From your local servo to the oilfields of Saudi Arabia, the petrol industry is in trouble.
Oil prices have collapsed, and the coronavirus lockdown has slashed demand to such an extent experts think it might never recover to pre-pandemic levels.
In the short term the fall in oil prices has largely been good news for motorists, despite concerns from the competition regulator that some retailers engaged in price gouging by not passing the plunge on quickly enough.
But experts say the turmoil has exposed the perilous financial position of the Australian industry, priming it for a shake-up that could reduce competition and increase pump prices.
The local industry is dominated by a few big players. There are just four refineries and a handful of big networks of petrol stations.
Australia’s two big supermarket chains, Coles and Woolworths, are among the keys to the market – they are deeply involved in petrol through deals with Shell and EG Group (which sells fuel under the Caltex brand), respectively.
Competitive tension that helps keep prices low is injected by the presence of smaller groups and independent retailers, says former Caltex executive Ben Everitt.
“If the little guys go out of business it’s going to have a really significant impact on competition,” he says.
Everitt now monitors the industry, alongside another former Caltex executive, Mick Jarvie, at data and consulting company The Pricing Project.
Demand for petrol tumbled in late April as lockdowns around the world emptied streets of cars. As a result, demand for oil in turn plummeted by as much as 14m barrels a day, global pricing group Oil Price Information Service estimates.
Storage filled up, and because crude oil is difficult to store – it lets off deadly gases – traders who had purchased oil and were then required to actually take delivery of it had to pay people to take it off their hands.
Back at the pump, prices fell, although not fast enough to satisfy competition tsar Rod Sims.
“Coronavirus has had a really significant impact on volumes,” Everitt says.
“If the big guys reduce their prices the little guys have to reduce their prices too.”
Petrol profit margins can be slim, depending on the day of the week, due to pricing cycles that can see the price of fuel swing by 20c or more a litre in the space of a couple of days.
Sims says the petrol market is “bizarre”.
“That cycle, that demand for action when prices are high, particularly when oil prices are falling, I think gives most people the sense that the petrol market is terrible and of course the ACCC is doing nothing about it,” he says.
The chairman of the Australian Competition and Consumer Commission is passionate about petrol (although he is yet to be photographed wielding twin pumps, six-shooter style, as a predecessor has).
As oil plunged in late April, Sims waded into the fray, calling on retailers – especially in regional areas and the smaller capital cities of Hobart, Canberra and Darwin – to bring petrol prices down faster.
He says that when he questions why people portray the ACCC as a toothless tiger, “the answer inevitably is going to be petrol”.
“They think we should be doing something about petrol, without understanding of course that price gouging is not illegal,” he says.
“Prices came down much too slowly, there was a lot of profiteering in all markets.”
He said the petrol market was “concentrated” due to the limited number of players and competition was always a concern because petrol stations could signal prices to each other on their billboards.
“If you had this structure in other markets it might be OK, but in petrol it’s too concentrated because of that ability to signal,” he says.
He says the ACCC is not allowed to control prices and doing so could be bad for smaller players anyway.
“The bigger companies have got lower unit costs, so if you price-control them to a reasonable level you put out of business the smaller players.”
At the same time, he’s been dealing with the potential sale of Caltex. Potential bids by EG Group and Canada’s Alimentation Couche-Tard have both fallen away.
A sale to EG Group would have meant the effective consolidation of Woolworths and Caltex outlets, he says.
“Clearly there were issues, but we never reached a concluded view,” he says.
Meanwhile, a step up the supply chain, Australia’s four oil refineries have also felt the pinch.
Even before the crisis, refiners have been reluctant to spend any more money on their ageing plants.
Last year, they successfully fended off improvements to Australian fuel standards that would have dramatically reduced noxious emissions, but would also have involved them spending large sums to upgrade their refineries.
“A couple of weeks ago it cost money to run a refinery,” Jarvie says.
He says the refineries are so old and costly to run that their operators might decide to pull the plug.
“You might just make that call,” he says.
“It’s a big call because the remediation costs are enormous.
“I see the refining business in Australia as a year-to-year proposition.”
In the longer term, the industry also faces disruption from electric cars.
Back in the late 90s and early 2000s, there was much talk of “peak oil” – the moment when production of fossil fuels can’t be increased anymore because the world’s supply is beginning to run dry.
This was supposed to happen some time before 2010, sending oil prices surging and wreaking economic havoc.
Amid ongoing uncertainty about just how much oil really is buried under the sands of Saudi Arabia, peak oil has still yet to happen.
But now the phrase has returned in a different context. This time, it describes the peak in consumption that will occur as the natural growth in demand is whittled away by the increasing number of electric vehicles on the road.
According to research by not-for-profit group Carbon Tracker released on Thursday, the decarbonisation of the global economy under the Paris Agreement, which is designed to limit global heating to less than 2C, is likely to slash the value of oil, gas and coal reserves by two thirds.
Before the coronavirus pandemic, analysts thought the peak in demand for oil might be five years away, Everitt says.
“Now the theory is that demand will take so long to recover from coronavirus that it will never come back,” he says.
While in the short term a fall in demand should also reduce petrol prices, the fear is that it could make it uneconomic to refine oil in Australia, leaving the country completely dependent on imports.
“The pressure on operators is pretty intense,” Everitt says.
“If I was a large institution invested in an oil company listed in Australia I would want to know what the plan is.”