The Minister of Energy Mr. Brownlee has called for cuts in petrol and diesel prices, on Monday Dec. 29 (The NZ Herald) and again Monday Jan. 5 (The Press),
It has been the norm that government officials come out to call for cuts in the prices of petrol and diesel and sometimes they go further to call for an inquiry to investigate petrol pricing in New Zealand. On the face of it, it seems a good policy that government acts as a watchdog to protect NZ customers from over-pricing. My question is that why does the Government, who is entrusted by the nation and have the legal authority to act against such improprieties, should use such a piecemeal approach to solve a problem that has been persistent for many years and have cost tax payers and the nation so dearly? The reason for that is very simple; our government has no system upon which to find out what is a fair price for petrol and regulate the market accordingly. The only system in place is the monitoring done by (MED) which is only indicative and has no compliance effect.
I am against strict regulation of the market or the prices because it is not practical and does not work, but I have called for regulatory guidelines that will at least keep the prices floating within reasonable limits and hence ensure a minimum safeguards against over-pricing. Without such guidelines government officials will continue to make calls of this kind and oil companies will always answer back to defend their position. The truth is that government argument (although correct in principle) is not based on solid evidence supported by facts and figures but based only on market indications and comparisons that can not make a very strong case for action, hence such calls will not give tangible results.
Monday, January 5, 2009
Sunday, October 26, 2008
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 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.
Tuesday, September 16, 2008
Peak Oil or Just Peak Oil Prices?
I append hereunder a comment I sent to Peak Oil Website regarding recent fluctuations in crude oil prices and shall be pleased to receive your feed-back on the subject.
Dear Sir
Regarding the article in the Wall St. Journal published Tuesday 16 September under the heading " Peak Oil or Just Peak Oil Prices",please see the link,
I think it is time to understand that there are no "rights and wrongs" in explaining the reasons behind the seemingly "unreasonable" fluctuations in crude oil prices world wide in the last few months. OPEC are blaming " Speculators" driven by greed, and they are right. Consumers put the blame on OPEC for restricting supply "as a mean of getting higher prices" again, they are right. Environmentalist are certain that we are close to hitting "Peak Oil" and that will be true, sooner or later. Economists are relating all this to the rising demand for crude oil from mainly China and India and that is certainly true. Peace movements are talking about "oil- wars" as the reason behind lack of exploration and production in the Middle East and the Caspian, and that is a factor as well. To sum it up, there is no single reason behind the chaos that we see nowadays in the oil market. Serious attempt by all parties concerned must be made to find a solution to a problem that (if not solved) could entail devastating consequences to humanity as a whole. It is very wrong to leave it to "market forces and supply and demand!" to find the answer. We are talking about an "exhaustible resource" within the boundaries of countries that are "politically unstable", the extensive and unlimited use of which might cause real damage to world environment, yet is extremely essential to the development and prosperity of all nations. The solution must be "part and parcel" of a comprehensive policy of "Pricing and Limiting the use of oil " and move towards the development of sustainable energy resources. It is high time that leaders of the world ( through the UN) realise that this planet can not continue running "indefinitely" to serve the interests of the few, It is high time we address the legitimate concerns of all parties of this equation or else, things may run out of control. Thank you
Mundher Al-Saleem
Dear Sir
Regarding the article in the Wall St. Journal published Tuesday 16 September under the heading " Peak Oil or Just Peak Oil Prices",please see the link,
I think it is time to understand that there are no "rights and wrongs" in explaining the reasons behind the seemingly "unreasonable" fluctuations in crude oil prices world wide in the last few months. OPEC are blaming " Speculators" driven by greed, and they are right. Consumers put the blame on OPEC for restricting supply "as a mean of getting higher prices" again, they are right. Environmentalist are certain that we are close to hitting "Peak Oil" and that will be true, sooner or later. Economists are relating all this to the rising demand for crude oil from mainly China and India and that is certainly true. Peace movements are talking about "oil- wars" as the reason behind lack of exploration and production in the Middle East and the Caspian, and that is a factor as well. To sum it up, there is no single reason behind the chaos that we see nowadays in the oil market. Serious attempt by all parties concerned must be made to find a solution to a problem that (if not solved) could entail devastating consequences to humanity as a whole. It is very wrong to leave it to "market forces and supply and demand!" to find the answer. We are talking about an "exhaustible resource" within the boundaries of countries that are "politically unstable", the extensive and unlimited use of which might cause real damage to world environment, yet is extremely essential to the development and prosperity of all nations. The solution must be "part and parcel" of a comprehensive policy of "Pricing and Limiting the use of oil " and move towards the development of sustainable energy resources. It is high time that leaders of the world ( through the UN) realise that this planet can not continue running "indefinitely" to serve the interests of the few, It is high time we address the legitimate concerns of all parties of this equation or else, things may run out of control. Thank you
Mundher Al-Saleem
Tuesday, August 19, 2008
Guidelines for Better Diesel Fuel Supply Contract
The guidelines bellow are especially useful for Transport fleet companies, Contractors, Fishing fleet, Rail operators and all other large scale (Industrial and Agricultural) consumers of "Diesel Fuel" who contract with Oil Companies for the supply of their fuel:
1-Irrespective of the supplier or the approach used, proper contracting (in writing) yields better results as far as the price and overall cost of fuel purchased.
