Why war in the Middle East has sent Aussie petrol prices soaring
Why has a war more than 10,000kms away got Aussie parents peaking at the pump? It all has to do with a pass of water called The Strait of Hormuz. But will other things go up in price too?
READING LEVEL: ORANGE
A war in the Middle East has Aussie parents peaking at the petrol pump.
You may have overheard your mum and dad fretting about fuel – and that’s because prices have exploded across Australia and the world.
Many motorists around the country are paying well over $2 a litre to fill up the tank as a global supply shortage hits hard. However, industry leaders have warned that many petrol stations have been taking advantage of the conflict in Iran to push up petrol and diesel prices even higher than they should be.
WHY HAS FUEL GONE UP IN PRICE?
The price of oil soared last week as scores of tankers were halted around the Strait of Hormuz*, with experts warning Australian households could experience rising petrol prices and a higher cost of living.
About 20 per cent of the world’s oil and gas flows through the vital shipping lane between the Persian Gulf and the Gulf of Oman directly south of Iran, but Iran warned ships not to pass through the strait after strikes from the US and Israel killed Supreme Leader Ayatollah Ali Khamenei last weekend.
Iran’s Islamic Revolutionary Guards Corps (IRGC) also claimed three tankers from the UK and US had been “struck by missiles and are burning”.
Footage released last Monday AEDT showed an oil tanker billowing smoke as Oman authorities confirmed the vessel had been hit in the strait, though they did not say who attacked or what hit the vessel.
The restriction on oil supply has driven up the value of the precious liquid, with Brent crude* oil surging almost 13 per cent to more than USD $82 a barrel on March 2 following the start of the conflict.
“20 per cent of world oil supplies flow through the Strait of Hormuz, so its effective closure points to a sharp spike in oil prices, possibly above USD $100 a barrel,” AMP Chief Economist Shane Oliver told news.com.au last Monday.
“That said, it’s anyone’s guess as to how high it can go. Back in the second oil shock* in 1979, oil prices rose threefold.”
Mr Oliver said each USD $1 rise in world oil prices adds about a cent a litre to Australian petrol prices.
So a USD $40 rise in oil prices would equate to an increase at the pump for Aussies of 40 cents a litre.
INDUSTRY WARNS AGAINST PRICE GOUGING
Alarmed by the thought of paying big at the bowser, Aussie motorists flocked to petrol stations to fill their tanks last week, causing long queues and some traffic jams. Some panic buyers even filled up jerry cans* and petrol drums to stockpile at home.
However, industry groups have accused petrol stations of preying on people’s worries by raising the price of petrol before supply issues have even taken effect.
The NRMA has called on the ACCC to clamp down on inflated* pricing for fuel, after half of the service stations across Sydney, Melbourne and Brisbane were found to be charging almost $2.20 a litre.
According to NRMA spokesman Peter Khoury it takes “7-10 days” for increased oil prices to flow through Down Under.
“That’s why you know NRMA has put this warning out today, because we know it hasn’t been 7 to 10 days,” Mr Khoury said.
“The price cycles in Sydney, Brisbane and Melbourne have left families in those cities worse off and oil companies are using the Middle East crisis as an excuse to jack up margins*.”
At the time of writing, remote parts of Northern Territory, including Ramingining located 560 km east of Darwin in Arnhem Land, were paying $3.99 per litre for diesel.
WHY THE COST OF LIVING COULD GO UP
Economists have said if the strait closed for a prolonged period, the spike in the oil price would drive up inflation*, or the cost of living, in economies around the world.
Oil is a major driver in the cost of things because, in many cases, fuel is essential for transport and manufacturing.
Usually, a country’s central bank* would help to bring down the rapidly rising price of goods and services by increasing interest rates. Higher interest rates tend to slow down people’s spending, which, in turn, helps to lower the prices of goods and services again.
Australia was already battling a cost of living crisis and has just been through an interest rate rise, with talk of another one to come. Economists have now become concerned that rising oil prices and other economic factors could prompt the Reserve Bank of Australia to hike interest rates yet again, which could mean higher mortgage costs for the roughly 35 per cent of Australian households that are paying off their home.
