Diesel: Why is fuel so expensive in Australia?

The escalating price of diesel fuel has been cause for panic over the past several months.

We’re paying more to transport goods to supermarkets, forcing the price of the goods to go up as well. Public transport (buses, country trains) can cost more for the same reason. Everything (goods and services) reliant on diesel-engined transport of one kind or another rises in price with diesel fuel.

Higher diesel pricing has an impact on the household budget too, if the family gets around in a one-tonne ute, an SUV or a passenger car powered by a diesel engine. That extra outlay eats into discretionary spending – think Tim Tams, Netflix or pokies – and sometimes essential spending also.

According to the New South Wales state government’s 'Fuel Check' app, in the first week of November the price of diesel averaged $2.36.8 in Sydney. In contrast, 91 RON unleaded petrol averaged $1.99.4 per litre.

Not only is that quite a gulf between diesel and petrol pricing, it’s a major leap from diesel pricing at the end of last year as well. Auto Fleet News has compiled national average pricing for diesel and ULP – unleaded petrol – from figures supplied by the Australian Institute of Petroleum (AIP) over several years.

With one notable exception, petrol and diesel prices to 2021 were always within 10 cents a litre of each other – with the price of diesel ($1.43 a litre) actually lower than ULP ($1.48 a litre) in 2021. That’s nearly a dollar per litre less than the current pricing for diesel, as per the Fuel Check app.

Diesel fuel pricing has never jumped so high, so quickly, and so much further apart from petrol.

What happened in 2022 to send the price of diesel skyrocketing? Russia invading Ukraine, that’s what. Russia is the largest exporter of crude oil in the world, after Saudi Arabia. Who knew?

When many nations around the world slapped trade sanctions on Russia for its invasion of Ukraine in February of this year, that halted Russian exports, including crude oil – from which diesel fuel is refined.

Australia doesn’t receive its oil from Russia, but the sudden chokehold on Russian oil reduced supply right across the world. And as we all know from Economics 101, reduce supply and you increase demand (often disproportionately). After the sanctions were imposed, crude oil suppliers to Australia found other markets that were willing to pay more. Australia was compelled to pay more as a consequence.

Once the price of fuel was hitting $2.00 a litre, the Morrison government halved the 44 cents/litre fuel excise and the price briefly returned to bearable levels.

Adding to our woes, the Aussie dollar is currently worth around 65 US cents. That’s a precipitous slide since April, when the Aussie dollar was buying 75 US cents.

Guess which currency we use to buy fuel?

From late September, local prices for both petrol and diesel peaked when the full excise was reimposed by the Albanese government and the Aussie dollar fell to just 62 US cents.

While petrol pricing levelled out, the diesel price kept climbing. One reason for that appears to be the lack of a retail discount cycle for diesel.

As the AIP explains it: “There is no retail discounting cycle (ie: sawtooth pattern) for diesel, as only 25 per cent of diesel is sold through retail outlets and most of this goes to contract or fuel card customers rather than private motorists; most diesel is sold in bulk to commercial/industrial customers (eg: mining, transport and farming) on long term contract; such contracts are subject to rigorous competition under regular market tenders.”

There’s a school of thought that retailers keep diesel pricing high to offset discounted petrol pricing, because it’s ULP that gets all the press. You may have noticed that Channel Nine’s news each night tells viewers what the lowest and highest prices are across the city. It’s always the prices of ULP being quoted, not diesel.

That could be the explanation for retailers being too slow to reduce their margin on diesel fuel during this difficult period, which is what the state motoring associations argue.

The AIP argues on the other hand that retailers make very little profit from petrol and diesel sales, citing just 16 cents per litre between average wholesale and retail diesel prices during November. That amount is not profit alone, it’s also paying the overheads for the retailer.

Who’s right and who’s wrong then? The motoring associations or the AIP and its retailers?

It’s hard to know. Taken in isolation, 16cpl is not a lot, but when the average service station is typically selling thousands of litres a day, that does multiply into a respectable amount of money.

Furthermore, service stations are often convenience stores also, selling chocolate bars, milk and newspapers to subsidise reduced profit from fuel and to even out the revenue peaks and troughs of fuel revenue.

If you can’t afford to run your one-tonne dual-cab 4x4 ute or large SUV, should you sell it? If you do, you’re left with this conundrum: What sort of car will you choose to replace the dual-cab or SUV, and will you be able to secure delivery of that new vehicle in a reasonable timeframe?

As long as the price of diesel remains within the family budget, it’s probably better to keep your vehicle. At this point in time there are very few practical alternatives to the diesel-engined dual-cab ute, especially the 4x4 variants. If, however, your dual-cab never goes anywhere near a gravel track and never tows a caravan, maybe it’s time to sell it.

Whether you should keep your diesel ute or SUV will depend on how you use it. Take for example the LDV D90, an SUV available in four-wheel drive configuration with either a diesel or petrol engine. Both powerplants displace 2.0 litres and both are turbocharged. The diesel D90 has an eight-speed automatic transmission and the petrol D90 has a six-speeder, but otherwise these two variants are mechanically close.

At the prices from Fuel Check listed at the start of this article, the diesel D90 remains markedly more cost-effective to run in the city and suburbs, based on the ADR 81/02 urban-cycle figures for each vehicle. It’s lineball with the petrol D90 in a mix of driving conditions, and the petrol D90 is cheaper to run when most of the driving is on the open road.

Here’s how the theoretical costs work out across the two vehicles and the three fuel economy modes over a 100km distance.

Urban cycle (built-up areas)
D90 diesel – 10.7L/100km, $25.34
D90 petrol – 14.8L/100km, $29.51

Extra-urban cycle (highways and freeways)
D90 diesel – 8.2L/100km, $19.42
D90 petrol – 8.6L/100km, $17.15

Combined cycle (mix of urban and open-road driving)
D90 diesel – 9.1L/100km, $21.55
D90 petrol – 10.9L/100km, $21.73

One short-term fix for rising fuel costs is this: Change your driving habits. If you’re in the dual-cab commuting to work, take public transport, walk, ride a bike or swap with your partner and take the family’s venerable light hatch instead. Leave the dual-cab for weekend recreation.

If that doesn’t fly, check with your boss whether you can work from home or vary your working hours to reduce time spent in peak-hour traffic.

You should take all the usual measures to use less fuel too, of course. Make sure you’re not carting around anything heavy that you won’t need in the foreseeable future. Check tyre pressures. Drive gently and pick your gaps in traffic to minimise stops or excessive loss of speed.

The war in Ukraine hopefully won’t last forever. Even if it does drag on for years, the global economy will adjust and prices of oil will begin to fall. That’s already happening, in fact. The price of crude is back below $US100 a barrel, and there is evidence that it will continue to decline.

We’ve seen something like this before with the GFC, when West Texas crude fell from $US145 a barrel to just $US30 a barrel after July 2008.

So hang in there.