The Fuel Excise is Back: Industry Winners and Losers

Pressure at the fuel pump is set to heat up as the former Federal Government’s temporary halving of the fuel excise has ended. The Russia-Ukraine conflict has caused global shortfalls in the crude oil supply. The conflict, along with pent-up demand from consumers following COVID-19 pandemic-related restrictions, drove unprecedented fuel price rises early in 2022.

With a federal election looming, the Morrison government adjusted the fuel excise twice in the third quarter of 2021-22: the excise rate increased to 44.2 cents per litre on 1 February 2022, and was later halved to 22.1 cents per litre on 30 March 2022 for a period of six months. This reduced rate aimed to ease the effects of inflation. On 29 September 2022, the full excise rate was restored, now amounting to 46.0 cents per litre.

Rising fuel prices will both positively and adversely affect sectors of the economy. The restoration of the full fuel excise will drive the cost of living higher and cause a ripple effect, with many industries likely to endure falling demand and turnover as a result.

Some consumers will be enticed to drive less, opting against buying a new fuel-guzzling SUV, which will rule out prospective revenue for petrol and motor vehicle maintenance and parts. Vehicle dealers, fuel retailers and motor vehicle parts retailers are therefore all expected to be worse off from the reinstated excise. Moreover, consumers that cannot reduce their fuel consumption, for reasons like work commitments, will grapple with high petrol prices by cutting back expenditure in other sectors, such as retail and hospitality.

Additionally, industries where fuel makes up a significant portion of their cost structure will either resort to cost-cutting methods (such as reducing staff numbers) at the expense of activity and output, or pass additional costs on to consumers at the expense of demand, both in an effort to remain viable. Even so, several industries are expected to benefit, such as road and bridge construction and motorcycle dealers.

Fuel retailers

Wholesalers pass the fuel excise markup on to retailers in full, through increased prices. As fuel retailers use up the stocks in which the lower excise has already been paid, and the effects of higher wholesale prices begin taking effect, petrol and diesel are expected to leap at the bowser over the second quarter of 2022-23. According to the Australia Institute of Petroleum, average weekly retail (pump) prices for petrol were up 5.3% for the week ending 2 October 2022 compared to the previous week when the excise was not fully in effect. Fuel retailers generate fairly low profit margins, and higher wholesale fuel prices place further downward pressure on these margins. Furthermore, the lag between changes in wholesale prices and changes in retail prices will increase challenges for retailers.

Fuel retailers will not bear the full brunt of these cost rises. Consumers' wallets are the next to be drained. These higher prices for consumers are expected to accelerate shifts in travel activity towards public and active transport (i.e., walking and cycling) at the expense of demand for fuel retailers. Nevertheless, fuel retailers face fierce price-based competition, limiting their ability to pass on substantial cost increases to consumers.

Fuel prices are also relatively inelastic, meaning demand is somewhat unaffected in the short term. For example, petrol sale volumes rose by 8.2% in March, despite sky-high average weekly petrol prices, which hit a record high of 212.5 cents the week ending 20 March. These high sales are also partly due to demand conditions recovering from the COVID-19 pandemic. However, petrol sale volumes then fell by 5.6% over April, representing consumers’ lagging response to price changes. Price hikes will likely encourage consumers towards fuel-efficient cars, posing a potential threat to long-term demand for fuel retailers.

Declines in global oil prices have helped limit further growth in petrol prices. The average weekly price of international benchmark Brent Crude slipped to 83.9 cents (AUD) per litre the week ending 30 September, from 84.8 cents per litre the previous week, and 85.1 cents the week before that. Global oil prices are projected to continue declining, with domestic fuel prices to follow suit in the short term, offering fuel retailers some reprieve from weaker demand conditions.

Petroleum product wholesalers

The excise duty is imposed on petroleum products. The restoration of the full excise is charged on wholesale fuel, which is then passed through at the browser. The average weekly wholesale price for petrol was up 4.7% for the week ending 2 October 2022 compared to the previous week. This growth causes retail fuel prices to rise at the expense of demand. Weaker demand from downstream fuel retailers will, in turn, have flow-on effects for petroleum product wholesalers. However, the reintroduction of the full excise takes time to flow through to retailer prices. Wholesalers will therefore not likely feel this trend until later in the current quarter. The speed at which fuel is sold and restocked at petrol stations with the higher wholesale prices will determine the pace at which demand declines.

The largest market for wholesale petroleum products is end users, such as mining, agriculture, industrial and transport companies. The main product sold in these markets is diesel fuel for heavy vehicles and machinery. Average diesel retail prices grew by 39.2% over 2021-22, compared to the 33.8% growth in petrol retail prices. Wholesale price trends are comparable, indicating that diesel consumers are facing greater cost pressures than petrol consumers. Consequently, farmers and miners have increasingly begun replacing diesel with biodiesel and renewable diesel to reduce costs. The reinstatement of the fuel excise is expected to increase the speed at which farmers and miners adopt renewable fuels, posing a threat to wholesalers.

