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ENERGY

Govt to Improve Monitoring of Petrol Pricing

Thursday 7 August 2008, 5:23PM
By Lianne Dalziel
266 views


Commerce Minister Lianne Dalziel today released an independent study of petrol pricing in New Zealand.

The study built on work carried out as part of an Australian Competition and Consumer Commission (ACCC) report on the price of unleaded petrol, and considered implications for the New Zealand market.

"New Zealand is not alone in its experience of rapidly increasing petrol prices, but it was right to check the market in New Zealand has been operating effectively. In New Zealand there has been confusing volatility in the price of petrol, so the government is going to increase monitoring in order to further improve the transparency of pricing."

Lianne Dalziel said the report showed that public perceptions that petrol prices had been fast to rise but slow to fall were just perceptions, no doubt affected by media reporting of increases.

"In fact the rise and fall in petrol prices mirror changes in offshore drivers, such as the price of crude, the value of the US dollar, as well as simple supply and demand which all impact on the price at the pump here.

"I certainly think that in recent times, probably thanks to pressure from the public and interest groups such as the AA, oil companies have got better at explaining price rises to the public."

The key findings of the review*, which focuses on petrol only and not diesel, are:

• The New Zealand petrol market is fundamentally competitive.
• Retail petrol prices are not fast to rise and slow to fall.
• Recent price rises are mainly due to increases in crude oil prices overseas.
• A Fuelwatch scheme like Australia’s wouldn’t benefit consumers, because our market works differently.
• More transparency about the makeup of importer margins and a move to report daily margin movements would be useful for consumers.

The review confirms the reality that petrol prices are set according to the international marketplace – 85 per cent of the price increase between January 2007 and June 2008 were due to offshore increases in crude oil prices. New Zealand has the fifth lowest petrol prices including taxes in the OECD and, unlike Australia, is ploughing all the fuel excise directly back into transport.
The report also shows that there is scope for more transparency about the makeup of importer margins - the difference between the retail price (less taxes and duties) and the landed cost of the refined product.

"This is an area where we can offer better information for consumers. We are currently working with officials towards this," Lianne Dalziel said.

The government has been working to ease the pressure of petrol prices on family budgets on several fronts, such as diversifying our sources of transport fuels and vehicle technologies, improving vehicle efficiency, changing driver behaviour and improving public transport.

• The Hale & Twomey report, commissioned by the Ministry of Economic Development (MED) is available on the MED website: www.med.govt.nz/nzpetrolreview

Weekly petrol price data are linked from www.med.govt.nz.

 

Contact: Elspeth (Ellie) McIntyre, Press Secretary, ph 04 471 9397 cell 021 227 9397
All Lianne Dalziel's media statements and speeches are at www.beehive.govt.nz/lianne+dalziel

 

Petrol Facts

Price trend (petrol only)

Petrol prices have increased steadily since January 2007, reaching a peak of $2.18 per litre in July 2008 (a 60% increase). Since February 2008 when the price was $1.68 per litre, prices have increased by 50 cents per litre (30%) in just over five months.

Makeup of petrol price

As at June 2008 when the petrol price stood at $2.01 per litre, the price was made up as follows:

• $1.038 cost of crude oil
• $ 0.11 petrol refining margin (the difference between the ex-refinery petrol price and crude price)
• $ 0.133 importer margin (the difference between the retail price - less taxes and duties - and the landed cost of the refined product)
• $ 0.729 GST and other taxes.

International comparison

New Zealand has the fifth lowest petrol prices and taxation levels in the OECD behind Mexico, the United States, Canada and Australia.

Tax

As at 1 July 2008, the following taxes and duties were placed on petrol:

• 42.524 cents per litre (cpl) excise tax used for the National Land Transport Management Fund
• 9.34 cpl ACC levy
• 0.025 cpl Petroleum Fuels Monitoring levy
• 0.66 cpl Local Authorities Petroleum tax
• 12.5% GST.

