Australia's petrol prices could soon fall to around $1 a litre, economists have predicted, as oil prices take a battering.

Key points: The oil price has plunged off the back of a standoff between Saudi Arabia and Russia

The oil price has plunged off the back of a standoff between Saudi Arabia and Russia Saudi Arabia wanted OPEC+ members to cut oil production by 1.5 million barrels per day but Russia rejected the idea, so the Saudi's announced price cuts for Saudi crude oil

Saudi Arabia wanted OPEC+ members to cut oil production by 1.5 million barrels per day but Russia rejected the idea, so the Saudi's announced price cuts for Saudi crude oil Treasurer Josh Frydenberg wants oil retailers to pass on the cuts to consumers so they get cheaper petrol

The impact of coronavirus had already put global oil prices under pressure, but now with Saudi Arabia starting a price war with Russia, oil stocks are getting smashed around the world.

Saudi Arabia and Russia cannot agree on how much oil should be produced, and the argument is having real-world ramifications.

The standoff saw the price of oil plunge more than 30 per cent overnight, and was a major factor in why more than $140 billion in value was wiped from Australia's share market on Monday.

Who controls oil prices?

Since the world's transport systems are still overly reliant on fossil fuels, namely oil, the countries that dominate global oil production have a huge influence on the world's economic activity (and international relations).

The Organisation of the Petroleum Exporting Countries (OPEC) is an international cartel of 14 countries which accounts for 35 per cent of global oil supplies.

Its members include Saudi Arabia (the de facto leader), Iraq, Iran, the United Arab Emirates, Libya and Venezuela, among others.

Since the 1960s, it has tried to control the supply and price of its oil production so its members can receive a steady income and its customers a steady supply.

However, in early 2017, a new super-cartel of oil producers came into existence, informally called "OPEC+", with 10 non-OPEC countries forming an alliance with OPEC, which boosted the group's control of global oil supplies to 55 per cent.

Russia leads the group of non-OPEC countries.

Problematically, the smooth operation of OPEC+ has come to rely on Saudi-Russian diplomacy.

OPEC members include Saudi Arabia, Iraq, Iran, the United Arab Emirates, Libya, Venezuela and others. ( ABC News )

Saudi Arabia starts a price war

In recent months, the COVID-19 outbreak has caused severe disruption to global supply chains, forcing analysts to slash their forecasts of oil demand for 2020.

In the face of the collapse in demand, late last week representatives of OPEC+ nations held a meeting in Vienna, Austria, to agree on ways to "stabilise" the global crude market.

Saudi Arabia wanted OPEC+ members to collectively cut oil production by 1.5 million barrels per day (1.5 per cent of global supply).

Russia rejected the idea.

So over the weekend, Saudi Crown Prince Mohammed bin Salman announced huge price cuts for Saudi crude (to encourage refiners in Asia, Europe and the US to use Saudi oil) and a planned increase in the country's daily production from 9 million barrels to 11 million barrels per day, with the extra production beginning next month.

The move has ignited an oil price war, aimed at Russia.

"Essentially, we're looking at a scorched earth tactic," according to Westpac's global head of financial market strategy, Robert Rennie.

"Presumably, with the objective of forcing Russia to come back to the negotiating table and to agree to price cuts.

"That is a very dangerous game to play at the moment, given the unknowns surrounding the impact of the coronavirus on global demand."

To make matters worse, the current OPEC+ agreement on oil production volumes expires on March 31. If members of the alliance fail to agree on new production limits before then they will all be free to produce without restrictions — so anything can happen.

What's happened to the price of oil?

The price of oil has fallen precipitously.

On Friday evening — after the OPEC+ meeting failed to agree on production cuts — the price of West Texas Intermediate (WTI) crude fell a large 9.4 per cent to trade at lows of around $US41 a barrel. On Monday, it has plummeted a further 31 per cent to hit $US28 a barrel.

The price of Brent has also dropped a whopping 29 per cent, from $US45 a barrel to $US32 a barrel.

Some analysts are predicting the price of oil could fall to $US20 a barrel.

"$20 oil in 2020 is coming," Ali Khedery, formerly Exxon's senior Middle East adviser, tweeted over the weekend.

"Huge geopolitical implications. Timely stimulus for net consumers. Catastrophic for failed/failing petro-kleptocracies Iraq, Iran, etc — may prove existential 1-2 punch when paired with COVID-19."

It has had a huge impact on Australia's stock market.

Over $110 billion in value has been wiped from Australia's share market on Monday, making it the worst day of local trading since November 2008 when the global financial crisis took hold.

Australia's dollar has plummeted to a fresh low, from US66.08 cents to US63.04 cents.

How will it affect petrol prices?

Global oil prices were already under severe pressure, thanks to COVID-19, before the weekend's price war erupted.

At the end of 2019, Brent crude was sitting around $US68 a barrel. It has now declined by more than 50 per cent. WTI crude has fallen by roughly 55 per cent.

Commsec chief economist Craig James said Australia's petrol prices could soon fall to around $1 a litre.

"The ready-reckoner is that every US$1 a barrel fall in the oil price leads to a 1.0 cent fall at the petrol bowser," Mr James wrote in a note to clients.

"Provided the Aussie dollar is reasonably stable, motorists may be able to look forward to filling up for near $1 a litre."

There is not always a guarantee that lower prices will be passed onto motorists.

But Federal Treasurer Josh Frydenberg has already spoken to Rod Sims, the head of the Australian Competition and Consumer Commission (ACCC), about this issue.

"I wanted to re-emphasise to the ACCC the importance of holding the oil retailers to account in ensuring that Australians get the benefit from the lower oil prices," Mr Frydenberg said.

"As you know, the ACCC plays a monitoring role with respect to prices at the bowser, and they have assured me that they will not only maintain their monitoring role and the vigilance that that involves, but they'll also be calling out any energy companies that don't pass on the reduction in the wholesale price to the Australian consumer."