The Refinery Squeeze Adding Cents to Every Litre You Buy

Here's a puzzle worth chewing on next time you're standing at the bowser. Crude oil has barely moved in the past fortnight, yet your unleaded has jumped double digits. So where's the money going?

The answer sits in a number most motorists have never heard of, and right now it's doing more damage to your fuel budget than the price of oil itself.

Petrol has outrun the oil that makes it

On Thursday the ACCC released its 29th weekly fuel monitoring update since the Middle East conflict began in late February. Its summary was blunt: retail petrol and diesel prices rose across every location it tracks, "influenced by high international refined fuel benchmark prices."

Read that carefully. Not crude oil prices. Refined fuel prices.

The same day, AMP chief economist Shane Oliver put a figure on the risk. With petrol averaging around $2.39 a litre, he warned it could head above $2.70 if the crisis drags on, and flagged that oil itself could reach US$150 a barrel in a bad scenario. But the more interesting line in his commentary was this one: Australian petrol prices have already "caught up with and overshot" the rise in crude. Brent was sitting at about US$105 a barrel on Thursday, with the Aussie dollar near 70 US cents. Neither of those numbers explains a 13 cent weekly jump on their own.

Oliver pointed the finger somewhere unexpected. Ukraine.

Here's what's really going on

Every barrel of crude has to be cooked into petrol and diesel before it's any use to your car. The gap between what a refiner pays for crude and what it sells the finished fuel for is called the crack spread, or refining margin. In normal times it's a sleepy number that traders watch and nobody else cares about.

These aren't normal times.

According to analysis published on 16 September by energy consultant Peter Cockcroft, the refining margin on Asian diesel hit US$87 a barrel, an all time high. Before the Middle East conflict it sat around US$22. Petrol margins in Asia have roughly doubled too, according to trade reports, from about US$8 a barrel to above US$20.

Why? Because the world has lost a staggering amount of refining capacity in a very short time. Ukrainian drones have hit Russian refineries more than 70 times this year, with a record 21 strikes in August alone. The International Energy Agency says a Russian refinery was successfully hit on average once every three days through the first eight months of 2026.

The upshot, according to figures reported by the Kyiv Post, is that Russian refineries processed just 3.8 million barrels a day in August, the lowest in more than two decades and well short of the 5.3 to 5.5 million the country needs in summer. Petrol output fell almost 20 per cent on a year earlier and diesel more than 23 per cent. Moscow servos started limiting drivers to 40 to 60 litres a fill.

So Russia has shut the export tap. Diesel exports by producers are banned until 30 September, with Reuters reporting an extension to the end of October is on the way. Petrol exports are banned until January 2027. Add Gulf supply disruption from the Middle East conflict and Cockcroft estimates combined Russian and Gulf diesel exports were running about 1.6 million barrels a day below February levels. Those two regions historically supplied almost 45 per cent of the world's seaborne diesel trade.

But we don't even buy Russian fuel

True. Australia banned Russian oil imports back in 2022. What most people don't realise is that it doesn't matter.

Fuel is a global pool. When Europe and Latin America can no longer get Russian diesel, they go shopping in Asia, bidding against the same refineries in Singapore, South Korea and Japan that fill Australian tankers. Our wholesale prices are set on what's called import parity, which basically means the Singapore price plus shipping, insurance and handling to get it here. When Singapore gets tight, the cost lands on every terminal in the country within days.

Let's put this in perspective with some back of the envelope maths. A barrel holds about 159 litres. At today's exchange rate, every US$1 increase in a barrel's price adds roughly 0.9 cents a litre before tax. The petrol margin blowout of around US$12 a barrel works out to something like 11 cents a litre, and more than 12 once GST is added. For diesel, the jump from US$22 to US$87 is worth well over 50 cents a litre. That's before a single cent of movement in crude.

That's why diesel prices have run so much harder than petrol this year, and why tradies and farmers have been feeling it more than commuters.

Here's the fascinating backstory

Going back to the early 2000s, Australia had eight oil refineries. Today we have two: Ampol's Lytton plant in Brisbane and Viva Energy's refinery at Geelong. The rest closed one by one between 2012 and 2021, from Clyde and Kurnell in Sydney through to Altona in Melbourne and Kwinana south of Perth. Each closure made economic sense at the time. Asian megarefineries could make fuel cheaper than we could.

The catch is that we now import the overwhelming majority of our refined fuel, which means we import every global refining shock along with it. When capacity was plentiful that was a bargain. When it isn't, we're price takers with no buffer on the margin.

To be fair, Canberra has been moving. This year's Budget committed $3.2 billion to an Australian Fuel Security Reserve, aiming for 50 days of diesel and jet fuel, and strengthened the payment that keeps Lytton and Geelong open. But reserves protect against running out. They don't protect against paying through the nose, and they won't change what Singapore charges next week.

So what does this mean at the bowser?

The honest answer is that refining margins are now the main swing factor for your fuel bill, and they're driven by events a long way from Adelaide or Parramatta. A ceasefire, a repaired Russian refinery or a lifted export ban could take cents off quickly. A fresh strike on a big diesel plant can add them just as fast.

There's some comfort on supply. The federal energy department says petrol stocks are above average and diesel sits near its long term levels, with at least 3.6 billion litres of crude and fuel scheduled to land in the four weeks from mid September. Shortages aren't the issue. Price is.

And here's the thing about price cycles. In the capital cities with regular cycles, a rising wholesale cost usually gets passed through at the next price hike, but discounting still happens on the way back down. The spread between the dearest and cheapest servo in a suburb often dwarfs the weekly movement in Singapore.

Your takeaways

The fuel industry rarely makes headlines until prices spike, but the refinery squeeze is the real story behind this month's jump. Keep an eye on it, because when it eases, you'll want to make sure your servo passes the savings on.