The Federal Government provides a rebate, a fuel tax credit (FTC), on the fuel excise to industries like mining and agriculture, as their vehicles are used off public roads. As the fuel excise was halved from March 2022, so too were FTCs, to a comparable rate of 22.1 cents. The restoration of the full fuel excise and the full FTC will therefore counteract one another, and likely halt demand for wholesalers from the mining and agriculture sectors.

Petroleum refining and petroleum fuel manufacturers

Petroleum refining and petroleum fuel manufacturers will also feel the pressures of the fuel excise rise, stemming from changes in consumer demand at the retail level, which flow up through supply chains. Refineries supply their own wholesale operations, and other wholesalers.

Consequently, the reinstated fuel excise will burden petroleum refineries, paid at the wholesale level of the supply chain. Petroleum and diesel retailers and other wholesalers account for more than two-thirds of revenue for manufacturers. Adverse trends in these downstream markets are therefore detrimental to the viability of manufacturers. Fuel manufacturers will likely lose earnings due to the projected declines in demand at both the retail and the wholesale level.

Taxi and limousine providers

Petrol prices have a significant influence on taxi and limousine transport operators’ cost structures. Taxi fares and charges are generally set state and territory wide, which largely determines industry margins. As the fuel excise cut has ended, drivers are calling on regulators to review maximum fares to help them offset rising overhead costs. States are hearing the pleas and have begun to act. In Victoria, the Essential Services Commission (ESC) announced an 11.2% increase in the maximum fare for unbooked taxis in the Melbourne metropolitan or urban and large regional zones. This new rate took effect on 15 September.

The effects of the higher excise are subsequently worn by travellers, who are likely to choose ridesharing operators instead of traditional cabs. Cost compensation through higher fares will therefore come at the expense of demand. Drivers that try to absorb the extra fuel impost will shrink their margins. These factors could pave the way to greater penetration of electric vehicles (EV) in Australian taxi fleets.

Motor vehicle dealers

Consumers rationally consider their fuel consumption when making vehicle purchase decisions, wary of higher prices at the pump. Rising fuel costs will likely encourage consumers to purchase smaller, more fuel-efficient motor vehicles instead of larger models, or forgo motor vehicles altogether. Smaller motor vehicles are cheaper, generating less per-unit revenue for motor vehicle dealers.

According to the VFACTS report from the Federal Chamber of Automotive Industries (FCAI), new car sales were 5.2% lower for the six-months through June 2022 compared to the same period in 2021. While disruptions in supply chains and microchip shortages are also to blame, consumers are feeling the pinch of record-high fuel prices, which have pushed the cost of living higher and deterred some vehicle sale momentum.

EVs, hybrids and plug-in hybrids are quickly becoming the Cinderella story for motor vehicle dealers. EV sales were up 1,455.2% in September 2022 compared to the same month in 2021. Similarly, hybrids sales were 74.4% higher in September 2022 than September 2021. Rising petrol prices have partly contributed to this electric vehicle boom, although the limited range of EV models in Australia and lack of infrastructure to support EV charging have restricted further growth. These vehicles carry a higher ticket price, boosting margins and turnover for dealers.

EV sales are expected to continue growing following the restored fuel excise, offering car dealers some reprieve from reduced sales for other vehicles. Notably, in September 2022, Chinese-owned car maker LDV announced its shipment of electric Utes to Australia, with some domestic companies already locking in batch deals. For example, electricity transmission network operator Transgrid has pre-ordered a batch of the LDV eT60 electric Ute for December 2022. Instances like this are expected to ramp up among commercial fleets and the trade industries, due to EVs’ lower running cost advantages.

Motor vehicle parts retailers

Motor vehicle parts retailers face a similar fate to motor vehicle dealerships following the fuel impost. Fewer cars being sold means fewer cars on public roads, and subsequently a lower pool of customers for retailers. Car owners will likely drive less due to living cost pressures. Less driving also means less wear and tear on vehicles, making car parts a lower priority to many consumers.

FCAI reported a 5.2% drop in vehicle registrations over the first half of 2022, compared to the same period in 2021. This decline has driven down demand for replacement parts, negatively affecting retailers. These trends will deepen as fuel prices again spike. Additionally, consumers will likely alter the way they manage other expenditures, such as delaying car maintenance or looking to online and DIY options.

