OPEC and Rising Petrol Costs

With OPEC finally getting its act together as an organisation again and becoming a bit of a spearhead organisation for global oil production in general, it's a case of great news for them and bad news for the rest of the world.

Well. It depends on where you live…

Yes, petrol prices at the bowser are set to rise.

Overnight, Oil prices on the global market went up 10%. Just in one day.

Now I am not sure what the reasons are, but for some reason, whenever global oil prices rise, local petrol costs tend to go up immediately. Whereas, when global oil prices fall, it can take weeks, even months, for those price falls to turn up at the bowser. So I think we can expect, especially with the headline news this move in oil prices will generate, that your local petrol bowser will be taking advantage of the excuse to lift prices rather quickly.

It is not a conspiracy among the big oil companies in Australia. It’s just something I don’t understand?

Implications for property can be significant. Especially over the medium term. Satellite cities outside the major Metropolis’s of Sydney and Melbourne too dependent on motor vehicle commuting, could have a vulnerability. Though we need to keep things in perspective here. I am one of the more bullish, calling the oil market higher, forecasters in the world this year. That’s been good for my trading clients, but even I, am only calling for oil to continue higher to US$58 and $US64 over the medium term.

What we should be really focussed on however, is that oil came all the way down from over US$100 per barrel to just $26, in the past three years.

That was very likely the biggest energy boost to the global economy ever experienced in history!

All that is happening now, is that some of that enormous stimulus is being unwound. Only a small proportion of it in fact.

We certainly never got $26 a barrel oil at the bowser. So the world economy never really experienced such low prices, but it certainly experienced the upper end of oil pricing a couple of years ago. There will be an impetus to increase bowser prices around the world. A chance at extra profits at the pump.

The increases likely to come over the next few months. However, are not going to be anywhere in the order of magnitude that we were seeing in the period 2009 to 2012, and certainly not akin to the 2006/07 extreme oil price rise, from $60 to above $140.

In this instance we are talking about just getting back toward that starting point then $60 level.

Then to a little beyond that. So you will see a lot in the media this week about the negative impact of OPEC coming together and reducing production, but it is not the crisis it will first appear on the TV. Production has been cut by 3% by OPEC, which equates to just 1% of global output. The non-OPEC oil producers, however, are likely to be influenced. So we could see an overall global reduction of about 2%. This is the context however of there already being a situation of over-supply.

The real reason oil prices shot up 10% overnight, is that this coming together of OPEC means that all the speculators who had been shorting oil need to get out of those positions. The oil market will settle a little, but remain in a more gentle upswing.

It will be uncomfortable. It will be unpleasant. It will hurt working families who have built their first home at the fringe of major cities without a public transport hub nearby. Overall though the biggest influence is going to be exactly on those properties that are close to the place of work, a major public transport hub or route, and even in the city centres themselves.

In a way, for the property market then, OPEC has actually added another rung to the ceaseless climb in prices in this country.

Clifford Bennett