2-It is always better to invite more than one supplier privately or by tender to submit full written offer on document prepared in advance. An ever-green agreement is easier but may be subject to exploitation by the supplier.
3-Written offers should be studied carefully as there will always be problems due to vague or missing provisions in the agreement. You have to remember that however smart you may be, a contract prepared by the supplier will work to his advantage. He has the expertise to embed sentences and provisions which are carefully worded and formulated to give him that advantage.
4-There will be room to improve on offers submitted in the final stages before contracting especially if you have more than one offer in hand and are aware of the market facts and trends.
5-Put a time frame to complete the contracting process and stick to it as this will be respected by the suppliers.
6-Let suppliers be free to submit more than one option as far as prices or price adjustments is concerned as this will give you a variety of option from which you may choose.
7-Contract duration is very important item in the contract, depending on your situations; you may fix it in the tender document or leave the supplier to determine the duration that suits his economics best.
8-In some cases it may be helpful if suppliers are asked to split the price into two components a- Price FOT depot (or truck-stop) and b- Transport cost to your storage (if you have storage), you will then be able to compare prices at different supply locations and may use your own transport contractor.
9-It is good to be loyal to your supplier, but you got to make sure (through the above procedure), that your supplier is also loyal to you.
1-Irrespective of the supplier or the approach used, proper contracting (in writing) yields better results as far as the price and overall cost of fuel purchased.
2-It is always better to invite more than one supplier privately or by tender to submit full written offer on document prepared in advance. An ever-green agreement is easier but may be subject to exploitation by the supplier.
3-Written offers should be studied carefully as there will always be problems due to vague or missing provisions in the agreement. You have to remember that however smart you may be, a contract prepared by the supplier will work to his advantage. He has the expertise to embed sentences and provisions which are carefully worded and formulated to give him that advantage.
4-There will be room to improve on offers submitted in the final stages before contracting especially if you have more than one offer in hand and are aware of the market facts and trends.
5-Put a time frame to complete the contracting process and stick to it as this will be respected by the suppliers.
6-Let suppliers be free to submit more than one option as far as prices or price adjustments is concerned as this will give you a variety of option from which you may choose.
7-Contract duration is very important item in the contract, depending on your situations; you may fix it in the tender document or leave the supplier to determine the duration that suits his economics best.
8-In some cases it may be helpful if suppliers are asked to split the price into two components a- Price FOT depot (or truck-stop) and b- Transport cost to your storage (if you have storage), you will then be able to compare prices at different supply locations and may use your own transport contractor.
9-It is good to be loyal to your supplier, but you got to make sure (through the above procedure), that your supplier is also loyal to you.
Friday, August 15, 2008
New Zealand Petrol Market
Petrol Price , How Fair and Competitive is it?
I refer to the Ministry of Economic Development (MED)report prepared by Hale & Twomey (July 2008) and would like address the two most important conclusions::
1- The price of petrol (in New Zealand) is fair and competitive!
2- Contrary to consumer perceptions,retail prices go down as quickly as they go up (with international changes in crude oil and product prices).
The question that I like to ask is "what is a fair and competitive price"? In my opinion, a fair price is the price of a commodity that attains its optimum value (in an open market where many sellers exist) compared to other products of similar quality.
There is no denial that the New Zealand oil products’ market is mainly run by the Major Oil Companies (in a production and distribution sharing arrangement) and as such, there is no real price competition in the market. The only competition that exists is that for (retail market share) and that is done (not through price discounting) but rather through good house keeping by each company. As long as retail price on “Service Stations’ Boards” is practically uniform, then competition does not exist. No single party is ready to “lose money” but gain nothing in terms of market share (as all the others will have to follow his price example or else lose their customers)
As long as the cost element of all the major companies is roughly the same, by the fact that they own and share all the existing oil facilities (except service stations), then they have no real incentive to deviate from each other’s pricing policies. This is a fully integrated industry (and there is nothing wrong with that, because it is more efficient and saves money for everybody), the question that needs be answered is does that saving is really reflected on the retail price? To answer this question,we need to investigate the "importer margin" and review (MED)'s price monitoring system.
Obviously the government knew very well that the industry is fully controlled by the majors and have in fact tried to break this in 1998 when Max Bradford was the Minister of Commerce; Gull and Challenge were introduced to the market. As we know, "Challenge" experiment was quickly challenged by Caltex and taken-out of a "newly born" competition system (with the blessing of the Commerce Commission!). Gull had partial success but sooner felt in-line (with the major oil pricing policies) to safeguard the market share (less than 5%) it initially managed to gain (through aggressive price discounting).
The Government price monitoring system has been successful to deter the majors from excessive exploitation of its semi-monopolistic position, but had failed to address the basic issue that prices are being imposed and major oil profits (overall) are in excess of what should be under true competitive environment.
Regarding the issue of price rises and falls, I believe that curves only show the trends (over time) but not the true picture (on daily basis) because you only need to advance the sequence by a short period of say two days and delay it by the same period to gain considerable amount of profit. I also think that (MED)’s one week time lag is not enough (as a correction) especially in a rising market, a product you buy today and sell to retail after say three weeks later will increase in value equals to the price differential within that period. Also allowing for storage etc., a well organized company can make a lot of money as a result of price fluctuations.
What needs be done (in the immediate future) is steps by Government to make the “Independents” really independent by transferring the ownership of service stations' storage facilities to the owner of the service station and truly address the issue of facilitating sea import terminals and storage tanks (for petrol and diesel) for the (independents and others) to import products collectively and directly. I have many other points about the import margin which I hope I will cover in a separate article.
I refer to the Ministry of Economic Development (MED)report prepared by Hale & Twomey (July 2008) and would like address the two most important conclusions::
1- The price of petrol (in New Zealand) is fair and competitive!
2- Contrary to consumer perceptions,retail prices go down as quickly as they go up (with international changes in crude oil and product prices).
The question that I like to ask is "what is a fair and competitive price"? In my opinion, a fair price is the price of a commodity that attains its optimum value (in an open market where many sellers exist) compared to other products of similar quality.
There is no denial that the New Zealand oil products’ market is mainly run by the Major Oil Companies (in a production and distribution sharing arrangement) and as such, there is no real price competition in the market. The only competition that exists is that for (retail market share) and that is done (not through price discounting) but rather through good house keeping by each company. As long as retail price on “Service Stations’ Boards” is practically uniform, then competition does not exist. No single party is ready to “lose money” but gain nothing in terms of market share (as all the others will have to follow his price example or else lose their customers)
As long as the cost element of all the major companies is roughly the same, by the fact that they own and share all the existing oil facilities (except service stations), then they have no real incentive to deviate from each other’s pricing policies. This is a fully integrated industry (and there is nothing wrong with that, because it is more efficient and saves money for everybody), the question that needs be answered is does that saving is really reflected on the retail price? To answer this question,we need to investigate the "importer margin" and review (MED)'s price monitoring system.
