Petrol industry bashing is a national pastime in Australia and is something that fuel retailers have grown to accept as an occupational hazard.
Despite more than a decade of oversight and reviews by the Australian Competition and Consumer Commission (ACCC), unfounded allegations of price gouging by fuel retailers continue to be put about by politicians, motoring clubs and media commentators alike.
Much of this commentary appears to be motivated by the fact that commentary on petrol prices grabs headlines – with these commentators apparently believing that they are immune from criticism because they are on the right side of community opinion (and therefore our industry is poorly placed to respond).
The real difficulty, however, is that the true explanation of retail prices is complex and cannot be neatly accommodated in a 15 second grab in the national TV news, or a few lines in a newspaper story.
And so, the criticism of our industry continues unabated – despite the fact that much of this criticism is poorly informed at best, and just plain wrong in many instances.
Recent comments by the RACT in Tasmania and the NRMA (NSW & ACT) take the usual level of industry criticism to new heights – and demonstrate a fundamental lack of knowledge of the fuel retail industry in Australia.
Earlier this week, RACT launched a criticism of Tasmanian retailers alleging that fuel retailers were making profits of up to 28cpl after comparing retailer petrol prices with published terminal gate (or ex refinery prices).
Last month, the NRMA’s spokesman made statements that he believed that retail petrol prices were too high. His justification for this allegation was essentially that retail prices were much higher than the wholesale price of fuel plus a 2cpl profit margin.
“Both organisations have neatly overlooked a key point – that is, the actual costs of transporting fuel to retailers in the first place and the costs of then retailing that fuel in a local market”, said ACAPMA CEO Mark McKenzie.
“To be more precise, their comments make no allowance for the cost of site rentals, staff wages, electricity costs, repair and maintenance, compliance costs and other business costs”, continued Mark.
At this point it is worth noting that the wholesale price of fuel is the terminal gate price plus the cost of transporting the fuel to the service station in the first place (the transport cost varies between 1.5 cpl and 3.5cpl in most cases).
“The simple fact that gets lost in statements such as these is that while fuel is wholesaled GLOBALLY (or regionally) at a relatively consistent price, fuel is retailed LOCALLY by a variety of different business types at variable prices”, said Mark.
That’s where the argument gets difficult, because commentators expect that because all fuel is wholesaled on a ational basis, they simplistically believe that the retail cost should roughly be the same.
This assertion is wholly unrealistic given that there are more than eight different business models in operation in our industry – all with different costs – and that fuel retailers are operating in different State/Territory markets (also with different costs).
These costs include site rents (which are larger in capital cities), salary costs (including variable payroll taxes), electricity costs, insurance costs, asset maintenance costs, and so on.
Motorists tend to forget that when they pull into a service station site, they are driving onto a site that stores an average of 50,000 litres of flammable fuel. That site must be designed and operated safely by the business and the operator is also required to take all reasonable precautions to minimise environmental harm.
“The safe and environmentally responsible operation of a service station doesn’t happen by accident – it costs money on an ongoing basis”, said Mark.
In short, the costs of retailing fuel – before any profit is factored in – vary markedly according to the size of the site, the location of the site and the structure of the business.
“Given the numerous different business models in operation, a typical site will incur average annual costs of between 8cpl to 14cpl before any profit is made”, said Mark.
Sites in regional areas, where fuel volumes are low but operating costs are still substantial, often need to earn an average of 16 to 18cpl per site per annum before realising any profit, said Mark.
Even using these figures is tricky as they do not take account of petrol price discounting cycles – where fuel retailers will discount below these average costs in response to market competition and then swing up above these average costs when they can no longer sustain discounts.
Simply put, service stations do not simply pass on fuel to motorists at the same price as the fuel is wholesaled from the refinery gate.
Transport and retailing costs have to be recovered and these costs vary markedly across the industry.
That said, there are some costs that fall evenly across the industry and we have seen two of these costs grow dramatically over the past year.
“Like all industries, energy costs have increased markedly with some retailers reporting that electricity costs have doubled in the past year”, said Mark.
“Another major cost increase has been site rents, where retailers leasing sites have reported increases of between 30% and 40% compared with the prior year, said Mark.
These are business costs which, like all industries, must ultimately be passed onto consumers. They cannot simply or reasonably be absorbed by business owners.
A third source of increasing business cost is compliance, with state and territory governments enthusiastically introducing ever increasing laws that are increasing the cost of operation.
Once again, the business costs of complying with new government regulations must ultimately flow through to motorists in the form of higher fuel prices.
In NSW, for instance, one retailer has reported that the cost of complying with new Vapour Recovery laws has required an investment across more than 100 sites at an average of around $120,000 per site over the past 2 years.
“The clear message here is that if politicians and other stakeholders genuinely want to understand why there is a growing difference between wholesale prices and retail fuel prices in Australia, then all they have to do is look at the growing costs being experienced by retail fuel businesses across Australia”, said Mark.
“And if these same commentators want to understand the reasons for differences between capital city prices, then all they need do is look at the differences in transport costs, different land values, different energy costs (and so on) between individual Australian States and Territories”, said Mark.
“As for NRMA and RACT, if they believe that it is possible to retail fuel at just 2cpl above the terminal gate price of fuel, then I invite them to do so”, said Mark.
On a final note, the ACCC periodically reports on the movement in the Gross Indicative Retail Difference (or GIRD). This is the difference between the average terminal gate price and the average capital city retail prices.
GIRD is not the profit earned by the fuel retailer. It is a combination of transport and retail cost plus a modest profit.
So, one of the reasons that a GIRD could be higher this year than last year is because average costs for fuel retail businesses have increased independently of wholesale costs.
Just a thought….