Current Issues Brief no.10 2003-04
Petrol pricing in Australia: issues and trends
Mike Roarty
Science, Technology, Environment and Resources Section
Stephen
Barber
Statistics Section
29 March 2004
Contents
The crude oil
market
The exchange rate
International petrol
prices
The significance of the
import parity indicator
Price cycles and retail
outlet competition
Taxation
Metropolitan price
cycles
City/country price
differential
Fuel price dissection and
indicative prices
International petrol
price comparison
Petroleum product
retailing
Trends emerging in the
petroleum retailing sector
Deregulation of the
refined petroleum products market
Fuel standards
AAA Australian Automobile
Association
ABS Australian Bureau of
Statistics
ACCC Australian Competition and Consumer
Commission
AIP Australian Institute of
Petroleum
bbl/d Barrels per day
CPI Consumer price
index
c/L cents per litre
FSGS Fuel Sales Grant
Scheme
IPI Import parity
indicator
ML Megalitres (one million
litres)
OECD Organisation for Economic
Co-operation and Development
PSA Prices Surveillance
Authority
Both international and domestic
factors affect petrol prices. International factors include changes
in international crude oil prices, movements in the Australian/US
dollar exchange rate, and changes in the international prices for
refined products. Domestic factors include local price cycles,
retail outlet competition and the level of federal taxes (i.e.
excise and GST). It is not possible to insulate the domestic market
from the dynamics of the world market as these are intrinsically
linked.
Some 90 per cent of the cost of
producing petrol and diesel is purchasing crude oil. Crude oil
prices vary on a daily basis according to global supply and demand
fundamentals. On the world scale, Australia is only a small
producer of crude; nevertheless on a theoretical basis, if total
Australian production had been directed towards domestic refining
in 200203, then Australia could have been some 85 per cent self
sufficient.
International prices for petrol, as
with other commodities freely traded on the world market, are set
by supply and demand factors, rather than production costs. The
international refined benchmark for the Asia Pacific region is
the Singapore refinery price (Singapore Mogas 95
Unleaded). Refiner margins for domestic refineries are the
difference between international refined product prices and the
cost of crude oil (sourced either domestically or
internationally).
Possibly of most annoyance to the
motoring public are the substantial weekly fluctuations of petrol
prices, particularly in major metropolitan markets. Prices can
suddenly increase in the order of 10 cents per litrewhen prices
suddenly move from the low point to the high point in the established retail price
cycle. Despite motorists' frustrations with continual fluctuations
of petrol prices in the metropolitan markets, it is claimed that
this feature and associated competition keep
Australia's petrol prices amongst the lowest
in the developed world. Furthermore, petrol price rises over the
last decade have been modest in real terms.
Australia's retail petrol prices remain
amongst the lowest in OECD countries and despite the fact that
taxes comprise some 50 per cent of the indicative petrol price,
petrol taxes in Australia rank as the fourth lowest in OECD
countries.
Petrol pricing remains a contentious
issue facing motorists in Australia. This is despite the implementation
of regulatory changes in the retail petrol market following some of
the numerous Government inquiries that have been held on petrol
pricing and other related refined petroleum product issues. Petrol
price information and its structure are readily available and there
is a high degree of price monitoring by a number of regulatory and
consumer organisations.
Petrol prices and archived data are
readily available from a number of websites including motoring
organisations, the oil majors (Mobil, Shell, BP and Caltex) and the
Australian Institute of Petroleum. Furthermore the Australian
Competition and Consumer Commission provides information relating
to petrol price cycles, factors affecting petrol prices, what
determines petrol prices in Australia and the city country price
differential.
Surveys of motorists' attitudes have
found they are unhappy with price fluctuations but prefer them to
higher overall prices. Motorists can take advantage of the cycles
by buying at the low point in the cycle. The ACCC has examined the
practice of price cycles and concluded that actions to limit their
operation could lead to overall higher average retail prices.
Furthermore, the ACCC recommended that there be a consumer
awareness initiative to increase consumers' understanding of price
cycles, and to help consumers buy when prices are relatively low.
The ACCC has not identified any incidence of price collusion or
raising prices prior to public holidays or weekendsother than
movements within the established cycleby the oil majors, an
anecdotal claim raised by a number of
commentators.
Country petrol prices are usually
higher than the prices of major metropolitan outlets. There have
been recurring claims of profiteering because of the differential
in country centres. Despite these claims there are reasons for the
price differential. A country service station typically sells less
than half the amount of fuel of a metropolitan service station.
Hence there is less opportunity to reduce the operating margin on
fuel sales taking into consideration the overall viability of the
business. Additionally there is higher distribution costs
associated with country retail outlets. Furthermore, there are
generally lower sales of higher profit non-fuel items in the
country.
Prior to the foray of
the Woolworths supermarket chain into petrol
retailing, competition with the oil majorsthe dominant force in
refining, marketing and retailingwas largely provided by
independent networks. However, the number of outlets operated by
independents was small in comparison to the retail outlets linked
to the majors. Woolworths first entered the petrol retail
market in 1996 and in late 2003 announced an alliance with Caltex
which aims to extend a discount petrol offer to supermarket
customers nationwide. The Woolworths/Caltex alliance follows an
announcement earlier in 2003 of a commercial alliance
between Coles Myer and Shell into petrol retailing.
Following on from the major supermarket alliances, the independent
IGA franchise supermarket chain also entered into a petrol
discounting in late 2003. Their offer matches the petrol discount
of the major supermarket chains, with the benefit of purchasing
petrol from any outlet.
A major problem for the independents
and the oil majors not associated with the supermarket alliancesBP
and Mobilis competing in a market where the discounts offered in
petrol retailing are being more than offset by increased sales and
the higher margins applying in the broader supermarket chain
market. Petrol retailing is a notoriously low margin
business.
