Late last year, the Australian Competition and Consumer Commission (ACCC) published a report into the Brisbane Petrol Market (See https://www.accc.gov.au/system/files/Report%20on%20the%20Brisbane%20petrol%20market—October%202017_0.pdf)

The first two paragraphs of the Summary presented at the very front of this ACCC report read as follows:

“Petrol prices in Brisbane have been significantly higher than those in the other four largest cities (i.e. Sydney, Melbourne, Adelaide and Perth) in Australia for the last eight years. Between 2009–10 and 2016–17, Brisbane motorists paid on average 3.3cents per litre (cpl) more for petrol than motorists in the other four largest cities.

The main factor influencing the higher prices in Brisbane is higher retail margins on petrol, which have contributed to profits in Brisbane being significantly higher than the average across Australia”.

The fact that the ACCC reports that Brisbane petrol prices ‘have been significantly higher than those in the other four (4) largest cities’ begs a simple question.

“Why not compare Brisbane against all ‘other’ Australian capital cities’? That is, all seven (7) of them and not just four of the others?

Now before you rush to point out the ACCC used the words ‘largest cities’, let’s just challenge the underlying notion that it is the largest cities that deliver the greatest competition.

Is it not the cities with the greatest intensity of competition – not overall size – that deliver the best average petrol price outcomes in this (or any other) country?

Let’s just park this point for a moment and come back to it later.

It is worth noting that all ACCC’s regular reports on the Australian Petroleum Market are developed around their concept of a five-capital city average. These five cities (i.e. Sydney, Melbourne, Brisbane, Adelaide and Perth) all operate in markets that are heavily influenced by a substantial petrol price discounting ‘cycle’.

Each capital city market is different in terms of competition intensity which is why, despite having similar input costs (i.e. finished product import/production prices as distinct from ‘wholesale prices’), that the shape of the fuel price discounting cycle is different across Australia’s capital cities.

Let’s consider, for a moment, the ACCC’s analysis of Brisbane’s average petrol prices within the context of their five-capital city average.

A comparison of capital city averages using the ACCC’s approach and average fuel price data for the first quarter of 2018 (as derived from the Informed Sources website) is presented in the graph below.

At first glance, you could be forgiven for thinking that all this graph does is demonstrate that there is substantial variance between average petrol prices in capital cities. But a closer look, gives rise to a series of interesting observations in that:

  • Brisbane, Melbourne and Adelaide experienced near identical top of cycle prices while Brisbane had a lower price than Melbourne at the bottom of the cycle (Curiously, this suggests that Brisbane’s average prices have been lower than Melbourne since January 2018).
  • Adelaide had the equal top of cycle price (with Brisbane and Melbourne) but has experienced the lowest bottom of cycle price (It is interesting to note that this city, easily the smallest of the five, displayed the widest price variation across the cycle and arguably, the greatest intensity of market competition over the period).
  • Perth experienced a lower range of fuel price variation overall but a much sharper daily variation in average fuel prices. This resulted in a total of nine price cycles in total – compared with just two/three in the other four cities. Compared with Adelaide – arguably the most comparable market by size and geography – Perth’s average prices were significantly higher than Adelaide, despite the existence of the FuelWatch Regulation

But how does Brisbane compare when all of Australia’s eight (8) capital cities – including the three that were excluded from the ACCC analysis – are included?

Does such an analysis give rise to the same conclusions (i.e. symmetrical conclusions)?

Or does it give rise to very different conclusions about the Brisbane petrol market?

For the sake of the analysis (and making the graph easier to read) let’s exclude the two largest capital cities of Sydney and Melbourne (as that comparison is already provided in the above chart anyway).

In other words, we will conduct a different analysis by excluding the Nation’s two mega capitals to derive our own six (6) city average – the ‘non-mega 6’ Capital City average, if you like.

The resulting analysis – again performed using the Informed Sources website – is presented in the graph below.

This analysis reveals that Brisbane had the second lowest average petrol prices since January 2018 – behind only behind Adelaide which also showed up as being amongst the most competitive in the former ACCC inspired analysis.

