Why petrol is so freakin’ expensive during the holidays
Were you watching petrol prices in the lead up to Christmas 2010? If you were, then you would have noticed that the average retail price of unleaded petrol was going up around Australia.
So what was behind the price hike in the lead up to Christmas? Well, there were a number of possible reasons, all of which meant that motorists were generally paying more than they needed to for petrol during the festive season. Some of these reasons, as we will see, also meant that motorists were paying inflated prices in some places.
Let’s start at the retail end and work our way back to international petrol and oil prices.
Data compiled by the Australia’s competition watchdog the ACCC, shows that average retail margins on petrol increased in 2010.
Significantly, the ACCC data shows that the average retail margins went up in Sydney, Melbourne, Adelaide and Perth during 2010. In Brisbane, the average retail margin dropped slightly, but that would be of little comfort to Brisbane motorists given that of all the major capital cites the average retail margin was the highest in Brisbane during 2010.
This increase in average retail profit margins is hardly surprising given the retail petrol market is becoming more concentrated with the major retailers, such as Coles and Woolworths, strengthening their market share and power at the expense of the independents.
As those independents exit the local market prices in those areas go up. We have all seen geographic price discrimination throughout the suburbs where petrol prices at an oil company or a Coles or Woolworths petrol site are higher in those suburbs lacking a strong price-competitive independent.
It’s worse in rural and regional areas where petrol prices at comparable regional centres can vary up to 16 cents a litre on unleaded petrol. Have a look for yourself on the motormouth.com.au website on any day of the week and you will see the dramatic regional price discrepancies for yourself.
Last Wednesday, for example, the highest average retail price for unleaded petrol published on the motormouth website in regional NSW was in Mudgee at 139.3 and the lowest was in Goulburn at 123.3. Here we are told that the difference in prices reflects the local competition.
Yes, the local retail competition is important and the absence of a strong price-competitive independent means that the regional price in the particular area will be higher, but equally important is the wholesale price the oil companies charge retailers in the particular regional centre. Quite simply, the more inflated the wholesale price the more inflated the retail price.
At this point, the defenders and apologists for the oil companies and major retailers will say “what’s the problem we have the fourth cheapest retail price in the developed world?” Well, that’s only true in relation to the retail price including government taxes. Strip out those taxes and compare the underlying price of unleaded petrol throughout the OECD and you will find that Australia jumps up the ladder.
So clearly motorists don’t have it as good as the defenders and apologists for the oil companies and major retailers would have us believe. The clear message for those concerned for the motorist is that we need more local and wholesale competition in the petrol market to keep retail prices as low as possible across Australia.
Seeking to push up retail prices and profit margins are just part of the games played by the oil companies and the major retailers. These games are played right through the production and distribution chain.
Take for example the international benchmark prices used as the basis for local prices in Australia. This is where the games begin. Local Australian prices are calculated by reference to the Singapore benchmark price for refined petrol which is, in turn, based on the Malaysian Tapis crude oil price benchmark.
Interestingly, a review of the United States Energy Information Administration’s data for world crude oil prices shows that the Malaysian Tapis crude oil price is generally the most expensive international crude oil price benchmark. Why? Because Tapis crude oil is referred to as “light, sweet” crude which means that is has fewer impurities such as sulphur making it easier to handle and refine.
So our local petrol prices happen to be based on the generally most expensive crude oil price benchmark in the world. Then add what’s called a “refiner margin,” the margin the refiners in Singapore make on the sale of their refined petrol and you end up with the Singapore benchmark for refined unleaded petrol.
This Singapore benchmark price for refined petrol is the price to keep a close eye on as this is used to calculate local prices.
Now on 23 November 2010 the Singapore benchmark price started to climb and then from around 2 December onwards remained stable until Christmas when the benchmark price started to fall with the stronger Aussie dollar. What’s significance of this chain of events? Well, surprise, surprise Australian average retail prices immediately started to rise around 23 November.
In contrast, when the Singapore benchmark price fell in May and September 2010 local prices surprise, surprise didn’t go down as fast and in some places in regional Australia didn’t come down at all.
What’s really interesting at the moment is that the Aussie dollar could keep rising or international prices could soften. Either way the Singapore benchmark price would fall in Australian dollar terms. How quickly would we see local petrol prices fall if either scenario occurred? Well, a savvy punter would say not as quickly as we have seen local prices rise in the lead up to Christmas 2010!
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