Importer margins

Importer margins have fluctuated, but not greatly over the period covered in the graph, January 2007 to May 2008. The exception was in May/June 2007, when Gull Petroleum led a discounting campaign resulting in importer margins being far lower than normal.

Source: MED

 

More information

http://www.med.govt.nz/templates/StandardSummary 353.aspx
Questions and Answers

Why does the report say the New Zealand petrol market is “fundamentally competitive”?
Oil companies compete on price, there is substantial innovation around loyalty schemes and supermarket discounts, and importer margins are substantially lower today than before the entry of independent operator Gull in 1998 and before deregulation of the industry in 1988.

Can monitoring in NZ be improved?
Yes, monitoring and transparency can be improved. However, the market will decide whether this translates into lower prices. The report recommends that MED’s website should be expanded to show more detail on daily margin movements. Once implemented, this increased transparency should mean that prices are subject to sustained downward pressure. Downward pressure does not necessarily lead to lower prices.

How is the Australian market similar to/different from ours?
The Australian and New Zealand markets are relatively mature with low margins, and the same refiner-marketers operate in them. There are important differences, however - most notably the absence in New Zealand of weekly price cycles and “buy-sell” contracts. Buy-sell contracts are arm’s-length transactions whereby companies either buy product from a competitor in a location where it lacks its own refining capacity or sell product to a competitor in a location where it does have its own refining capacity but its competitor does not.

In the absence of these weekly price cycles, there appears little benefit in introducing a Fuelwatch scheme to New Zealand - the administrative costs of establishing such a scheme are likely to far outweigh any potential benefits.

What were the terms of reference?
It was agreed that Hale & Twomey would review the ACCC report in detail to assess which findings were relevant to the New Zealand situation. Where appropriate H&T would undertake similar analysis to that done in the ACCC report using the relevant New Zealand data, and would refer to previous studies on the New Zealand industry rather than redo this analysis.

What further investigation is needed? Will there be a full inquiry into petrol prices in NZ?
There is nothing in this review that would indicate a detailed inquiry into the New Zealand petrol market would come to a different conclusion. Accordingly, there are currently no plans for further investigation.

Why is only petrol covered by the report?
The ACCC inquiry was limited to petrol. The concept behind the NZ review was to take the findings of the ACCC inquiry and examine whether any were applicable to the New Zealand petrol market. While the market for diesel is somewhat different from that for petrol, the key conclusions of the review are likely to be equally applicable to diesel.
How will the government use the report? What are the next steps?
The government will liaise with the Ministry of Economic Development (MED) to see that the report’s findings into increased transparency about the makeup of importer margins and the introduction of daily importer margin monitoring are implemented quickly.

Will we introduce Fuelwatch or Informed Sources?
There is no intention to introduce a Fuelwatch-type scheme in New Zealand for the reasons mentioned above. Informed Sources is a private company already operating in parts of New Zealand, although there is no electronic exchange of pricing information between retailers as occurs in Australia. Informed Sources currently conducts manual price checks in the Auckland region. There is nothing preventing Informed Sources from extending its operations to other parts of the country.

Will we get a Petrol Commissioner?
There are no plans to introduce this role. Without price regulation (which the government doesn’t intend to introduce in New Zealand) such a commissioner would be relatively powerless to drive prices any lower.. The monitoring function is best undertaken by the appropriate government agency, in this case MED. Consumer groups such as the AA and Consumer NZ also have a part to play.

Why does the report say that retail prices aren’t actually faster to rise than to fall?
The quantitative analysis undertaken by Hale & Twomey could find no pattern of prices increasing faster than the market rises and decreasing more slowly than the market falls. Hale & Twomey was able to demonstrate a strong correlation between refined product price changes and retail price changes (with a one-week lag).

Why doesn’t the NZ market have price cycles? Is this a good thing?
Price cycles only occur in some markets and their causes are subject to much debate. A concern in Australia over these price cycles is that they are confusing to the consumer and do not enhance price transparency.

How are crude oil prices set?
Crude oil is the most heavily traded commodity in the world, with prices determined in the same manner as all other internationally-traded commodities – via supply and demand.