The implementation of increasingly
tighter fuel standards are likely to have an impact on the price
motorists pay for fuel in the coming years. Australian standards
are being aligned with European standards through the
Commonwealth's Fuel Quality
Standards Act 2000 which established the first national
regulations to ensure consistent fuel quality across
Australia. The Commonwealth is currently
undertaking a review of this Act and assessing whether the cleaner
fuels which underpin the introduction of improved vehicle
technologies are consistently available.
The aim of this paper is to provide a
background to petrol pricing issues and update and expand on
earlier work that has been undertaken by the Parliamentary Library
on this topic.(1)
Australia's petrol prices overall are among
the lowest in the OECD, even when taxes are included. Nonetheless,
petrol pricing is one of the most contentious issues that face
motorists in Australia. This is despite the implementation of
regulatory changes in the petrol retail market following numerous
inquiries (see Appendix A) held on petrol pricing and related
petroleum product issues. There has been high profile media claim
and counter claim of oil company profiteering, price collusion
amongst industry participants and repeated calls for regulatory
intervention in the market.
Probably the issue of most annoyance to the
motoring public is the substantial weekly movement in retail petrol
prices in major metropolitan areas. Prices can suddenly jump 10
cents per litrewhen prices suddenly move from the low to the high
point in the established retail price cycles that feature in the
major metropolitan markets.
The paper looks at a number of the issues
relevant to petrol pricing. These include international and
domestic factors. International factors include the world crude oil
market, the exchange rate, international prices for refined
petroleum products (petrol and diesel) and the significance of the
import parity indicator. Domestic factors include retail
competition and price cycles, petrol retailing trends, government
policies and taxation. Petrol price data is discussed including
city/country price differentials as is dissection of prices into
components including the refinery price, taxation and retailing
margins. Domestic prices are also compared with international
prices. A number of current and emerging issues related to petrol
pricing including petroleum product retailing, trends emerging in
this sector, deregulation of the refined petroleum products market
and new fuel standards are discussed.
Whilst there is an abundance of information
available to the general public on petrol pricing issuesprobably
more now than ever beforethe detail is less than previously
available. For example, the components of an indicative petrol
pricepetroleum product excise, state franchise fees, refinery
feedstock, and the margins of the oil refiner, the marketer and
retailerhas reverted to, in the case of the Shell company, a
refinery price, tax and the Shell and retail margin. These
components are published daily on the Shell website: www.shell.com.au.
Both international and domestic factors are
key determinates of petrol prices. International factors include
changes in international crude oil prices, movements in the
Australian/US dollar exchange rate, and changes in international
prices for refined products. Domestic factors include local prices
cycles, retail outlet competition and the level of federal taxes
(i.e. excise and GST). These factors are discussed below.
Some 90 per cent of the cost of producing
petrol and diesel is the cost of purchasing crude oil. Crude oil
prices vary daily on global supply and demand fundamentals. On the
world scale, Australia is only a small producer of crude;
nevertheless production of crude oil and condensate averaged
574,000 bbl/d in 200203. In the same year however Australian crude
oil and condensate production only supplied 36.6 per cent of
Australian refinery feedstock, with the balance being provided from
imports. The bulk of crude oil and condensate production from the
North West Shelf and other northern Australian oil fields is
exported. On a theoretical basis, if total Australian production
had been directed towards domestic refining, then Australia could
have been some 85 per cent self sufficient.
Whilst there are a number of components making
up the domestic petrol price, there is a broad correlation between
petrol prices and world crude oil price in Australian dollars as
shown in Figure 1. Although the price of the crude oil feedstock
presently comprises some 35 per cent of the overall price, the
other major price components vary to a much smaller extent than the
crude oil price. A common broad rule of thumb is for an upward or
downward movement in the world price of crude of one United States
dollar per barrel, the Australian price of petrol would increase or
decrease in the vicinity of 1c/L.
Because of competitive aspects in the domestic
petrol market and movements in the exchange rate, there can be
times when despite upward movements in the crude oil price,
domestic petrol prices can trend downwards, as is evident in the
latter part of 2003 and into 2004. Conversely, domestic petrol
prices can trend upwards whilst world crude prices are trending
downwards as was evident in the early to mid part of 2001.
A
common theme that emerges in times of high world oil prices as at
present is the call by some commentators to question why Australia
has tied itself to the international crude oil market. It needs to
be understood that oil is an internationally traded commodity and
that it would be counter productive for Australia to attempt to insulate itself from
changes in the international market (see Appendix B).
Figure
1: West
Texas Intermediate crude oil
price vs. Sydney
petrol
prices

Source:
Datastream. WTI West
Texas Intermediate.
World crude oil prices are set in US dollars.
Therefore a key factor for the Australian market is the conversion
of the world price into Australian dollars via movements in the
US$/A$ exchange rate. These movements and relationships are
illustrated in Figure 2. Movements in these measures may counter or
can reinforce each other. For example, a strengthening world oil
price can be offset by an appreciating A$ with conversion of the
world oil price to A$. This feature was apparent in the relative
movements of the two currencies during the later part of 2003 and
into 2004. Conversely, a strengthening world oil price can be
further boosted in A$ terms by a depreciating A$ as evidenced for
much of 2000.
Figure
2: West
Texas Intermediate crude oil
price and conversion to $A.

Sources:
Datastream; FuelTrac.
International prices for petrol, as with other
commodities freely traded on the world market, are set by supply
and demand factors, rather than production costs. The international
refined benchmark for the Asia Pacific region is the Singapore
refinery price (Singapore Mogas 95 Unleaded). Refiner margins for
domestic refineries are the difference between international
refined product prices and the cost of crude oil (sourced either
domestically or internationally). Whilst imports of refined
petroleum product account for around 10 per cent of the domestic
refined petroleum product market, it is not commonly appreciated
that its price largely determines the Australian wholesale market
price. The reasoning is that if prices were out of alignment, one
market would predominate. Imports of refined petroleum product over
the last three years are shown in Table 1.
