Gareth Hutchens, 08 January 2016

There was panic in the tabloid media this week about petrol price-gouging, with revelations Sydney motorists have been forced to pay hundreds of dollars more than Melbourne motorists over the last five years.

It followed a report from the Australian Competition and Consumer Commission last month that found the margin between wholesale petrol prices and retail prices in the September quarter was the biggest since 2002.

It’s a good question to ask why Sydney motorists have been consistently paying more for their fuel.

Does that mean petrol companies have been ripping us off? Not necessarily.

There’s no evidence to prove petrol prices in Sydney have been unfairly higher than Melbourne since 2011, nor that petrol companies have been making anything more than reasonable profits in recent months.

Let me explain.

In theory, petrol retailers should be able to charge whatever they want for their fuel because they’re private companies and their point is to make a profit.

Petrol is not a normal commodity, however.

It plays a central role in our economy that other commodities don’t, where huge swings in its price can have a noticeable dampening or stimulatory effect on economic activity, particularly on household budgets.

We therefore think petrol companies should behave appropriately. We accept they have to make a profit, as long as it’s not extortionary. Part of the deal is retail prices should move in line with wholesale prices.

That’s why there was a fuss last month when the ACCC discovered the difference between wholesale prices and retail prices in the September quarter was 11.8¢ a litre on average, across the country – the biggest margin since 2002.

Why were margins so historically big? Because retail prices in our five largest cities did not fall as much as wholesale prices during the September quarter.

The ACCC said the bigger margin may have reflected overall retail profits. That caused serious anger.

But see that word “may”? That’s the strongest word the ACCC could use. It also said the cost of doing business may have risen for different players in the petrol supply chain, so retail margins had to rise to cover costs.

It couldn’t say either way.

Commsec’s economists said the same thing: “Rising gross retail margins on fuel may be supporting revenues and profits for petrol marketing groups. The big unknown is whether the margins have lifted to cover higher costs in other parts of the business.”

Is that evidence of price-gouging? It may be. But we’d need more information before we started throwing punches at the petrol companies.

What about the panic in the tabloids this week about the long-term price differences between Sydney and Melbourne markets?

Labor senator Sam Dastyari – fresh from his popular political campaign against multinational tax avoiders – was using Parliamentary Library research to show that since 2011 Sydney motorists have been paying far more for petrol than Melbourne motorists.

His analysis amounted to this: Data shows the average bowser price in Sydney has been higher than Melbourne over the last five years. If you assume motorists in both cities have bought the same amount of fuel, that means Sydney motorists have paid hundreds of dollars more for the same product.

He wants to know why pump prices have been different between the two cities.

Here are some reasons.

On Monday, MotorMouth recorded the following average retail prices for our capital cities: Sydney 103.9¢; Melbourne 123.7¢; Brisbane 116.1¢; Adelaide 124.9¢; Perth 113.1¢; Canberra 129.9¢; Darwin 125.8¢; Hobart 131.5¢

Why were they so different? Because each city is a unique market. They have their own geographic and economic  characteristics, with different competitive pressures.

The margin between wholesale prices and retail prices is different in every city.

According to the ACCC, in the 12 months to September last year, the average margin on Sydney’s retail petrol prices was 10.2¢ a litre while in Melbourne it was 6.8¢ a litre (supporting Dastyari’s analysis).

But in Brisbane it was 12.6¢, in Perth it was 10.1¢, and in Adelaide it was 8.1¢.

Those different margins may reflect different levels of retail profits in each city, but they may also reflect different costs of doing business.

The degree of competition in each city also has a big influence on pump prices.

You often hear the complaint that we must be getting ripped off when a petrol station down the road’s selling unleaded petrol for $1.25 a litre while one up the road’s selling it for $1.05.

But isn’t that a sign of decent competition? And how can you tell which one of those prices is closest to the wholesale price? The one selling for $1.05 might be losing money for a little while for competitive reasons.

In Sydney on Monday, average pump prices were trading at 103.9¢ a litre, below the wholesale price of 106.3¢. That meant some motorists were getting their petrol below cost.

Why was petrol being sold below cost in Sydney and not in other cities on Monday? Because it’s at a different stage in its competitive price cycle to them, and some companies made the gamble it was in their interests to do so.

It’s a good question to ask why Sydney motorists have been consistently paying more for their fuel than Melbourne motorists. But there’s a long way to go before we can say with confidence they’re therefore being unfairly treated.

Extracted in full from the Sydney Morning Herald.