By Vish Viswanathan.
If you have been wondering why the prices of the petrol at are much higher at around $1.50 on 19/20 June this year, you’re not alone. Even petrol pundits watching the prices of crude oil in the international market have been speculating on the same issue. Price hikes and the pricing of petrol even when crude oil prices were plummeting appear to defy common logic, and remain a mystery to Australian consumers of petrol.
For example, when petrol prices in big cities like Sydney plummeted to below $1 in January 2015, many people were happy; but in the third week of June 2015, the prices have jumped to $1.50, a 50% increase in less than six months, even though there has not been a corresponding crude oil price increase.
A recurring problem
According to many media reports, there have been severe disparities in petrol prices in metropolitan cities as compared to rural Australia, such as northern NSW, Queensland or Tasmania. Even in the Northern Territory (NT), rising retail fuel prices have been of concern to the Government and consumers for a number of years. Whilst fuel has always been more expensive here than in other parts of the country, there was a noticeable shift in the fuel market from 2012 which saw significant increases in the price differential between the Territory and the national average. The change also coincided with a dramatic increase in the retail margin, that is, the difference between the wholesale and retail price. The NT fuel market became upwardly sticky; it did not respond to downward movements in wholesale prices, with retail prices remaining high despite worldwide reductions in the price of crude oil. This has resulted in the state’s Government initiating an enquiry titled, “Inquiry into the Draft Fuel Price Disclosure Bill in April 2015”.
Petrol pundits propound
Public concerns have been raised from time to time by experts, such as highly acknowledged Australian economist and AMP chief economist Shane Oliver, who has been analysing prices of crude oil and pump prices since 2000. According to his analysis in March 2015, “Petrol prices were 20c a litre higher than they should be, given the fall in crude oil prices. This was based on the normal relationship between the level of the Asian Tapis oil price in Australian dollars and average Australian petrol prices .The inflated pump price has added about $14 to the cost of filling a typical family sedan,” he said. “You can’t justify current pump prices given the price of Tapis oil and the value of the Australian dollar,’’ added Oliver.
The real story?
However, according to Business Insider, the most interesting point in the CommSec analysis by economic Savanth Sebastian is that the the key driver in pump prices is actually the discounting cycle. There are two aspects worth noting: the cycle runs over a much longer time frame than you think (it’s not weekly); and each city runs on a different one. Another important factor as per the Australian Institute of Petroleum, is that Australia’s regional market for petroleum products is the Asia-Pacific market. The Singapore price of unleaded petrol (MOPS95 Petrol) is the key petrol pricing benchmark for Australia. Australian wholesale prices for petrol and diesel (including spot Terminal Gate Prices or TGPs) are closely linked to the Singapore prices of petrol and diesel, and not to crude oil prices.
The Singapore price of petrol plus shipping costs and Australian taxes represents almost the entire wholesale price of petrol - typically around 95%. The remaining 5% of TGPs is accounted for by insurance, a quality premium for Australian fuel standards, local wharfage and terminal costs, and a wholesale marketing margin (where competitively possible).
Investigation and intelligence
The Australian Competition and Consumer Commission (ACCC) is independently monitoring the pricing of petrol by the various players. In response to complaints at the end of last year, the Minister for Small Business bestowed powers on the ACCC to investigate fuel markets by ‘deep diving’ into regional areas to find irregularities or dysfunction affecting consumers at the bowser. In this announcement, the minister outlined the issue of regional petrol prices stating, “The new direction provides for the ACCC to produce more timely reports than its current annual fuel market review publication that contains detailed information on the petroleum industry and to target specific aspects of concern for closer examination. Monitoring reports will now be produced quarterly to be more informative, responsive and able to identify areas of market concern or heightened interest for the community.”
But the average Australian making a trip to the petrol pump every week, is still left wondering about this anomaly, of how despite international crude oil prices being down, the price of petrol is still going up. We need simple answers, not complicated pricing formula or the pricing cycle justifications. Anyone care to explain?