Australia / Coronavirus Insights
Industries Helped and Hindered by Low Crude Oil Prices

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by IBISWorld
Apr 27 2020

The COVID-19 pandemic has plunged the global economy into an unprecedented period of turmoil. The current period of economic disruption is clearly illustrated by the shift in the price of oil. The West Texas Intermediate (WTI) price, which represents the price of oil in the United States, plunged into negative price territory for the first time in history this month, as a lack of demand and unrestrained supply led to an abundance of oil barrels with nowhere to go. The Brent price of crude oil, which is a more accurate representation of global oil prices, has also fallen to a historic low.

Demand and supply shocks

When oil prices collapsed in 2014-15, this trend provided a much-needed stimulus boost for the Australian economy, by reducing the costs of manufacturing and transporting goods. The low price of oil contributed to a sustained period of global economic growth up to 2018-19. However, the current collapse in oil prices is unlikely to provide a similar boost in 2019-20. While low prices may support businesses by reducing operating costs, a sustained downturn in consumer demand is expected to counteract this benefit. Even if consumers would like to take advantage of cheaper prices, government-mandated COVID-19 social distancing restrictions prevent them from engaging in oil-intensive activities, such as air travel.

The world price of crude oil is expected to remain subdued until 2020-21, as the magnitude of the global drop in demand for oil outweighs production cuts announced by the Organization of the Petroleum Exporting Countries (OPEC). However, low oil prices are expected to help the Australian economy recover once the COVID-19 pandemic fades.

Australian industries to benefit from low oil prices

For Australia, a record drop in global crude oil prices over the past two months represents both a help and a hindrance to different parts of the economy. Oil is a staple of almost all economic activity, due to its use in fuels for cars, ships and airplanes. Oil is also used in producing petrochemicals, which are used to produce plastic bags, toothbrushes, food packaging, detergents, paints, cosmetics, clothing and hundreds of other intermediate and end-user goods. Many medicines also contain petrochemical derivatives. Examples of industries that could benefit from low oil prices include:

Australian industries to be hurt from low oil prices

Some industries will be hurt by low oil prices. Oil producers are at a distinct risk, as lower prices threaten the viability of their operations. Oil production is expected to account for approximately 10.7% of industry revenue in the Oil and Gas Extraction industry in 2019-20. Natural gas producers are also at risk, as the prices of oil and gas are strongly linked in global markets. Large-scale liquefied natural gas export facilities have been developed in Australia over the past decade, to supply gas to energy-intensive economies such as China, Japan and South Korea. Natural gas exporters are also at significant risk if prices remain subdued for an extended period. The low price of oil is also expected to reduce the price of automotive gasoline, limiting revenue in the Fuel Retailing industry. While fuel retailers may benefit from cheaper purchase costs from upstream fuel refineries, this benefit is expected to be passed onto consumers through lower prices.

Australia’s oil reserves

Oil is converted into usable products through the Petroleum Refining and Petroleum Fuel Manufacturing industry. Australian refineries consumed close to 186 million barrels of oil in 2018-19, of which only 19.2% came from indigenous oil suppliers. Australia’s oil refining capacity has dwindled over the past decade, as cheap imports of petroleum products have eroded the viability of domestic refining. Currently, only four refineries remain operational in Australia. One of these, the Lytton refinery operated by Caltex in Brisbane, is scheduled to close in May due to plummeting profit margins caused by the COVID-19 crisis’ effect on world fuel demand. The refinery is not expected to reopen until operating conditions improve.

The chart below shows Australia's ‘Days of Consumption Cover’ for 2018-19. This represents the number of days that Australia's end-of-month petroleum stockholdings would last if 2018-19 consumption rates continued. Australia is meant to have 90 days’ worth of oil supply on hand at any given time, in order to maintain normal supplies during supply shocks. But Australia has fallen short of this 90-day target for many years. The Federal Government purchased 4.2 million barrels for $94 million earlier this month to take advantage of the current low oil prices and to increase the national stockpile.

IBISWorld reports used to develop this release:

For more information, to obtain industry reports or to arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647