-oil producers and increased Russian oil production. However this time Russia has also recently agreed to reduce production to drive up the price in concert with OPEC producers.

An analysis in the Australian Financial Review predicts that rising prices will encourage American shale oil producers to increase production from newly drilled wells which will push global prices down again in 2017. Those shale oil producers will be encouraged by incoming President Donald Trump, who’s particularly gung-ho when it comes to increasing American coal and oil production. And it’s not just the US. Canada is also a major oil producer from its tar sands, while Brazil can increase production from deep water oil reserves.

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OPEC’s failure

OPEC’s increased production in recent years was largely driven by Saudi Arabia’s desire to maintain market share and put pressure on more expensive US producers. It’s a strategy that’s largely failed, achieving little but putting pressure on the economies of OPEC members. Driving any sort of a deal on production has been difficult for OPEC due largely to the political, economic and religious rivalry of Saudi Arabia and Iran, but in recent days they’ve put that aside to reach an agreement.

Price rise for Christmas

So what does this mean for Australian motorists and fleet owners? Well they’re likely to see an increase in the price of petrol by as much as 10c/litre driven by the rising Singapore unleaded price, which rose 10% in the fortnight to December 5. It’s an unwanted Christmas present if ever there was one. The rising price of crude oil is not the only factor in the equation. The falling Australian dollar is also working against motorists.

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CommSec’s senior economist, Savanth Sebastian believes the days of “super cheap” petrol are over, but he also predicts greater volatility in the market. He urges motorists to keep a close eye on the discounting cycle “because at the low point in the cycle motorists should still be able to pick up petrol at or below the cost price.”

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