Aussies have been struggling with a rising cash rate to squash inflation but there’s a strong sign it’s just not going to work.

Last week saw the conclusion of the Morrison government’s fuel excise tax cut, which lopped 22 cents a litre plus GST off the cost of fuel between the end of March and the end of September.

On a rolling weekly average basis, this has already seen the average fuel price nationally rise to the highest level since the end of July, up 20 cents from the lows recorded in mid-September.

It’s worth noting that this data only covers the first few days past the end of the excise tax cut, during which there was still pre-excise tax resumption fuel in the tanks of some petrol stations across much of the nation.

But as events around the globe continue to unfold, it increasingly appears that forces far beyond the shores of our little corner of the South Pacific may end up deciding the fate of not only Australian fuel prices, but everything that goes along with them including the inflation rate and interest rates.

Over the weekend it was revealed that OPEC+ was considering cutting oil production by around 1 million barrels per day. To put this into perspective it’s roughly 1 per cent of global consumption, if the cut is fully realised by all member and participating nations.

On Thursday, the Organisation of the Petroleum Exporting Countries (OPEC+) announced that it would be cutting production by even larger 2 million barrels a day based on the baseline of existing production targets. In a press conference following the announcement, the Saudi Energy Minister Prince Abdulaziz bin Salman clarified that in reality the production cut would amount to roughly 1-1.1 million barrels per day due to existing production targets not being met by some OPEC+ nations.

Given that the global oil market remains finely balanced between supply and demand, this cut in production could put significant upward pressure on oil prices.

In March, the Biden Administration announced that it would be releasing roughly 1 million barrels per day for six months from the United States Strategic Petroleum Reserve (SPR), in an attempt to drive down oil prices sent higher due to the war in Ukraine.

The initial impression of the policy from analysts was generally that it would not be especially impactful on the course of the market. However, due to the far more protracted than expected and still ongoing impact of the Chinese government’s ‘Covid-0’ strategy on oil consumption in the Middle Kingdom, it arguably ended up being a significant factor in sending oil prices lower.

Balance between global oil supply and demand pre-OPEC cut, relative to 2019 levels. pic.twitter.com/SEzjJ5yepC

The release of reserves was initially slated to conclude at the end of September, but has been extended until the end of October. Some analysts have noted that with the US midterm elections coming up in early November, the Biden Administration had a fair amount of political incentive to extend the release of reserves in an attempt to keep gasoline prices lower.

Whether the release of reserves will conclude on time remains to be seen, but with each passing month the Biden Administration is running out of scope to continue the sale of reserves, with total reserves recently hitting their lowest level since 1984.

A potential triple whammy for Aussie motorists and more

Between the potential end of the release of US strategic reserves at the end of the month and cuts in oil production by OPEC+, motorists around the globe face the possibility of significantly higher fuel prices in the months ahead.

While it’s possible that concerns about a major global economic slowdown could continue to put downward pressure on oil prices, that is probably a trade-off many would like to avoid.

If oil prices do go back above $100 a barrel as investment bank JP Morgan recently suggested they may, this would impact Australia’s headline CPI inflation significantly. In the most recent ABS inflation data release, headline inflation fell slightly due to falling fuel prices, even while most items in the CPI basket continued to rise.

If that trend was to be reversed and fuel prices were to become a neutral or inflationary driver of the headline inflation rate, this could send interest rates higher than where they would have been otherwise.

Ultimately, forces far beyond our shores will heavily shape the future of Australian fuel prices and by extension everything that goes along with them. Concerns about a slowing global economy may yet prevail and keep prices low if conditions continue to deteriorate. However, if OPEC+ wants to keep prices high, it could be challenging to overcome that upward pressure on prices, particularly if the release of US strategic reserves concludes on time.

Tarric Brooker is a freelance journalist and social commentator | @AvidCommentator

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