Oil prices fell — why Australian businesses should not expect their costs to follow

Australian businesses received what appeared to be good news this week.

Oil prices fell.

Brent crude dropped more than US$2 a barrel after the United States unveiled its latest economic measures against Iran without immediately imposing the sweeping penalties on major Chinese institutions that some traders had feared.

For businesses that have spent months watching fuel, freight and transport costs rise because of the Iran war and disruption to the Strait of Hormuz, it would be tempting to conclude that some relief is finally arriving.

Unfortunately, it is not that simple.

The price of crude oil has fallen. The cost of operating an Australian business has not necessarily followed it.

The reason is increasingly clear.

Australia does not run its trucks on Brent crude.

It does not fly aircraft on crude oil.

Farmers do not put crude into tractors.

Builders do not put it into excavators.

Businesses consume petrol, diesel and aviation fuel — products that first have to be refined, transported, insured, imported, stored and distributed.

And it is increasingly that part of the global energy system that is under pressure.

Reuters estimates Asian imports of light and middle distillates — including products such as petrol, diesel and jet fuel — are running around 21 per cent below pre-conflict levels during August.

Australia has largely maintained its supplies.

But it is paying the international price required to do so.

For Australian businesses, that distinction is critical.

Crude oil is only the first cost

The international oil benchmark receives enormous attention because it is easy to understand.

Brent rises.

Fuel should rise.

Brent falls.

Fuel should fall.

Over time there is obviously a relationship.

But it is not instantaneous and it is not one-for-one.

Between an oil well and an Australian business sits an enormous industrial and logistical system.

Crude has to reach a refinery.

The refinery has to be operating.

It needs the appropriate grade of crude.

It has to manufacture the particular fuel required.

That fuel must then be shipped to Australia.

The cargo requires a tanker.

The tanker requires insurance.

The fuel has to enter Australian storage and distribution networks.

Only then does it become the diesel delivered to a transport depot or the petrol sold at a service station.

The Iran war has disrupted several of those stages simultaneously.

The bottleneck has moved to the refinery

This is the important change.

The initial concern surrounding the Iran war was crude-oil supply.

Could enough oil escape the Middle East?

Could tankers get through Hormuz?

Could Saudi Arabia and the UAE move sufficient crude through alternative routes?

Those questions still matter.

But the world's refining system has also been badly disrupted.

More than 20 per cent of Middle Eastern refining capacity has remained offline, while Russian refining has also suffered substantial disruption associated with the Ukraine war. Reuters estimates global refinery runs were 5.1 million barrels a day lower year-on-year during the second quarter.

Consequently, crude oil can become cheaper while diesel remains expensive.

That is precisely the distinction Australian businesses need to understand.

Refining margins tell the story

Australia has produced an extraordinary example of the economics involved.

Ampol has reported underlying first-half net profit after tax of approximately A$857 million, almost five times the previous corresponding result.

Its Lytton refinery margin more than tripled to US$28.26 a barrel as international refining margins surged during the Middle East disruption.

This is not evidence that an Australian company caused high fuel prices.

It demonstrates something more useful.

Refining has become exceptionally valuable because refining capacity has become scarce.

For businesses buying the finished product, that scarcity remains part of the price even when crude becomes slightly cheaper.

Diesel matters more than the service-station sign

For many Australian businesses, diesel is the number that matters.

Its influence extends through almost every physical supply chain.

Road freight depends upon it.

Mining depends upon it.

Agriculture depends upon it.

Construction depends upon it.

Warehousing and logistics depend indirectly upon it.

Regional businesses are particularly exposed because goods frequently travel enormous distances before reaching them.

A retailer may never purchase a litre of diesel directly and still be heavily exposed to its price.

The diesel is hidden inside the freight bill.

Every delivery contains energy

Consider a restaurant.

Food arrives by truck.

Drinks arrive by truck.

Cleaning supplies arrive by truck.

Furniture and equipment arrive by truck.

Waste is removed by truck.

The restaurant owner may look at the electricity bill and believe that represents the business's energy exposure.

It does not.

Energy is embedded throughout the supply chain.

The same principle applies to a retailer.

Products travel from a manufacturer to a port.

Then by ship.

Then to a distribution centre.

Then to the shop.

Fuel sits inside the delivered cost of almost everything.

Freight companies cannot indefinitely absorb the increase

Transport operators face exactly the same problem as every other business.