In fact, Brisbane’s average prices in the period since 1 January 2018 to this week (estimated at 137.9cpl) were just 0.7cpl higher than the Adelaide average (at 137.2cpl) but were:

  • 8.3cpl lower than Hobart’s average (estimated at 146.2cpl)
  • 10.4cpl lower than Canberra’s average (estimated at 148.3cpl)
  • 11.7cpl lower than Darwin’s average (estimated at 149.6cpl)

That is right, 11.7cpl lower than Darwin where the NT Government introduced compulsory fuel price reporting laws last year along similar lines to that now being called for in Queensland by the RACQ!!

Adelaide, which is a relatively small market (and has no compulsory fuel price reporting laws) was the second lowest of all eight Australian capitals – just marginally higher than the Sydney average and marginally lower than the Brisbane average for the period.

So, what does all of this tell us?

Firstly, and most importantly, it tells us to be careful of making simplistic (and selective) assumptions about petrol price data across Australia’s capital cities as average price curves differ markedly in terms of timing of prices, cycle duration and standard deviation of average prices (i.e. difference between highest and lowest average price).

It does, however, raise a question about why the ACCC analysis focussed so narrowly on the five (5) capital city Australian average – as opposed to our own (6) non-mega city average.

Or better still, the actual (8) Australian Capital City average!

The ACCC’s recent comparison of the Brisbane petrol market conveniently excluded all the capital cities that typically have a much higher average petrol price than the Brisbane market – an approach that ultimately made average Brisbane petrol prices look significantly worse than they do if properly compared with all other Australian capital city prices.

Any attempt to justify the ACCC’s narrow interpretation of Australia’s Capital City Average on the basis that market competition is just a ‘big capital city phenomenon’ simply doesn’t cut it.

You only have to look at the market dynamics between Sydney (big market) and Adelaide (small market) – as evidenced in the ACCC’s own data – to see how wrong such a justification is.

Put simply, the statement in the last line of the ACCC quote cited above – that Brisbane prices are higher because “retailer profits in Brisbane are significantly higher than the average across Australia’ – is a ‘highly qualified finding’ at best.

And could more plainly be called out as just being ‘wrong’.

If the ACCC is going to analyse a capital city market relative to other Australian Capital Cities, then it should be calculated by considering data from all Australian Capital Cities – not just the five (5) that make selling a story easier.

Perhaps the most glaring observation from the above, however, is not about the selective use of data of average petrol price data.

It is the obvious relationship between the infamous ‘petrol price discounting cycle’ and average petrol prices in Australia’s capital cities.

The operation of these cycles, while uncomfortable to motorists (and the cashflow balances of fuel retailers if we were honest), delivers lower average fuel prices to motorists over time than stable price markets.

Such an observation is irrefutable on the basis of the above evidence – and is, we argue, one of the reasons why Australia enjoys the 4th lowest average petrol price of any OECD economy (see https://www.energy.gov.au/publications/australian-petroleum-statistics-2017).

The ‘cycle’ is the very essence of a strong and healthy competition dynamic (which varies across capital city markets), evidenced by the ‘ups and downs’ in average prices as competitors constantly adjust prices to attract customers – to the point of selling fuel below cost for short periods.

In doing so, the market delivers better average petrol prices for motorists over time.

These cycles aren’t just created by the wave of a wand by Governments, Regulators or industry for that matter. They evolve as the structure of the market constantly changes.

While many in the five largest capital cities may hate the volatility, think of the alternative. Chances are that those living in some of Australia’s ‘other capital cities’ (i.e. Canberra, Hobart and Darwin) would love to see petrol price discounting cycles in their cities!

Perhaps RACQ (and others) might ponder this alternative as they continue to attack the operation of the Brisbane petrol price discounting cycle and call for government duplication of fuel price information systems that are already in place (It is already clear that the new compulsory price reporting laws have failed in the in the NT and there is no evidence that NSW FuelCheck has had any material effect on average Sydney petrol prices either).