Imported refined petrol is mainly sourced from
Asian refineries that are usually much larger than Australia's. For
example, the Jurong/Pulau Ayer Chawan and Pulae Bukom refineries of
ExxonMobil and Shell in Singapore have capacities of 587,000 and
458,000 bbl/d(2), compared to Australia's largest of
130,500 bb/d. As a result, Asian refineries have better economies
of scale and as a general rule have lower operating costs.
|
Imports of unleaded automotive
gasoline
|
Total sales of automotive
gasoline
|
Percentage of imports on total
sales
|
Imports of automotive diesel
oil
|
Total sales of automotive diesel
oil
|
Percentage of imports on total
sales
|
200001
|
1,188.7
|
15,213.8
|
7.8
|
1,129.0
|
12,952.4
|
8.7
|
200102
|
1,436.2
|
16,308.8
|
8.8
|
1,280.3
|
13,441.2
|
9.5
|
200203
|
1,686.1
|
17,173.5
|
9.8
|
1,645.6
|
13,888.0
|
11.8
|
Source: Department of Industry, Tourism and
Resources. Note: unleaded automotive gasoline is petrol and
automotive diesel oil is diesel.
Other factors impact on the cost of delivered
refined product to Australia. Firstly, demand for automotive diesel
oil in the Asian economies tends to be particularly strong and
excess associated petrol production is made readily available for
the export market. Surplus supply in the Asian market can exert
downward pressure on petrol prices in Australia. Equally, if petrol
supply in the Asian market is tight, because of say strong demand
in China and India, then the international petrol price will
increase and these increases will be felt in Australia.
The IPI is a benchmark used to determine the
Australian refinery pricewhich is effectively the wholesale price.
The lower the IPI, the lower the Australian refinery price and vice
versa. The IPI is commonly confused with the term 'world parity
pricing' which referred to a number of previous Australian
Governments' pricing formulae for crude oil prior to the
deregulation of the crude oil market in 1988 (see Appendix B).
The ACCC used the IPI before deregulation on 1
August 1998 to determine maximum endorsed wholesale prices. The IPI
comprised three components:
-
the import parity componentthe 'landed cost'
for ex-refinery petrol stock from Singapore (incorporating the spot
price for fuel, freight, wharfage, insurance and loss, and the
Australian/US dollar exchange rate)
-
the assessed local componentwhich incorporates
downstream terminalling, marketing and distribution costs as well
as return on assets employed in that sector, and
-
State subsidies, Commonwealth excise (currently
at 38.143 c/L) and the GST.(3)
The IPI is a base indicator across Australia
for fuel delivered into a service station and adjustment has to
take into account the various state subsidies that
apply.(4) Whilst the IPI is no longer determined by the
ACCC it is used by various groups to monitor price trends, as for
example in the AAA petrol price charts (see Figure 3).
Despite motorists' frustrations with continual
fluctuations of petrol pump prices in the major metropolitan
markets, it is claimed(5) that this feature and
associated competition keep Australia's petrol prices amongst the
lowest in the world. As explained, petrol prices are made up of a
number of components including product cost, tax and refiner and
retailer's gross margins. Competition between retail outlets also
has a major bearing on the pump price.
Well developed price cycles are evident in the
metropolitan markets of Sydney, Melbourne, Brisbane, Adelaide and
Perth. Canberra, Darwin and Hobartdo not exhibit regular
cycles.(6) At the top of the pricing cycle the
retailers' margin is usually about 9 to 10 c/L. Discounts begin to
be offered by retail outlets to attract greater sales volume. The
discounts are matched by other stations to remain competitive. Once
discounting starts in an area, competition ensures it quickly
spreads to other stations. Prices are normally discounted for about
a week and the retailer's margin falls considerably. Revenue
shortfalls are partly offset by non-fuel sales. When petrol price
margins become unsustainably low (say with retailer's margin
between 2 and 4 c/L and anecdotal evidence suggests that they
sometimes even become negative) some retailers will raise prices in
order to bring some profitability back to their sales. This is
usually followed by other retailers who raise their
prices.(7)
A Royal Automobile Club of Victoria survey of
motorists' attitudes has found they are unhappy with price
fluctuations but prefer them to higher overall
prices.(8) Motorists can take advantage of the cycles by
buying at the low point in the developed cycle. The ACCC has
examined the practice of price cycles and concluded that actions to
limit their operation could lead to overall higher average retail
prices. Furthermore, the ACCC recommended that there be a consumer
awareness initiative to increase consumers' understanding of price
cycles, and to help consumers buy petrol at times when prices are
relatively low.(9) The ACCC has not identified any
incidence of price collusion or raising prices prior to public
holidays or weekendsother than movements within the established
cycleby the oil majors, an anecdotal claim raised by a number of
commentators.
The taxation on petrol, the single largest
component of the petrol price, is applied by the Commonwealth
Government and comprises the petroleum product excise and the GST.
The Commonwealth Government petrol and diesel excise is currently
set at 38.143 c/L (other products have lower rates). Formerly
excise increases were indexed to the consumer price index (CPI)
twice yearly in February and August. This was discontinued in March
2001 following concerted community and pressure group lobbying to
abandon indexation. This was in response to prices hovering around
$1 per litre at that time and the claim that the Commonwealth would
be 'double dipping'as excise increased with indexation, so would
GST revenue.