When fuel costs rise temporarily, some may absorb part of the increase.

When they remain elevated for months, that becomes increasingly difficult.

Margins disappear.

Eventually freight rates rise, fuel surcharges are introduced or contracts are renegotiated.

The cost moves along the supply chain.

That is why Australian businesses should not interpret a two-dollar movement in Brent as an instruction to immediately revise transport budgets downwards.

The more relevant question is what happens to Australian diesel prices and regional refining margins over the following weeks.

Aviation businesses face the same problem

The aviation sector demonstrates the principle particularly clearly.

Jet fuel has been rerouted around the world since Hormuz became severely disrupted.

Earlier in the conflict, a tanker travelled from Louisiana to Melbourne carrying about 300,000 barrels of jet fuel — the first such shipment on that route in years.

Long-distance cargoes like that demonstrate the extraordinary flexibility of international markets.

They also demonstrate the cost.

Longer voyages require more shipping capacity, more fuel and more working capital.

Reuters reported that airlines globally could face around US$14 billion in additional fuel costs during 2026 as the industry adapts to the disruption.

Australian tourism and business travel therefore remain exposed even if Brent eases.

Australia is buying its way through the shortage

There is a reassuring aspect to the current situation.

Australia is still obtaining fuel.

That should not be understated.

Earlier this year, the country experienced enough supply pressure that the government released fuel from reserves and temporarily relaxed fuel-quality requirements. Australia relies on imports for roughly 90 per cent of its fuel requirements, making continuity of international supply particularly important.

Yet Australia has subsequently maintained refined-fuel imports considerably better than some poorer Asian economies.

Why?

Purchasing power.

When a commodity becomes scarce, price helps determine who receives it.

Australian importers can compete for cargoes.

That is helping keep Australian businesses supplied.

But it means the economic problem is increasingly price rather than physical availability.

Businesses should distinguish availability from affordability

This is perhaps the most useful distinction for business planning.

There are two different energy risks.

Supply risk: Can we obtain the fuel we require?

Price risk: At what price can we obtain it?

Australia's immediate supply position is much stronger than it was during the early stages of the crisis.

But that does not restore pre-war economics.

A truck that continues operating at substantially higher fuel cost has avoided a supply crisis.

It has not avoided an economic one.

Do not build quotations around yesterday's oil price

This has practical consequences for businesses preparing quotations.

A construction company quoting a project that will run for six months should be cautious about assuming today's decline in crude prices will translate into permanently cheaper diesel.

A transport company entering a long-term freight agreement faces the same problem.

So does a tour operator budgeting coach fuel.

So does an agricultural contractor.

So does a delivery business.

Where fuel is a significant input, long-duration fixed-price contracts deserve careful consideration.

Businesses should understand who bears the fuel-price risk if international conditions deteriorate again.

Review fuel-surcharge clauses

For freight-intensive businesses, fuel-surcharge arrangements deserve particular attention.

The important questions are straightforward.

What benchmark determines the surcharge?

How frequently is it adjusted?

Does it move down as well as up?

Is there a delay between market movements and the surcharge?

Is the mechanism clearly disclosed?

A business that understands the formula can budget.

A business that merely receives a larger invoice cannot.

Ask suppliers what is changing

This is also an appropriate time for Australian businesses to speak with major suppliers.

Not to demand predictions nobody can reliably provide.

Ask instead about exposure.

Is transport being repriced?

Are suppliers introducing temporary energy surcharges?

Are delivery frequencies changing?

Are imported products taking longer to arrive?

Are minimum-order quantities changing?

Does the supplier expect another price review?

The objective is early information.

A price increase known six weeks in advance can often be managed.

One discovered when the invoice arrives is much harder.

Margin management becomes important

Businesses should also distinguish between temporary cost shocks and structural changes.

Passing every small fuel movement immediately to customers may be commercially unrealistic.

Absorbing persistent increases indefinitely can be equally unrealistic.

The sensible approach depends upon the business.

Some have sufficient margins to absorb volatility.

Others operate on margins so thin that a small freight increase materially affects profitability.

Owners need to know which category they occupy.

That requires current costing rather than assumptions based upon last year's expenses.

Recalculate delivered cost

For businesses selling physical products, the relevant number is not simply the wholesale purchase price.

It is the landed or delivered cost.

Product.

Freight.

Insurance.

Duties where applicable.

Warehousing.