Road freight transport providers

While many industries are grappling with falling demand, road freight transport providers are welcoming the return of the full fuel excise. Before the fuel excise cut, eligible truck operators could claim a fuel tax credit of 17.8 cents per litre of fuel. At the time, the fuel excise was 44.2 cents per litre, with its difference from the FTC (26.4 cents per litre) representing the government’s road-user charge (RUC). The halving of the fuel excise meant that the RUC sat above the FTC, and claims were subsequently paused between 30 March and 28 September 2022.

While these measures provided a net benefit of 4.3 cents per litre for truck drivers, they were not welcomed with open arms. This saving was modest compared to the 22.1 cents savings enjoyed by the greater population, stripping trucking operators of their monthly rebate cheques, which has hurt their annual cashflows. Moreover, truck drivers have little bargaining power.

Many operators were expected to pass cost savings down the supply chain, especially as major customers contended for lower freight rates. As a result, truck drivers' profit margins are anticipated to have shrunk over the past six months. Meanwhile, non-road users like farmers and miners saw their credits drop to 23.0 cents, unburdened by the excise cut.

On 29 September, FTCs returned alongside the full fuel excise and now amount to 18.8 cents. Despite significantly higher costs at the bowser, truck drivers will have a greater ability to negotiate a commensurate rise in their freight rates. This will allow truck drivers to offset the rise in fuel excise, improving their profitability.

Road and bridge contractors

Over the past six months, road and bridge contractors suffered from the excise cut, and are now set to benefit from its reinstatement. The upfront cost of the fuel excise cut was around $5.6 billion. However, the pause in diesel excise rebates for miners, fishers and farmers reduced this cost by $2.7 billion.

The fuel excise is essentially a road-user fee, which is used to fund transport infrastructure. The approximate $2.9 billion loss therefore represents revenue that would have otherwise been principally funnelled into transport infrastructure. Road and bridge contractors were the ones paying the toll, as reduced capital contributions limited their ability to operate or undergo major developments. The reinstated fuel excise will therefore return higher coffers for infrastructure projects, in turn driving up activity for road and bridge contractors.

Solar, wind and other electricity generators

Skyrocketing fuel prices will likely accelerate consumers' shift toward EVs. Unlike traditional vehicles, which are fuel-powered, EVs are powered by alternative sources of fuel, including renewable energies like solar. EVs either need to be charged at home or at a charging station. Soaring electricity prices, combined with pent-up demand for EVs, will encourage more households to install renewable energy systems to ease the financial pressures of charging their EVs. Consumers will likely turn to renewables as they are the cheapest form of energy in Australia.

A greater number of EVs on domestic roads will also require EV charging stations. As federal and state governments are the largest benefactors of this infrastructure, their commitment to meet the Renewable Energy Target (RET) will likely lead to more renewable charging technology. Collectively, these trends will boost demand and turnover for renewable energy generators.

Some states have already committed to expanding their EV charging networks. For example, in August 2022, the ACT government announced plans to deliver more than 70 public charging stations over the year. With many consumers poised to purchase EVs following the increased fuel excise, more states may follow suit. Furthermore, the recent release of the October 2022-23 Budget shows that the Federal Government is aiming to increase EV charging infrastructure and reduce the EV prices to encourage their uptake. With many consumers poised to purchase EVs following the increased fuel excise, more states may follow suit.

Urban bus and tramway providers

Higher prices at the pump have two diverging effects for public transport operators. On one hand, people struggling with the cost-of-living pressures will begin travelling by public transport, driving up profitability for operators. On the other, rising retail diesel prices will cause input costs to soar, emptying the profit tank for bus and tram operators as they cannot pass on these cost increases to passengers.

However, the public transport industry relies on state and territory government subsidies to operate and investment to expand. A projected upsurge in public transport patronage, alongside rebounding petrol prices, will entice state and federal governments to increase funds for transport, to the benefit of bus and tramway operators.

The Victorian Coalition have announced a plan to cap public transport costs at $2.00 a day should they win the upcoming state election. This cap would lead to a fare revenue loss, although offset by higher government subsidies. Nevertheless, it would raise patronage, especially from price-conscious consumers, boosting operational schedules and keeping public transport commercial.

Motorcycle dealers

Skyrocketing petrol prices will encourage many consumers to forgo motor vehicle purchases, or switch to fuel-efficient vehicles, such as motorcycles or motor scooters. Motorcycles are typically cheaper to purchase and operate than other motor vehicles, such as cars and SUVs, therefore appealing to price-conscious consumers. According to FCAI, sales for road motorcycles increased by a modest 0.5% between January and September 2022, while motor scooter sales rose by 18.7% over the same period. This disparity shows Australian motorists growing keenness towards two-wheel transport, a trend that will likely accelerate following the reinstated fuel excise.