“It probably makes the RBA more wary, given that inflation problem,” Mr Oliver said.
But unlike a normal economic boom where people were just spending too much money, an oil shock is inflation that actually makes people worse off.
If the RBA raises rates, they risk hurting borrowers who were already struggling with the “petrol tax” from the US-Iran conflict and could potentially trigger a recession*.
“That (a recession) would be the risk — it depends on how high oil prices go,” Mr Oliver said.
“Donald Trump may decide in a few days’ time that he’s done enough, and it could settle relatively quickly. In that scenario, you’d get a spike in Australian petrol prices, but it would turn out to be short-lived.”
POLL
GLOSSARY
- Strait of Hormuz: the only sea passage from the Persian Gulf, which is rich in oil, and the open ocean. At its narrowest point, the Strait of Hormuz lie entirely within the territorial waters of Iran and Oman. With Iran not allowing the passage of any ships through the strait, the supply of oil from Iran as well as other Gulf States like Kuwait, Iraq, Qatar, the UAE and Saudi Arabia to the rest of the world has been blocked off
- Brent crude: a light, sweet oil produced in the North Sea and considered the global benchmark for pricing oil
- second oil shock: an Iranian revolution in 1979 led to a worldwide shortage in oil – the second in the space of five years. The price of oil began to rise sharply, which led to panic buying, which, in turn, caused even worse price hikes
- jerry cans: a type of container that has been specially designed to safely carry fuel or other liquids
- inflated: when the price gets pushed up without real justification
- margins: the amount of money a company makes from buying a product, like fuel, and selling it to the public at a higher price
- inflation: when money loses its value, leading to products and services becoming more expensive
- central bank: a national bank that decides the monetary policy of a country and provides financial services to the country’s government. In Australia, the central bank is called the Reserve Bank of Australia (RBA)
- recession: a significant and long-lasting economic downturn, defined by a period in which a country’s productivity goes backwards (instead of growing) for at least six months in a row
EXTRA READING
Middle East: What is happening?
Small change gets design change
Matildas beat Iran but trail in goals
QUICK QUIZ
1. Why have oil tankers stopped travelling through the Straight of Hormuz?
2. How much of the world’s oil and gas supply usually passes through this narrow channel?
3. How much did the value of Crude oil go up on March 2 following the start of the conflict?
4. Why have Aussie motorists been queuing up to buy petrol?
5. How could war in the Middle East push up the price of goods and services here in Australia?
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CLASSROOM ACTIVITIES
1. Calculating the impact
Create a table that will help motorists to understand the actual impact of price changes when they fill up their cars at the petrol station.
The column headings of your table should show a range of petrol prices (in 10 cent increments) from $1.50 per litre up to $2.20 per litre.
The row headings should show a range of fuel tank sizes (in 10 litre increments) from 40 litres up to 100 litres.
Then make the calculations to complete your table so that it shows the price of filling up a variety of fuel tank sizes at different price levels.
Options – use a calculator to help or complete your table as a spreadsheet and use formulas to complete the calculations.
Time: allow 25 minutes to complete this activity
Curriculum Links: English; Mathematics
2. Extension
Create four maths questions based on the table you created. For example: How much more expensive will it be to fill a 60 litre fuel tank at $2.20 per litre than it was at $1.50 per litre?
Swap your questions with a classmate and answer each others problems.
Time: allow 20 minutes to complete this activity
Curriculum Links: English; Mathematics
VCOP ACTIVITY
Read this!
A headline on an article – or a title on your text – should capture the attention of the audience, telling them to read this now. So choosing the perfect words for a headline or title is very important.
Create three new headlines for the events that took place in this article. Remember, what you write and how you write it will set the pace for the whole text, so make sure it matches.
Read out your headlines to a partner and discuss what the article will be about based on the headline you created. Discuss the tone and mood you set in just your few, short words. Does it do the article justice? Will it capture the audience’s attention the way you hoped? Would you want to read more?
Consider how a headline or title is similar to using short, sharp sentences throughout your text. They can be just as important as complex ones. Go through the last text you wrote and highlight any short, sharp sentences that capture the audience.