Local transport.

Energy surcharges.

If transport costs have materially changed, an old gross-margin calculation may no longer describe the business.

A product that appears profitable at the supplier's invoice price can become considerably less attractive after today's logistics costs are included.

Inventory decisions become more complicated

High and volatile transport costs also affect inventory strategy.

Ordering larger quantities less frequently can reduce freight cost per unit.

But doing so ties up cash.

It increases storage requirements.

It increases inventory risk.

Ordering smaller quantities preserves cash but may expose the business to repeated freight charges and future price increases.

There is no universal answer.

The appropriate decision depends upon cash flow, storage capacity, product turnover and supply reliability.

But the decision should now be deliberate.

Cash flow deserves particular attention

Higher energy costs can damage cash flow before they appear clearly in the profit-and-loss statement.

Businesses pay suppliers.

They pay freight.

They pay wages.

They buy fuel.

Then they wait to be paid by customers.

If input costs rise while customer payment terms remain unchanged, more working capital becomes trapped in the operating cycle.

A profitable business can still experience cash-flow stress.

That is why persistent fuel inflation deserves attention from businesses that do not consider themselves particularly energy intensive.

Regional businesses face an additional burden

Distance amplifies almost everything we have described.

Regional Australia frequently has fewer suppliers.

Goods travel further.

Freight represents a larger proportion of delivered cost.

Businesses may have fewer alternatives if one transport operator raises prices.

Fuel can therefore have a disproportionate impact outside the capital cities.

This was visible earlier in the conflict when localised shortages affected rural areas despite Australia's overall fuel position remaining stable.

For regional businesses, supply-chain resilience can be as important as securing the cheapest possible freight quote.

Do not assume the crisis ends when Hormuz reopens

There is another reason businesses should remain cautious.

Even a diplomatic breakthrough tomorrow would not instantly restore the international fuel market.

Damaged or constrained refineries need time to recover.

Inventories have to be replenished.

Tankers have to return to efficient routes.

Insurance premiums need to normalise.

Trade flows have to unwind.

Reuters' assessment is that the refining disruption could keep energy markets tight even after the immediate geopolitical crisis eases.

There could therefore be a considerable lag between peace and cheaper delivered fuel.

There is some good news

None of this means businesses should assume fuel costs can only rise.

Oil's latest decline is welcome.

The global petroleum industry has demonstrated extraordinary adaptability.

Alternative crude supplies have been found.

New shipping routes have emerged.

Refiners outside the Gulf have increased exports.

Australia has maintained supply.

Markets eventually respond to high prices by encouraging additional production and reducing consumption.

Those mechanisms are working.

The mistake would be assuming they have already completed the job.

What Australian businesses should do now

The appropriate response is not panic buying or attempting to speculate on tomorrow's oil price.

It is conventional business discipline.

Review actual fuel and freight expenditure.

Check supplier contracts.

Understand fuel surcharges.

Recalculate delivered margins.

Stress-test quotations involving substantial transport costs.

Maintain sensible inventory rather than excessive stock.

Preserve working-capital flexibility.

And budget using a range of fuel-cost assumptions rather than one optimistic number.

That is risk management, not pessimism.

Business Times View

Oil prices fell after Washington's latest sanctions announcement.

That is good news.

But it does not mean Australian business costs are about to fall with them.

The Iran war has evolved from a crude-oil disruption into something considerably more complicated.

Refineries have been disrupted.

Finished fuel has become scarce.

Tankers are travelling longer routes.

Insurance has become more expensive.

Inventories have been consumed.

Asian economies are competing for petrol, diesel and aviation fuel.

Australia is succeeding in that competition because it has the financial capacity to secure cargoes. Reuters' latest analysis indicates Australia has largely maintained refined-fuel supply even as overall Asian imports of key products run around 21 per cent below pre-conflict levels.

That is reassuring.

But Australian businesses should understand what it means.

We have largely avoided a fuel-availability crisis by participating successfully in a high-priced international market.

The service station has fuel.

The truck can make the delivery.

The aircraft can fly.

The excavator can operate.

But somebody still has to pay the higher cost required to make those things possible.

Eventually that cost moves through freight, suppliers, margins and customer prices.

Brent falling is therefore welcome.

Australian businesses should simply resist confusing it with the end of the energy shock.

Watch the price of the fuel your business actually uses—not merely the price of the crude oil from which it began.