While it is true that the Commonwealth
Government collects the GST, all GST revenue is passed to the
States (net of administration costs).(10) The GST
component depends on the pump price. The GST component is
determined by dividing the pump price by eleven. As rural and
regional petrol prices are mostly higher than in metropolitan
areas, so is the GST component.
The former State Franchise fees levied on
petrol sales, collected by the Commonwealth Government on behalf of
the states since August 1997, were discontinued with the
introduction of the GST in July 2000. Queensland did not have a
State Franchise fee and the fee was not the same rate in the rest
of the states. Because it is unlawful under the Australian
Constitution to apply different levels of federal taxes to
different localities, the Commonwealth Government collected an
additional excise of 8.1 c/L (in August 1997). Where this amount
was greater than the State Franchise fee, the State governments
paid a subsidyequivalent to the differenceto the oil companies so
that the price of petrol remained unchanged. Most state governments
have since cut out the subsidy but Queensland still subsidises the
full amountnow 8.354 c/L (the 8.1 c/L has been indexed by the CPI).
Victoria pays 0.429 c/L and the Northern Territory 1.1
c/L.(11) Subsidies also apply in northern New South
Wales (in six designated regions that move south from the
Queensland border), and non-metropolitan regions of South
Australia.
Petrol price information is widely
availableprobably now more so than ever before. Petrol prices and
price data series in a number of formatsrecent and archived
pricesare shown on a number of websites including the AAA, the
major oil companies such as Mobil, Shell, BP & Caltex, the ACCC
and the AIP. Petrol prices are also published by the Australian
Bureau of Statistics (ABS). Recent average capital city unleaded
petrol prices trends are shown in Figure 3. The price movements in
Figure 3 are compared to movements in the IPI (see Section on the
significance of the IPI).

Source: Australian Automobile Association
www.aaa.asn.au
The price data clearly show the volatility and
movement of unleaded petrol prices over the last six
years.(12) An analysis of prices in real terms indicates
price increases have only been relatively modest over the last
decade. Although average capital city prices have increased from
the March quarter 1994 to the December quarter 2003 in actual terms
from 66.8 to 90.3 c/L, an increase of 35.2 per cent, the increase
in real terms (after removing the effect of inflation) of 4.5 per
cent over this period has been modest. Average capital city retail
prices over the last decade in both actual and real terms, are
shown in Figure 4.

Data Sources: ABS (6401.0, 6403.0)
In addition to the above data, there is a
plethora of information explaining the background to petrol pricing
and the rationale for petrol price fluctuation. For example, the
ACCC site has comprehensive links to information relating to petrol
price cycles, factors affecting petrol prices, what determines
petrol prices in Australia and country petrol prices (see Petrol
price information).
The price cycle in the Sydney metropolitan
market is shown in Figure 5. Price cycles are also a feature of the
metropolitan markets in Melbourne, Brisbane, Adelaide and Perth.
The data shows clearly for two of the major oil companiesCaltex and
Shella regular cycle of pricing with Caltex leading Shell to the
low point in the cycle by a day. The data for the period shown from
early January 2004 to mid February 2004 demonstrates that the low
point in the cycle usually occurs in the early part of the week
with the high part of the cycle occurring towards the latter part
of the week.

Source:
AAA
Country petrol prices are usually higher than
in the major metropolitan retail outlets. There have been recurring
claims of profiteering because of this differential. There are
however reasons for the price differential. A country service
station typically sells less than half the amount of fuel of a
metropolitan service station. Hence there is less opportunity to
reduce the operating margin on fuel sales taking into consideration
the overall viability of the business. Furthermore, there are
generally lower sales of higher profit non-fuel items in the
country. Another factor is that competition in the country is less
intense than in city areas and consumers cannot benefit from the
significant discounting associated with pricing cycles that are
evident in city markets. Additionally there are higher distribution
costs associated with a country retail outlet. Because of the wide
geographic spread of country service stations and the relatively
small quantities they sell, it is often impractical to supply these
service stations directly from terminals. Consequently, most
country service stations are supplied by distributors who incur
their own operational costs which they seek to recover.
In an effort to compensate country people for
the higher costs of fuel caused by the imposition of the GST, the
Commonwealth introduced a Fuel Sales Grant Scheme (FSGS) whereby
registered retailers were provided with grants of one cent per
litre in non-metropolitan zones and two cents per litre in
so-called remote zones. The scheme was introduced on 1 July 2000 as
part of A New Tax
System.(13) In January 2004, the Government
proposed the FSGS end from 1 July 2006 and the funds be used to
improve land transport infrastructure in regional and outer
metropolitan areas. It is readily apparent that it was difficult
for the consumer to see benefit given the rebate was so small in
relation to the retail price. Some commentators had suggested it
was difficult to see if the rebates had in fact been passed onto
the consumer, but the ACCC was unable to confirm this in one of its
investigations.
Whilst there is a wealth of information
available to the general public on petrol pricing as outlined
above, less information is now available on fuel price components. The AIP previously
published an indicative price for the major capital cities
comprising a number of componentspetroleum product excise, state
franchise fees, refinery feedstock, and the margins of the oil
refiner, the marketer and retailer. This practice was discontinued
in 1998 coinciding with the abandonment of the setting of a maximum
endorsed wholesale price for petrol and diesel by the ACCC. The
provision of the components of an indicative petrol price did not
head off the recurring call for Federal and State inquiries into
petroleum product pricing and repeated claims of profiteering by
the oil majors. The Shell Company now publishes an indicative price
comprising a refinery price, tax and the Shell and retail margin
(see www.shell.com.au).
Pricing components of domestically refined petrol now available are
shown in Figure 6.

Source:
Shell Australia
www.shell.com.au
The refinery price includes the cost of
purchasing crude oil and the refinery margin. Crude oil is the
basic feedstock for the manufacture of refined petroleum products
(including petrol and diesel) and its price has a major bearing on
petrol pump prices (see Appendices B and C for more information on
crude oil pricing in Australia and the Australian refining
industry).
