Petrol and Diesel Prices : From Monitoring to Regulatory Guidelines

We often learn, through local media, that we are paying too much for petrol and diesel at the pump. No one can tell how real these claims are and definitely no one knows how much we are paying higher than what a fair price should be.

The Ministry of Economic Development (MED) is monitoring petrol and diesel prices at its website for years through a system called the “Importer Margin” and they are presenting graphs and figures of this system for the public to see. The Importer Margin System is defined as the difference between retail petrol price (minus GST and government taxes) and landed prices of Singapore Spot Prices (for petrol or diesel of similar quality to NZ specs) including freight and insurance. All prices/costs are converted to NZ dollar.

In general terms, the importer margin equals to:
Retail margin + wholesale margin + other expenses (inside NZ) such as transport and storage.

If you consider that retail margin and expenses are roughly constant, then the daily fluctuations in the Importer margin as we see it in MED’s curves translates to how much oil companies wholesale profits are moving up or down!



The problem with the current importer margin system is the following:
1- It is not possible to calculate the wholesale margin that the oil companies are collecting because of the multiple and inter-related factors embedded in the system.
2- There are many "flaws" in the basic assumptions upon which the system is constructed, most are to the companies’ advantage.

In order to achieve a more fair and transparent pricing system, the MED should consider developing its current system from being “monitoring” to being based on “regulatory guidelines” that the companies should comply with. This can be done and I believe that the Australians (through the appointment of “Oil Commissioner”) are slowly moving in that direction.

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.