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Mandy Money

Mandy Money

how petrol prices work

They seem to change all the time, but what determines petrol prices? Let’s take a look at the economics behind the pump…

There are two key factors that determine petrol prices:

1. The Oil Price

2. The Exchange Rate ($AUD to $USD)

Oil Prices

Petrol is pretty much oil, just with a few changes. So, the price at which oil is traded at in the global market impacts how much it costs you at the pump. If oil prices go up, then you’re looking at a higher petrol bill.

Oil prices are determined by global demand and supply. If supply decreases with less oil being sold into the market, the price will increase. If demand decreases (as has happened throughout the COVID-19 crisis), the price will decrease.

Lower supply can be caused by less oil being pulled from the ground, while decreased demand can come from something like people driving less.

Exchange Rates

This is the unexpected oil price x-factor.

It turns out that big petrol companies here, such as BP and Caltex, buy oil in $USD.

But we pay for petrol in $AUD. See where this is going?

Any price differences associated with exchange rates will be passed on to you (the end customer) through changes to the price at the pump.

So, even if the oil price does not change but the Aussie Dollar depreciates ($AUD buys less $USD) then you’ll see petrol prices increase. It’s exactly the same as online shopping!

Got any more slightly left-field questions just like this one? #askmandy

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