Australia's retail petrol prices remain
amongst the lowest in OECD countries. For example, in the September
quarter 2003, Australia had the fourth cheapest petrol prices as
shown in Figure 7. Additionally, despite the fact that taxes
comprise some 50 per cent of the indicative petrol price (see
Figure 6, Petrol price components), petrol taxes in Australia rank
as the fourth lowest in OECD countries.

Source: Department of Industry, Tourism and
Resources. Note * Country now reporting in Euro
currency.
A number of issues related to petrol pricing
are addressed under the following headings. These include petroleum
product retailing, the entry of supermarkets into retailing and the
effects of new fuel standards.
Petroleum retailing and marketing are
dominated by the major oil refiners in Australia (see Appendix
C)Mobil, Shell, BP and Caltex.(14) These refiners are in
turn are owned by the world's largest, second largest, third
largest and eighth largest oil companies respectivelyExxonMobil,
Royal Dutch/Shell Group, BP PLC and ChevronTexaco.
According to the Australian Institute of
Petroleum (AIP), there were around 8300 service station outlets as
at the end of 2000(15) (see Service Station
link). The AIP survey details the types of service stations
operating in the retail market. These include service stations
operated by:
-
the refiner-marketer (direct operation,
commission agency or similar and franchise)
-
the owner-dealer supplied ex-terminal by an oil
major
-
the independent networks
-
the supermarket networks, and
-
various types of distributors (with
refiner-marketer equity, with refiner-marketer branding and other
non-branded sites).
Often petrol price discussions do not
distinguish between the upstreamthat is oil and gas exploration,
development and productionand downstream sectors, which includes
petroleum refining, marketing and retailing. Whilst oil majors have
equity in both sectors, the economics of these sectors have
decidedly different characteristics. For example, crude oil price
increases do not necessarily lead to higher profitability in the
downstream sector.
Whilst there are a number of factors currently
affecting petrol retail prices (see Section on 'Factors affecting
petrol prices') competition between the retail outlets is also a
determinant. The retail outlets of the 'refiner-marketers' and
those 'supplied by a distributor with refiner-marketing equity
groupings' have probably drawn most scrutiny and attracted most
critical comment from consumer bodies over pricing issues.
The refiner-marketersthe oil majorsdirectly
control only a very small number of petrol retail sites (175),
because of the legislative constraints of the Petroleum Retail Marketing Sites Act
1980. However they exert a broader influence when their close
business associations with other categories such as commission
agencies, or similar (140), franchise (2018) and distributor with
refiner-marketer equity (2200) are included.
There have been significant changes since the
AIP service station survey undertaken in 2000, especially following
the recent forays of Coles into petrol retailing in Australia.
Woolworths is already firmly established in the petroleum retailing
sector having opened their first petrol retail outlet in 1996.
Prior to the entry by the Woolworths chain
into petrol retailing, competition with the oil majors was largely
provided by the independent networks. However, the number of retail
outlets operated by these networks was small in comparison to the
retail outlets linked to the oil majors.
The oil majors claim that petroleum refining,
marketing and retailing have not been a highly profitable business.
As a result, there have been significant changes over the past
decade or so including the rapid decline in the number of petrol
retail outletsdown from around 20,000 in the 1970s to the current
8000 or so. Further, petroleum retailing is now closely associated
with retail convenience outlets and substantial income is generated
from non-fuel sales in most petrol retail outlets.
Probably of most significance to petrol
retailing in the past decade is the entry of the major supermarket
chains. Woolworths entered the petrol retailing market in October
1996 at Dubbo, New South Wales. The strategy revolved around
providing discounts on petrol prices in association with a
threshold level of grocery purchases from their supermarkets. Prior
to an announcement of a joint venture with Caltex(16) in
late 2003, Woolworths had built a national network of around 290
petrol retail sites. The Woolworths venture with Caltex was a
response to the Coles/Shell petrol retailing alliance strategy
announced earlier in 2003.
The Woolworths/Caltex association aims to
extend a discount petrol offer to customers nationwide at up to 450
service stations. The Woolworths/Caltex venture is subject to
regulatory review by the ACCC, third party consents and execution
of transaction documentation. The proposed final arrangements would
see all of the Woolworths sites become jointly branded while Caltex
would jointly brand 130 of its sites that are near Woolworths
stores. It is expected the Caltex sites involved in the venture
will include company-operated sites and franchisees selling fuel
under a commission agency agreement. At the time of the
announcement Caltex indicated it would continue to support Caltex
franchisees within the remaining Caltex and Ampol network of about
1650 service stations. However, recent press reports indicate
Caltex franchisees are far from happy with the Woolworth/Caltex
association. A group of Caltex franchisees has set up an entity
called the Caltex Ampol National Action Group, which has taken
legal action against Caltex for what it claims is a breach of
franchise agreements, unconscionable conduct and breach of
fiduciary duty. The group is seeking unspecified damages stemming
from the adverse commercial impact on Caltex franchisees that are
not included in the petrol discount scheme with Woolworths. The
Federal Court has ordered both parties to attend private mediation
in order to achieve an outcome.(17)
Prior to the Woolworths/Caltex joint venture,
Coles Myer and Shell had announced a commercial alliance in petrol
retailing. The alliance, when fully rolled out, will see a Coles
Myer subsidiary become operator of Shell's core retail property
network of 584 service stations across Australia. The roll out
commenced with around 150 sites in Victoria from July 2003 and is
expected to be completed nationally by mid 2004. Shell will supply
fuel products and Coles Myer will purchase the rights to operate
Shell sites from multi-site franchisees for a total amount of less
than $100 million.(18) Coles Myer have matched the
existing Woolworths discount fuel offer by providing a 4 c/L
discount on Shell when customers spend more than $30 at Coles or
BiLo supermarkets and Liquorland. In addition, Coles Myer has added
additional Fly Buy points to purchases from supermarkets, liquor
and fuel purchases.
