Refining Took 29 Cents a Litre of Your Petrol Bill. Servos Got 3.7

Fill a 55 litre tank with unleaded and, on RACQ's latest figures, about $16 of what you pay goes to turning crude oil into petrol. The servo that sells it to you keeps about $2 of that tank, and that's before it pays wages, rent and the power bill.

With diesel the refining slice is far bigger. It's the part of the fuel price that has moved the most this year, and it gets the least attention.

The numbers nobody puts on the price board

RACQ's quarterly fuel price report, released in mid October, breaks a litre of fuel into its parts. Its September quarter figures are startling. The refinery margin on unleaded averaged 1.2 cents a litre last year. Last quarter it hit 29 cents, a rise of more than 2,300%. Diesel's went from 8 cents to 62.3 cents.

Over the same stretch, what service stations made on petrol fell from 11 cents a litre in the June quarter to 3.7 cents.

RACQ economist Dr Ian Jeffreys pointed to three culprits for this year's prices: full fuel excise coming back, the conflict in the Middle East and the surge in refinery margins. Big fuel companies, he said, "appear to be making little profit at the bowser". The money has moved up the chain.

Different measures give different numbers, but they all point the same way. Ampol, which runs the refinery at Lytton in Brisbane, told the market on 19 October that its own refiner margin averaged US$23.92 a barrel in the September quarter. That's 21.40 Australian cents a litre, more than double the 10.22 cents of a year earlier.

Here's what's really going on

A refining margin is the gap between what a barrel of crude costs and what the petrol, diesel and jet fuel made from it sell for. In normal years it's a dull number that moves a few cents either way. It blows out when finished fuel is scarcer than the crude it's made from.

That's what the disruption in the Strait of Hormuz has done. The Gulf exports refined fuel as well as crude, and much of it has to pass the same chokepoint. When Middle Eastern crude dried up in March, refiners across Singapore, Southeast Asia and parts of North Asia cut how much they processed.

Diesel has copped the worst of it. Asian diesel margins set a record of nearly US$90 a barrel in September, according to trade data reported in October, beating the previous peak in late March. They had eased by mid October but remain far above anything seen before the war.

What you're not being told is that a fat margin on a trading screen isn't the same as a fat profit. Those margins are measured against Brent crude. Asian refiners trying to replace Middle Eastern barrels have paid war risk insurance and freight that, for a supertanker from the US Gulf to China, worked out at about US$41 a barrel in early October. Before the war it was US$8.87. The International Energy Agency's October oil market report found Asian refiners running high sulphur Middle Eastern crude had negative margins in September.

So the margin is less a windfall for every refiner and more a scarcity price for finished fuel. It goes to whoever has fuel to sell and can get crude at a sensible price.

Six years ago it ran the other way

When the pandemic emptied the roads, margins collapsed. S&P Global reported March 2020 margins of US$4.62 a barrel at Lytton and US$2.70 at Geelong. By October that year BP had announced it would turn its Kwinana refinery south of Perth into an import terminal. ExxonMobil said the same about Altona, in Melbourne's west, in February 2021.

To put this in perspective, Lytton's latest margin is roughly five times what it earned in March 2020. Refining has always worked like this, with brutal busts and sharp booms. Most motorists only notice it at the extremes, and this year is one of them.

A local refinery doesn't make your fuel cheaper

Here's what most people don't realise. Australian wholesale fuel is priced at import parity, which means it tracks Singapore benchmarks whether a litre was refined at Lytton or in South Korea. Domestic refineries supply around 20% of the country's needs, according to the federal government's fuel statistics. The rest arrives by ship.

So a refinery here doesn't lower the price at your bowser. What it changes is who keeps the margin. When refining diesel is worth 62 cents a litre, most of that goes to refiners overseas. The argument over keeping Australia's last two refineries open, which we looked at in Australia's $9 billion diesel bill, is about supply security and about where that money ends up. It isn't a promise of cheaper fuel.

What this means for you at the bowser

The practical upshot comes down to four things.

Most of diesel's premium is refining. On 3 November the terminal gate price in Sydney, which is what a retailer pays to fill a tanker, was 265.4 cents for diesel and 225.4 for unleaded, according to the Australian Institute of Petroleum. That's a 40 cent gap. The gap between RACQ's two refining margins last quarter was 33.3 cents, so most of the premium is refining. Crude and tax account for very little of it.

That's why the two fuels can move in opposite directions. Between 28 October and 3 November, wholesale diesel fell in every capital, from 2.6 cents in Melbourne to 3.8 cents in Adelaide and Hobart. Unleaded rose between 1.6 and 2.5 cents over the same days. Brent closed at US$116.72 on 23 October, its highest since late April, and a dearer crude price pushes both fuels up. Diesel fell anyway, which suggests its refining margin is shrinking faster than crude is rising. Wholesale prices follow Singapore by a week or two, so if that keeps up, diesel prices at the bowser should drift lower while petrol firms.

Don't expect your servo to soak up much more. At 3.7 cents a litre in RACQ's figures, there's no cushion left. When wholesale prices fall, retailers will probably rebuild some of their margin before passing on the full cut.

Where you fill up still matters. The refining margin is the same everywhere, but local competition isn't. In regional Queensland, Beaudesert averaged 193.5 cents for unleaded last quarter while Longreach averaged 229.2. Diesel ran from 233.9 in Tully to 256 in Longreach. Brisbane averaged 199.2 for unleaded, the dearest of the five biggest capitals, which RACQ puts down to the city having fewer independent servos.

The bigger picture

Two things are worth watching over the next fortnight. Ampol expects the catalytic cracker at Lytton, the unit that breaks heavy oil down into petrol and diesel, to restart in mid November. Extra maintenance has cut about 150 million litres from its fourth quarter output, though the company doesn't expect customer supply to be affected. The other is whether Asian diesel margins keep sliding from their September record.

RACQ's longer term answer is to need less imported fuel. "Electrification and biofuel use are the quickest ways to improve fuel security," Dr Jeffreys said. For regional drivers covering long distances, he says biofuels will matter most.

Refining margins tend to fall as fast as they rise. When this one does, diesel has the most room to come down.

Worth keeping in mind: