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.
Tuesday, August 19, 2008
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!)?
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