Oil Prices on the Rise?

Prompted by an article entitled “Bust and Boom” in the current issue of The Economist, I have decided it is time to dust off a Stubborn Mule staple: the petrol price model. As The Economist notes, following last year’s precipitous fall, oil prices have been climing again over the last few months. The West Texas Intermediate oil price per barrel (bbl) has almost doubled in US dollar terms and, despite a stronger Australian dollar, the price in Austalian dollars is not far behind.


West Texas Intermediate Oil Prices

Rising oil prices may seem odd in a world economy still under the influence of the Global Financial Crisis (aka the GFC), but The Economist points the finger at the collapse in investment in oil exploration and development of new fields. This raises the fear that, while oil inventories are currently in record excess, once these inventories are drained, digging up more oil is getting harder and, consequently more expensive.

So where does this leave Sydney motorists? The simple regression model I have used before is still showing a tight relationship between wholesale oil prices (in this case refined Singapore 97 oil prices) and prices at the bowser. If The Economist’s fears are justified, petrol prices will be reaching $1.30/L very soon and will be headed north from there.Updated Petrol Model

Data source: Bloomberg and the Australian Automobile Association.

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