The Rising Cost of Diesel: A Growing Concern for Australia
The price of diesel in Australia continues to rise, driven by ongoing conflicts in the Middle East and limited access to global fuel supplies. Despite the federal government reducing the fuel tax excise, the average price of diesel has once again surpassed $3 per litre. This increase is causing concern among experts and industry advocates, who warn it could exacerbate inflation and force some road transport operators to shut down.
But why is diesel becoming more expensive while petrol prices are falling? And what impact does this have on Australia, where a significant portion of freight transport relies on diesel, along with nearly 30% of passenger vehicles?
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Why Is Diesel More Expensive Than Petrol?
While many drivers of petrol-powered vehicles can adjust their transportation habits during a crisis, those operating diesel-powered commercial vehicles often do not have that flexibility. This is because 90% of everyday goods are transported by road, primarily using diesel-powered vehicles.
Kushneel Prakash from the Melbourne Institute of Applied Economics and Social Research explains that higher petrol prices can sometimes lead households to reduce driving or change their behavior, which helps ease demand. However, diesel is heavily used in freight, mining, agriculture, and commercial transport, where there is far less room to cut usage.
“This combination of tighter supply and less flexible demand is why diesel is surging while unleaded has remained relatively stable, despite the cut in excise taxes in Australia,” he says.
Industry advocates are also concerned about the rising diesel prices. Michael Kaine, national secretary of the Transport Workers’ Union, notes that the price of diesel has doubled since February. This has led to investigations into allegations of anti-competitive conduct by major fuel suppliers in regional and rural Australia.
Fuel Excise Cuts: A Temporary Relief?
The federal government reduced the fuel excise on petrol and diesel by 26.3 cents per litre in an effort to moderate rising prices. This was followed by additional cuts from state premiers and chief ministers, bringing the total reduction to 32 cents per litre until June 30. However, prices have started to rise again within weeks.
As of Friday, the NRMA reported an average diesel price of 323 cents per litre. It’s important to note that petrol and diesel prices are set using different benchmarks. Phil Bullock, director of NineSquared, explains that while crude oil prices have eased slightly, Australian fuel prices are based on international refined-fuel benchmarks, not crude.
“Diesel is priced off the Singapore gasoil benchmark, which has risen far more than petrol benchmarks and remains elevated,” Mr. Bullock says. He adds that 60-70% of crude oil processed by Singapore’s refineries comes from the Middle East, and when they access oil from other regions, additional transport costs are incurred.
What Can the Government Do?
Some experts suggest the government should have focused on a larger cut to the diesel excise rather than petrol. Lurion De Mello from Macquarie University argues that diesel is a bigger issue and should have been prioritized.
Higher diesel costs have a greater impact on inflation because diesel-powered trucks move almost everything we buy. “Diesel is going to have a huge inflationary impact on our groceries, transportation, things that we import from overseas as well,” Dr. De Mello says.
He points to countries like India, which have significantly reduced taxes on diesel to support industry and farmers. Inflation in Australia rose 3.7% in February, remaining above the Reserve Bank’s target band. Westpac’s chief economist warns of the growing risk of a recession and predicts three more interest rate hikes this year due to the energy crisis.
What’s Next for Diesel Prices?
Energy analyst Saul Kavonic warns that the situation will worsen before it improves. “The real shortage hasn’t hit us yet,” he says. “We’re still living off the fuel that left the Strait of Hormuz before the war began.”
He predicts the “real crunch-point” will come at the end of the month and in May, when increased competition from other nations in Asia and globally will drive up fuel prices further.
Michael Kaine highlights the strain on trucking companies, noting that major retailers, manufacturers, and miners are imposing harsh contract terms on the industry. He and other stakeholders are calling for these entities to share the burden of rising energy prices.
“If we don’t get this right, we’re going to see our supermarket shelves empty, we’re going to see medical supplies slow down, we’ll see the wheels of transport come to a standstill,” he says.
