The Role of the Independent Petrol Retailers in NZ

Preview
A study I submitted and published by the Ministry of Economic Development (MED) in (2002). To put it in perspective, the average price of crude oil at the time of this study was around US$23.

The Report
NZIER report published in March 2002, titled "The Decline of Independent Petrol Retailing: Rationalisation or Predation?" tackled the problem from the viewpoint that the Major Oil Companies in NZ are operating as competitors! The fact that the Majors hold majority share in the refinery, wiri terminal, the pipeline and coastal shipping makes them more of sisters competing for market share in a friendly environment.

The Oil Companies take the bulk of their profit from the wholesale price, which they freely set. They also decide the retail margin for their owned operated service stations which “in effect” has to be followed by the “independents” since the retail margins allowed were meant to be low enough to leave little room for meaningful (pump price) competition by the retailers. The terms of reference of the review did not touch base on the issue of wholesale, retail margins and pricing hence avoided a pivotal point, upon which MTA based its proposals, I have constructed a model to calculate wholesale cost of oil products in NZ and after six months run, I came to the conclusion that major oil companies are charging at least (5) NZ CENT/LITRE more than what a fair price should be compared to what say the Australian Oil Companies are charging for their wholesale petrol sales. Wholesale price may have been reduced in recent years (as evident from the importer margin curve shown in the report) nevertheless this further show how much more NZ motorists are paying for the liter of petrol they purchase.

The retail margin allowed in NZ at around (5) CENT/LITRE is similar to that in Australia(regardless of the sales volume and service provided). This means that the minimum retail price policy executed by the majors is not for the benefit of the motorist but as a mean of squeezing the independent operators out of the market and prevent them from “price based” competition for market share. I do not want to go into details about service station “rationalization process” which is taking place at the present but will directly come to agree with the conclusion that “in the end” it will mean the demise of most “independent service stations’ and hence bring a closure to a trend that has started since deregulation in 1988.

I believe that Independent Service Stations still have a role to play and the government has a duty to protect them from an “eventual demise” major oil company’s policies are leading them towards. The very existence of these stations gives a window of opportunity to many “new comers” to inter the market and break the near 100% monopoly existing at the present. Without the independents, Gasoline Alley Services (G.A.S) wouldn’t have existed, even Gull and Challenge have gained strength by incorporating some existing independent service stations, and has it not been for the ownership of the tanks by the majors, many more service stations would have joined Gull and Challenge.

Proposals
Given the present state of the oil industry in NZ, it is difficult to legislate to protect the interest of the independent operators in the manner proposed by MTA, however, I believe a simple first step could be a legislation to make it compulsory for owners of a “service station” to own the associated tanks and equipment and hence “free the tanks from the hands of the majors”. Such a regulation will be very helpful for future developments and will remove a burden (and in my opinion a barrier) to free trade in the oil product market. Tank ownership will also strengthen the negotiating position of the independents and remove a barrier to entry for wholesale imports. The regulation could also be extended to apply for diesel in the industrial and transport sectors. Ownership transfer may go either way by mutual agreement between the two parties (oil company and independent) within a time frame to be stipulated in the regulation.