Obviously the government knew very well that the industry is fully controlled by the majors and have in fact tried to break this in 1998 when Max Bradford was the Minister of Commerce; Gull and Challenge were introduced to the market. As we know, "Challenge" experiment was quickly challenged by Caltex and taken-out of a "newly born" competition system (with the blessing of the Commerce Commission!). Gull had partial success but sooner felt in-line (with the major oil pricing policies) to safeguard the market share (less than 5%) it initially managed to gain (through aggressive price discounting).
The Government price monitoring system has been successful to deter the majors from excessive exploitation of its semi-monopolistic position, but had failed to address the basic issue that prices are being imposed and major oil profits (overall) are in excess of what should be under true competitive environment.
Regarding the issue of price rises and falls, I believe that curves only show the trends (over time) but not the true picture (on daily basis) because you only need to advance the sequence by a short period of say two days and delay it by the same period to gain considerable amount of profit. I also think that (MED)’s one week time lag is not enough (as a correction) especially in a rising market, a product you buy today and sell to retail after say three weeks later will increase in value equals to the price differential within that period. Also allowing for storage etc., a well organized company can make a lot of money as a result of price fluctuations.
What needs be done (in the immediate future) is steps by Government to make the “Independents” really independent by transferring the ownership of service stations' storage facilities to the owner of the service station and truly address the issue of facilitating sea import terminals and storage tanks (for petrol and diesel) for the (independents and others) to import products collectively and directly. I have many other points about the import margin which I hope I will cover in a separate article.
Tuesday, August 12, 2008
Oil and Gas Reserves off Denedin
The Dominion Post in its 9th August Edition published a news report under the heading "Gas and Oil Riches may lie off Denedin" that the Australian Company Origin Energy plans to drill exploration well off the coast of Denedin and that they are looking for a partner to join them in what they say is a high risk-high reward venture. I am suggesting, and in view of the increasing scarcity of crude oil, its high prices and the possibility of future supply disruptions, that the New Zealand Government takes a far reaching inititive and decide to take part in this venture, the rewards will be enormous and to name few, I say first, it will encourage more companies to explore in the New Zealand shores and secondly ,in case of a find, the revenue will far exceeds the investment and most importantly, is that New Zealand share in the crude may be added to a "National Reserve" to be utalised in case of emergency or disruption of supplies.If small size foreign company is ready to take the risk, then why not the New Zealand Government and (for a good reason too!)?
Thursday, July 31, 2008
NZ Tui Field Depleting Fast?
New Zealand Oil and Gas (NZOG) CEO David Salisbury was quoted as saying that the Tui Field has produced the year end June 2008 ( first year in production) over 15 million barrels (mmbbls) of oil -see link, making a one year revenue of $234.6 Million from its 15% stake in this "Joint Venture" field. Obviously, this is good news at first glance, however, The the Ministry of Economic Development (MED) has published in its Energy Data Book- June 2008 that the remaining recoverable reserve of Tui Field is 35.4 mmbbls. A quick calculation will show that Tui will be depleted in about 2 years time on present production rate (or slightly more if operators decide to reduce present production rate).
It is quite understandable that "Joint Venture" should make the best out of present crude oil prices, however, this will bring to question the NZ Government Policy (Crown Minerals) regarding rate of depletion of oil fields as a factor concerning National Energy Security Policy and the well being and good management of the fields. If there is no such policy then we think it is time that (Crown Minerals) should put some restraints on the rate of depletion of fields proportional to their recoverable reserve and the nature of each field. It is important to safeguard the interest of all parties, but we believe that the nation has the right and a stake in the way its natural resources being utilised.
It is quite understandable that "Joint Venture" should make the best out of present crude oil prices, however, this will bring to question the NZ Government Policy (Crown Minerals) regarding rate of depletion of oil fields as a factor concerning National Energy Security Policy and the well being and good management of the fields. If there is no such policy then we think it is time that (Crown Minerals) should put some restraints on the rate of depletion of fields proportional to their recoverable reserve and the nature of each field. It is important to safeguard the interest of all parties, but we believe that the nation has the right and a stake in the way its natural resources being utilised.
Subscribe to:
Posts (Atom)
