The Saudi Pipeline Behind the 14 Cent Jump in Your Petrol Price

If your usual servo put unleaded up by about 14 cents a litre over the past week, the biggest single reason sits in the Saudi desert, roughly 12,000 kilometres from the nearest Australian bowser. It's a steel pipe most motorists have never heard of, and on 11 September it stopped pumping.

What happened on 10 and 11 September

Over two days, drones hit pump stations along Saudi Arabia's East West Pipeline in the Riyadh and Medina regions. Saudi authorities said the drones came from Iraq, and Baghdad's own investigation traced the launch site to Maysan Governorate in the country's south east. Nobody has claimed responsibility. On 11 September Saudi Aramco shut the whole line as a precaution.

Why does one pipeline matter so much? Because since March it has been doing the job the Strait of Hormuz used to do. According to Al Jazeera, tanker traffic through Hormuz has dropped from around 20 million barrels a day before the conflict to somewhere between 6 and 9 million. The East West line had been carrying 4 to 5 million barrels a day across the Arabian Peninsula to the Red Sea port of Yanbu. That's 4 to 5 per cent of the world's oil moving through a single piece of infrastructure.

Markets reacted the way you'd expect. Brent crude futures closed above US$100 a barrel on 9 September for the first time since May, and were at US$104.82 by 17 September. Before the conflict escalated on 28 February, Brent was around US$72.

What you're not being told about that US$100 figure

Here's the part that didn't make the evening news. The price quoted on the finance report is a futures price, a bet on oil delivered weeks from now. Refineries buy actual cargoes, and the price of those has pulled well away from the headline.

The ACCC's weekly fuel monitoring report, released on Friday 18 September, puts dated Brent (the benchmark for physical cargoes) at an average of US$132 a barrel in the week to 16 September. That's up US$25 in seven days. In a footnote, the regulator cites Reuters reporting that some physical cargoes topped US$130, close to April's record, as buyers hunted for alternatives to Middle East supply.

That gap between paper oil and real oil is what landed at your local servo.

From Yanbu to your bowser in about a week

Australia doesn't buy much Saudi crude directly. We import 80 to 90 per cent of our fuel already refined, and NRMA figures show where it comes from. Singapore supplies 54.7 per cent of our imported petrol, with South Korea at 22.5 per cent. For diesel, South Korea leads at 28.8 per cent, followed by Singapore at 15.4 per cent and Malaysia at 14.4 per cent. Only two refineries remain here, Viva Energy's plant at Geelong and the Ampol refinery at Lytton in Brisbane.

Those big Asian refineries are, in the ACCC's words, "mostly configured to process the more sour crudes produced in the Middle East". When their feedstock gets dearer, so does everything they sell us. Australian wholesale prices follow two Singapore benchmarks, Mogas 95 for petrol and Gasoil 10 ppm for diesel.

Follow the chain through the ACCC numbers. In the week to 16 September, Mogas 95 rose 12 cents a litre to around 126 cents. Average terminal gate (wholesale) petrol prices across the five largest cities rose 13.7 cents to 219.8. Average retail petrol rose 14.3 cents to 224.2. Benchmark, wholesale, retail, all moving in step inside a week.

Diesel did the same. Gasoil rose 15 cents to about 162 cents a litre, wholesale diesel rose 13.6 cents to 259.3, and the five city retail average rose 14.2 cents to 267.9.

Where it bit hardest

Canberra had the dearest unleaded of the eight capitals on 16 September at 234.3 cents, after the largest weekly rise of 17.3 cents. Adelaide was cheapest at 218.3. Sydney averaged 224.8, Brisbane 224.0 and Melbourne 223.7, while Hobart sat at 229.1 and Darwin at 230.1.

Regional drivers copped it too. Across the more than 190 regional locations the ACCC monitors, petrol averaged 228.6 cents, up 13.5, and diesel 270.9, up 12.6. Dubbo rose 19.5 cents in the week to 232.0 and Coonabarabran rose 19.1.

To put this in perspective, we're still a long way below the worst of it. Compared with 31 March, five city petrol is 33.0 cents lower and diesel is 54.5 cents lower. Compared with 20 February, before the conflict, petrol is 53.3 cents higher and diesel a hefty 91.3 cents higher. Diesel has worn more of the pain all year because, as the ACCC notes, the Middle East is a key supplier of both diesel itself and the crude grades that yield the most of it.

And we're not alone. American diesel hit a record US$6.06 a gallon on 11 September, beating the 2022 mark. In our money that's roughly $2.25 a litre, still about 40 cents under the Australian city average, thanks largely to lower fuel taxes over there.

A pipe built for exactly this

Here's the fascinating backstory. The East West Pipeline exists because Saudi planners in the early 1980s feared the war between Iran and Iraq would close Hormuz. They were right to worry. More than 400 merchant ships were attacked in the Gulf during what became known as the Tanker War. The answer was 1,201 kilometres of pipe from Abqaiq in the east to Yanbu in the west, with 13 pumping stations along the way. The larger of its two pipes is 142 centimetres across, big enough for a primary schooler to stand up inside.

Capacity was 5 million barrels a day in 2018 and was lifted to 7 million this year by converting the second pipe to carry crude. It's been hit before. A Houthi drone strike shut it briefly in May 2019, and an Iranian drone attack in April cut throughput by about 700,000 barrels a day.

There's a catch that rarely gets a mention. Oil leaving Yanbu for Asia still has to sail south through the Bab el Mandeb strait at the mouth of the Red Sea, and Houthi forces aligned with Iran have stepped up attacks there this month. The bypass has its own chokepoint.

So what happens next?

Bloomberg reported on 16 September that Aramco wants about half the pipeline's capacity back within days by routing around the damaged section, with full capability in about six weeks. Reuters sources say pump stations 8 and 9 took the damage. If the partial restart holds, the Singapore benchmarks should ease, and the ACCC data shows retail follows within a week or so.

Supply isn't the worry. Energy Minister Chris Bowen says Australia holds 41 days of petrol and 42 days of diesel, with 41 ships carrying 3.3 billion litres due over the next four weeks. "The conflict involving Saudi Arabia and the Houthis, as well as the ongoing war in Iran, is doing nothing to improve global fuel supplies and is pushing oil prices higher," he said.

Price is another matter. As the NRMA's Peter Khoury told SBS, "It really depends exclusively, almost, on what's going to happen in the Middle East."

The practical upshot for your wallet

A pipeline built 45 years ago for a different war is now helping set the price of a tank of fuel in Dubbo. Keep an eye on this space.