The independent franchise supermarket chain
IGA also entered into the petrol discounting market in late 2003.
The chain has offered a similar discount, however only available on
Fridays, to the Woolworths/Caltex and Coles Myer/Shell alliance on
any petrol purchase. IGA had trialled its original petrol discount
offer in Queensland and it was extended in late 2003 to New South
Wales, South Australia, the ACT and the Northern Territory. IGA
maintains its offer is superior to that offered by Coles Myer/Shell
and Woolworths/Caltex outlets as customers can buy their petrol at
any major fuel chain or from independents and qualify for a rebated
discount.(19)
Independent retail outlets and the Service
Station Association Ltd have expressed concern regarding the
alliances of the supermarket chains with the oil majors. They claim
that the discounts currently being offered by the
alliancesincluding where, in a number of cases, retail prices are
below wholesalehas the effect of forcing independents from the
market thus substantially reducing competition. They maintain that
the ability of motorists to be able to enjoy cheap petrol rests
with the continuation of diversity of suppliers and hence diversity
of competition in the market place. They conclude that if
independent operators can't survive, then neither would effective
competition, and prices will inevitably rise.(20)
Whilst the ACCC was aware of claims that the
discount schemes being offered by the supermarket/oil major
alliances would reduce the number of independent operators, it
maintains that a number of factors had seen the number of retail
outlets fall from 20,000 in the 1970s to about 8000 on 2003. It
found that the introduction of the shopper docket schemesassociated
with the alliances of the supermarket chains with the oil majorshad
encouraged competition and had lowered prices in the retail fuel
market.(21)
A major problem for the independents and the
oil majors not associated with the supermarket alliancesBP and
Mobilis competing in a market where the discounts offered in petrol
retailing are being more than offset by increased sales and the
higher margins applying in the broader supermarket chain market.
Petrol retailing is a notoriously low margin business.
Gross margins run at only 3 or 4 cents a litre
compared with 25 per cent-plus gross margins in Woolworths
supermarkets. On its current volume, if the most common 4 cents
discount per litre were applied to all sales, Woolworths would
sacrifice about $70 million of petrol margin. That would make sense
if the discounts generated more than $270 million a year of
additional supermarket sales, which it appears they do. It is this
relationship which makes the petrol discount concept workthe cost
of the discount is small relative to the margins generated on
increased supermarket sales.(22)
The second term Howard Government introduced a
number of reforms to the refined petroleum products market.
Firstly, there was the abandonment of the setting of the maximum
endorsed wholesale price for petrol and diesel by the ACCC. This
had involved the ACCC and its predecessor, the Prices Surveillance
Authority (PSA), setting a maximum wholesale price for petrol and
diesel for declared companies (refiners/marketers). Second, the oil
majors committed to providing access to bulk terminals owned by the
refiners, thus allowing bulk purchases of refined product by
interested parties on commercial terms. Bulk purchases were however
not available to service station franchised operators who operate
under exclusive supply contracts. As part of the deregulatory
process at that time the Government intended to repeal the
Petroleum Retailing
Marketing Franchise Act 1980 and the Petroleum Marketing Sites Act
1980 and establish a mandatory Oilcode. These further reforms
did not proceed as agreement between all stakeholders was not
forthcoming.
The third Howard Government has revisited the
deregulatory process. In March 2003 the Minister for Industry
Tourism and Resources released a package aimed at replacing the
1980 Franchise and Sites Acts with a national Oilcode. The Oilcode,
which would apply to all market participants, includes a national
terminal gate price to promote transparency, minimum standards for
petrol re-selling agreements and a dispute resolution
scheme.(23)
The implementation of increasingly tighter
fuel standards are likely to have an impact on the price motorists
pay for fuel in the coming years. Australian standards are being
aligned with European standards through the Commonwealth's
Fuel Quality Standards Act
2000 which established the first national regulations to
ensure consistent fuel quality across Australia. The Commonwealth
is currently undertaking a review of this Act and assessing whether
the cleaner fuels which underpin the introduction of improved
vehicle technologies are consistently available.(24)
There are around 8,000 service station outlets
in Australiadown from around some 20,000 in the 1970s. Whilst
retail outlet numbers continue to decline, probably the most
significant change in the petrol retailing sector in Australia
during the last few years is the concerted forays of the
supermarket chains into the market with discount petrol offers.
While Woolworths was already firmly established in the petroleum
retailing sector having opened their first petrol outlet in 1996,
Coles Myer entered the market and both Woolworths and Coles Myer
formed alliances with an oil majorWoolworths with Caltex and Coles
with Shellduring 2003. Additionally the independent supermarket
chain IGA also entered into a petrol discounting scheme in late
2003.
Petrol retailing has been a notoriously low
margin business. The entry of the supermarket chains into such a
business is based on a model of increasing sales in the supermarket
chainswhere margins are higherwhilst sacrificing even greater
proportions of the low margins available in petrol retailing. These
alliances present commercial pressures for independent retailers
and even the oil majorsBP and Mobilwho are outside the
alliances.
Petrol prices and archived data are readily
available from a number of websites including the oil majors,
consumer bodies and motoring organisations such at the AAA. In
addition, there is a plethora of information contained on a number
of these sites; in particular the ACCC providing information
relating to petrol price cycles, understanding petrol price
information, what determines petrol prices in Australia and the
city-country price differential.
The price data show that petrol prices are
volatile and move broadly in line with world crude oil prices.
