Have you ever thought that you were being taken for a ride on petrol prices? Well, you have!
So how are you being ripped off? It’s simple really – once, of course, you know the games that can be played by the big oil companies and Coles and Woolworths.
Let’s begin at the retail level.
Here the rip off can occur in two basic ways. First, there is the practice of geographic price discrimination. This is where, for example, the same oil company charges one price for unleaded petrol at location A and a higher price for the same petrol at location B.
Why the higher price at some locations and lower prices at other locations?
Quite simply because the oil company can get away with the higher prices at those locations where there is little or no competition. At these higher priced locations there is simply no incentive for the oil company to lower its prices. Motorists simply pay a higher price than they would have if there had been independents in the local market.
Clearly, geographic price discrimination serves two purposes. To begin with, it allows the oil companies and Coles and Woolworths to gouge motorists in those locations where there is no competition from independents.
This gouging is nothing more than profiteering as the failure of competition in the local market means that consumers are being forced to pay much more than they would have if the local market had been vigorously competitive.
The profiteering gets larger as local competition fails in more and more areas.
Conveniently for the oil companies and Coles and Woolworths the geographic price discrimination can facilitate the destruction of local competition as the practice allows independents to be ambushed.
This can occur as the lower prices charged by the oil companies and Coles and Woolworths where there are independents can be subsidised by the higher prices in those areas where the big players don’t face any competition from independents.
In this way geographic price discrimination can be used in a predatory manner to target independents through at times below cost pricing with the clear aim of driving those independents out of business. The big players can sustain this below cost pricing against the independents through their higher prices in those areas where independents have been driven out of the local market.
Sadly for motorists the below cost pricing only lasts as long as the independents do, because once the independents are forced out of the local market prices will go up.
Why are independents so critical? For the simple reason that independents have to be aggressive on price to survive. For them the volume of petrol they sell is essential to their survival and maintaining or growing their volumes means that they have to always be sharp in their pricing. This explains the cheaper prices at independents.
Big players on the other hand can act as a cosy club. Why cut prices when they only cut their profit margin? If it’s only the oil companies and Coles and Woolworths in the market there is no incentive from them to sustain or even have a price war.
Of course, there may be the odd angry shot fired between the big players, but it’s far easier for them to behave in a “gentlemanly” manner by shadowing one another as that enables them to keep inflating prices and, hence profit margins, at the expense of motorists.
Nothing wrong with inflating profit margins you might say, but just remember that while “profit” is not a dirty word, “profiteering” is!
At some point, the failure of competition means that prices are not being kept in check by the market and this market failure allows those remaining big players to fleece consumers. Put simply, we don’t want profiteering as that demonstrates that the market is failing or has failed to the detriment of consumers.
In petrol, profiteering doesn’t just arise from geographic price discrimination. It can also arise when falls in the international price of petrol are not passed onto motorists locally as quickly as they should.
Since Australian wholesale and retail petrol prices are calculated by reference to an international price benchmark based in Singapore, our petrol prices will fluctuate according to changes in that benchmark.
The only problem is that while rises in the international benchmark are passed on to motorists very quickly, any falls take much longer to flow through.
Again, put simply motorists are being ripped off by the inevitable time delay in the big players fully passing on falls in the international benchmark price for petrol.
This has happened recently. With the international benchmark out of Singapore having fallen by upwards of $10 a barrel during the past 3 weeks, average retail prices have fallen ever so slowly during that time.
Why the delay in reducing local petrol prices? Well, the oil companies’ stranglehold over the wholesale level, as well as the power that they and Coles and Woolworths have in the retail market means that there is no real incentive for them to quickly pass onto motorists any falls in the international benchmark price for petrol.
After all, the oil companies and Coles and Woolworths have 93% of the retail market between them and the longer the delay in passing on the falls, the more that flows into their coffers at the expense of motorists.
Where are the ACCC and the Federal Government on all this? Well, they like to watch.
All we get from them is excuses and then more watching. Sounds like fiddling while competition burns. Meanwhile, consumers are paying the price and family budgets being stretched to breaking point by inflated petrol prices.
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