Other factors currently affecting petrol prices include changes in
international prices for refined products, movements in the
Australian/US dollar exchange rate, the level of federal taxes
(i.e. excise and GST and State government rebates), local price
cycles and retail outlet competition. Whilst petrol price rises are
of particular concern to motorists, an analysis of prices in real
terms indicates price increases have only been relatively modest
over the last decade. Furthermore, fuel prices in Australia remain
amongst the lowest in OECD countries.
The international price of imported refined
product (petrol and diesel) largely determines the Australian
refinery wholesale pricea benchmark price often referred to as the
import parity indicator (IPI) The IPI is commonly confused with the
term 'world parity pricing' which referred to a number of previous
Australian Governments' pricing formula for crude oil prior to the
deregulation of the crude oil market in 1988. Whist the IPI is no
longer determined by the ACCC it is used to monitor price trends by
motoring organisations such as the AAA.
There have been a plethora of inquiries into
the Australian petroleum products marketsome forty sevenover the
last few decades. These have come about following high profile
media claims and counter claim of oil company profiteering and
price collusion amongst industry participants. Despite this and the
fact that there have been relatively few measures implemented as
outcome from the above inquiries, there are recurring calls for
additional regulation of the market or for further inquiries when
petrol prices hover towards the $1 per litre mark.
Following the announcement of the Fuel
Taxation Inquiry terms of reference in 2001(25), a
number of commentators made reference to the large number of
inquiries into petroleum products over the past few decades. One of
the background papers produced in association with the Fuel
Taxation Inquiry outlined documentation of previous inquiries and
reportssome forty sevenon petroleum products (see:
Fuel inquiries). Most previous reports into petroleum products
have focussed on pricing issues. In addition to these, the
Australian Labor Party conducted two committees of inquiries into
the Australian petroleum industry in 1991 and 2001. Also the ACCC
has prepared further reports since the Fuel Taxation Inquiry into
national petrol price movements and an assessment of reducing fuel
price variability.
Since 1939, when price controls were
introduced at the outbreak of World War II, there has been
continuously some form of government regulation of petroleum
products in Australia. Except during war, the Commonwealth's role
has been confined to surveillance or monitoring of prices. The
Commonwealth established the Prices Justification Tribunal in 1973.
The Tribunal was succeeded by the Petroleum Products Pricing
Authority in 1981 and the Prices Surveillance Authority (PSA) in
1984. The role of the PSA was absorbed into the responsibilities of
the ACCC in 1995. Formal price surveillance of oil companies ceased
from 1 August 1998, as was the setting of the maximum endorsed
wholesale price. These arrangements were replaced by an independent
price monitoring system for 100 country towns which is monitored by
the AAA and its constituent members. The ACCC continues to monitor
petrol prices, with a particular focus on hot
spots.(26)
Despite the numerous inquiries and reports
that have been conducted, much contention still remains, especially
in relation to petrol pricing. It is apparent that when petrol
prices edge towards the $1 per litre mark, it isn't long before
some form of regulatory intervention into the market is called for
or yet another investigation or inquiry is demanded based on the
claim of profiteering by oil companies. For example, profiteering
claims were made in early 2004 by the Service Station
Association.(27)
From 1977 to 1 January 1988, Australian crude
oil production was priced via an import parity pricing formula.
This effectively took the prevailing world crude price into account
but applied a number of other factors such as the cost of importing
crude oil. Up until 1977, the price of crude oil produced in
Australia was largely set independently of the world market. The
world crude oil market experienced a severe shock in the early
seventies, with the West Texas Intermediate price rising from an
average of $US3.87 a barrel to $US10.37 a barrel in 1974. The
rationale in Australia at that time was that the indigenous price
of crude should be cheap, as it was being produced in plentiful
supply from the then relatively new Gippsland basin (in Bass
Strait) oil fields. However, as time progressed Australia moved to
the concept of import parity pricing.
It has been argued that attempts to hold down the price of
Australian crude oil artificially in order to prevent increases at
the retail level would have a number of adverse impacts. First it
would induce Australian producers to export oil rather than supply
the domestic market in order to take advantage of the higher
international prices. Second, it would reduce the incentive to
conserve a scarce resourcecrude oilwhich is already in decline
in Australia. Finally, artificially holding down
Australian crude oil prices would discourage investment in oil
exploration and development with serious long-term consequences to
our ability to supply our own needs.(28)
The then Hawke Government fully deregulated
the domestic crude oil market on 1 January 1988 and as a
consequence Australia now both sells and buys crude oil on the
prevailing world market.
The ability of companies in Australia to trade
internationally ensures that 'the' domestic price reflects 'the'
international price, since any differences between the two prices
would result in imports or exports as the case may be.
Unfortunately some commentators still refer to
the term 'import parity pricing', which is now defunct, and they
have been confusing this term with the IPI.
Australia currently has eight main refineries
owned by the four major oil companies (Caltex, BP, Mobil and Shell)
located in the capital citiesSydney, Melbourne, Adelaide, Perth and
Brisbane. These companies also have either crude oil or refined
product terminals at most major Australian ports. The total
capacity of the Australian refineries is around 860,000 barrels of
oil per day (bbl/d), although Mobil Oil Australia announced in
early 2003 that it intended to cease operations at its Adelaide
Refinery at Port Stanvac which reduces overall capacity to 782,000
bbl/d. The capacities of the individual refineries including the
mothballed Port Stanvac refinery are shown in Table 2.
Company
|
Location
|
Capacity
bbl/d
|
Caltex/Ampol
|
Lytton,
Qld
|
100 000
|
|
Kurnell, NSW
|
116 000
|
BP/Amoco
|
Kwinana, WA
|
138 500
|
|
Bulwer Island, Qld
|
86 500
|
Mobil
|
Altona, Vic
|
135 000
|
|
Port Stanvac, SA
|
78 000
|
Shell
|
Geelong, Vic
|
119 000
|
|
Clyde, NSW
|
86 000
|
Source: AIP
In relation to the Port Stanvac closure, Mobil
Oil Australia(29) announced that this is a small
refinery and under current market conditions cannot compete with
the much larger lower cost regional Asian refineries. Mobil's Port
Stanvac refinery has recorded significant financial losses over
many years. Mobil however has also maintained that the
international refining business has the potential to improve, and
proposed to maintain the refinery in a condition that would allow a
re-start should future operations be viable.(30)
Australia's refineries are dated and small
compared to new capacity being brought on line in Asia. Australia's
oldest refinery, at Clyde in NSW, was built in 1928. Most of the
others were built in the 1950s and 1960s, the two newest being
Lytton and Bulwer Island in Queensland, built in 1965. Major
capital investment programs undertaken at most refineries in the
early 1990s were largely related to the production of unleaded
petrol. More recently major capital investment programs at some
refineries have been directed at the production of cleaner fuels
and further investment will be required at most refineries in order
to produce product to comply with more stringent fuel standards.The
Australian petrol and diesel market comprises both domestically
produced product and imports (see Table 1). To the consumer, the
domestically produced and imported products are not differentiated.
The two types of products must be price competitive: otherwise one
could prevail over the other in the market.
- Mike Roarty, 'Petroleum Refining and Marketing in
AustraliaChanges Ahead', Current Issues Brief No. 11 199900; Richard Webb,
'Petrol Price Rises: Causes and Consequences' Research Note No 6, 200001; Greg
Baker and Stephen Barber, 'Petrol PricesThe Statistics, Research Note No 7, 200001', Parliamentary Library,
Canberra.
- David Nakamura, 'Refining capacity creeps higher in 2003',
Oil & Gas Journal,
22 December 2003, Volume 101.49, Penwell, p. 68.
- The Australian Competition & Consumer Commission,
Reducing fuel price
variability, December 2001, Dickson ACT, pp. 21-22.
- The Australian Competition and Consumer Commission, Increase in the average retail petrol
prices in Australia compared with the rise in International
prices, www.accc.gov.au
- Peter Harris, 'Petrol Price Movements, One of the oil companies
provides an explanation', Motoring Direction Issue 1/02,
Australian Automobile Association, Canberra, p. 10.
- ACCC, Petrol price cycles, www.accc.gov.au
- Peter Harris, 'Petrol Price Movements, One of the oil companies
provides an explanation', Motoring Direction Issue 1/02,
Australian Automobile Association, Canberra p.12.
- ibid., p.13.
- ACCC, What determines petrol prices in Australia,www.accc.gov.au
- Richard Webb, ' Petrol Price Rises: Causes and Consequences',
Research Note, No 6,
200001, Parliamentary Library, Canberra.
- Various State Revenue Offices.
- The price data have been collated by FuelTrac, a private
company that conducts, inter alia, fuel monitoring services. The
AAA has commissioned FuelTrac to collect petrol price information
in each capital city and other major regional centres around
Australia.
In total, 98 regional and rural centres and 8 capital cities are
monitored, providing AAA with data to ensure informed debate on the
issue of petrol prices.
- Department of the Treasury, 'Fuel Taxation Inquiry Report',
March 2002, Canberra , p. 161.
- Caltex Australia Limited, unlike the other three majors has a
50 per cent public shareholding. Previously Caltex and Pioneer each
held a 50 per cent share of Australian Petroleum Pty Ltd trading
under the Caltex and Ampol brands. Pioneer sold its 50 per cent
holding via a public offer in early 1998.
- Australian Institute of Petroleum, http://www.aip.com.au/industry/stations_stats.htm
- Woolworths Limited, Caltex, 'Caltex and Woolworths Open First
Co-Branded Petrol Stations', ASX/Media release, 21 November
2003.
- Simon Evans, 'Franchisees, Caltex told to talk', Financial Review 28 January 2004,
p. 9.
- Shell Australia, 'Customers the winners from Coles Myer-Shell
Alliance', Media
Release 27 May 2003, www.shell.com.au
- Nigel Wilson, 'IGA's seven-day petrol offer', The Australian, 26 January 2004,
p.29.
- Service Station Association Ltd, 'Oil companies pocketing the
profits', Press
Release, 13 January 2004, www.ssa.org.au/newevents
- Australian Competition and Consumer Commission, 'Shopper docket
petrol discounts to continue', 6 February 2004, www.accc.gov.au/content
- Stephen Bartholomeusz, 'Let the retailers petrol battle begin',
Sydney Morning Herald,
26 July 2003, p.47.
- Department of Industry, Tourism and Resources, 'Reforming the
Downstream Petroleum Industry', Annual Report 200203, Canberra, p.
46.
- Department of Environment and Heritage, 'Review of Fuel Quality
Standards Act', Media
Release, 20 February 2004.
- Department of the Treasury, 'Fuel Taxation Inquiry Report',
March 2002, Canberra, p. 1.
- Joint Statement The Treasurer, The Hon. Peter Costello And
Minister for Industry, Science and Tourism The Hon. John Moore,
'Petroleum Marketing Reforms', Press Release No. 068, 20 July
1998.
- Chris Taylor, 'Petrol price probe urged', Brisbane Sunday Mail, 18 January
2004, p.23.
- Australian Labor Party, 'The Report of the Special Caucus
Committee of Inquiry into Aspects of the Australian Petroleum
Industry', 16 April 1991, Canberra, p.6.
- Mobil Oil Australia Pty Ltd, 'Adelaide Refinery', Media Release, 8 April 2003,
www.mobil.com.au
- ibid.
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