Tim O’Brien, 17 February 2016

As of February 1 2016, the excise levied on every litre of petrol we buy is 39.5 cents (cpl). Despite falling petrol prices – which, the ACCC argues, are not falling quickly enough – that excise figure will only ever travel in one direction: upwards.

The excise on fuel is pegged to the CPI and adjusted upwards bi-annually. And, of course, it is not the only tax impost on fuel, as GST is also added to the transaction, every time you buy.

Do motorists mind that they contribute so much to Federal coffers for every litre they buy?

Possibly not, it is a key revenue stream of Government raising tens of billions of dollars annually, which builds roads and hospitals and parklands, and contributes positively to making Australia the privileged country and community we all enjoy.

But it is a significant impost on every litre of fuel, and it perhaps makes much of the discussion raised by the ACCC of price gouging and its ‘show cause’ demand of petrol retailers, seem just a little hollow.

If we park the current barrel price of oil for one moment, that discussion turns on the question:“how much should we pay for fuel?” Only then do we know if we’re paying too much.

Consider this: if oil companies supplied fuel from the terminal gate at just 1-cent per litre, and the distributor charged just 1-cent per litre for transport and delivery, and the retailer charged just 1-cent per litre to supply it at the bowser – motorists would still be paying 47 cents per litre for every fill.

Because added to the cost of that fuel (3 cents) is the cost of excise (39.5 cpl) plus 10% GST.

But, of course, 3cpl is ridiculous – there is a cost to the manufacture and supply of any elaborately transformed product.

And the simple fact that we use a lot of it – vast, vast, volumes – may provide economies of scale but does not erase the significant cost involved in the extraction, refining, shipping, storage, bulk transport and delivery of the product.

And the fact that oil companies are never going to win the Noble Prize for ‘services to humanity’, should not obscure the other fact that we’re addicted to this fossil fuel, and expect to have it supplied in modern, easily accessed high-tech facilities for next to nothing.

For less than bottled water.

And given that close to half of what we currently pay per litre is excise and GST (with prices hovering around $1.10 per litre), is there now an air of unreality to what we consider to be ‘a fair price’.

The ACCC points to the collapse in the barrel price of oil and says the price should be lower. Chairman Rod Simms, says, possibly correctly (but that’s to be shown), that retailers have been too slow to pass on the savings and are thus profiting unreasonably at the pump.

Gouging consumers, in other words.

But what is “profiting unreasonably”? Is it more than making hay while the sun shines, and at what point does it move from a subjective judgment to empirical? Surely the ACCC is on a hiding to nothing here.

Plunging world barrel price

The global price of oil is hovering around USD$30 per barrel, with WTI (West Texas Intermediate) at USD$29.44, and Brent Crude at USD$33.36.

That price, $30 a barrel, values 159 litres of crude oil – extracted and ‘potted’ for shipping – at about the same price as one cheap sneaker (not a pair).

The most heavily traded commodity on the planet, the barrel price of oil has been on a plunging roller coaster ride in global markets. From $145 a barrel in 2008, to be now just a fifth of that value (and not inconceivable that it may fall further).

Some recent commentary puts this current distorted figure at below the actual cost of production, but that’s incorrect. ‘Break even’ for most major oil producers is at around USD$20 a barrel (USA at around $15pbl, Kuwait and Saudi Arabia as low as $10pbl).

The pump price disconnect

So, if this is what it costs to get the raw product out of the ground, why do we pay so much at the pump?

Why? Because the cost of crude, the unrefined raw material, is a junior part of the total cost of production, shipping, refining and storage on one side of the terminal gate, and of the total cost of the distribution, transport and delivery of the refined product on the other side of the terminal gate.

And that’s before the addition of margins – profit – to each of those parts of the production and delivery chain.

Given a current price per litre of $1.10, and given that nearly 50cents of that price is excise and tax, the cost of crude oil, the primary resource, is just a part of the remaining 60cents.

Prima facie, then, there does not appear to be too many loose cents floating about in there, in that part of a litre of fuel that is not tax, to be gouged.

And with the Australian dollar at little more than 60 percent of its 2011 value, and as a net importer of petroleum products, both raw and refined, some of the benefit of that downward movement in the barrel cost of oil has been erased by the downward movement of the AUD.

The ‘Parity Pricing’ construct

Thanks to Australia’s ‘Import Price Parity’ policy adopted some decades ago, the price of Australian refined product from the terminal gate takes its lead from the Singapore MOGAS price per barrel of 95RON. (Whether that remains relevant in this brave new world of FTAs is a debate for another day.)

The MOGAS benchmark price, as you can see, fell through January, before recovering most of the lost ground through February.

And the Australian wholesale price of refined product at ‘the terminal gate’ is pegged to this price (shown here in AUD). (In the absence of other factors, that puts the current underlying wholesale price at ~40.8cpl).

The terminal gate price (TGP) in Australia however is the Singapore price of petrol plus shipping costs and Australian taxes. The TGP, under Oilcode regulations, must be published daily. As of today, Wednesday 17th February, inclusive of GST, it is averaging (from terminals around Australia) around $0.95-$0.96cpl.

And that’s before you begin to add in distributor margins, delivery and retailer margins.

The ‘Retail Margin’

Some years ago, when I worked in the industry (rather than commenting upon it), retailer margins were as low as 1cent to 3cents per litre.

But that was before the grocer duopoly of Coles and Woolworths saw there was easy money to be made here, and saw the benefit of creating customer loyalty through fuel ‘shopper docket’ concessions, and scooped up around half of the Australian fuel retailing market.

As the graphic above shows, the five-year average retailer margin stood at 9.8cpl, to end-2015 (Source: Commsec.), rising to 11.8cpl, and is now, according to the ACCC, at 12.4cpl.

It is this figure that has prompted to the ACCC to issue a “please explain” demand of the retailers. If accurate, 12.4cpl is a 26.5 percent increase on that five year average (but, let’s be realistic here, we’re talking 2.6 cents).

“The ACCC believes that retail prices have been unreasonably high in the second half of 2015 and in early February 2016 wrote to the major petrol retailers seeking an explanation for the high retail margins. I expect to receive their responses shortly,” ACCC Chairman Mr Sims said.

Can that be gouging? We can only wait on the ACCC’s report.

The ACCC, in fact, is barking up the wrong tree here. If there is anything to examine, it is whether there is genuine competition in the market, or merely the appearance of competition.

If there is genuine competition, then the debate about margins becomes irrelevant, because competition creates the mechanism to keep downward pressure on prices. And, given that consumers have free choice and can search for the best price, will isolate and expose ‘price gouging’.

And despite victories like consumer access to Informed Sources pricing information, and occasional wins on identifying collusive behaviour between retailers, and despite its 2007 report, ACCC Inquiry into the Price of Unleaded Petrol, the ACCC has had few wins when it comes to taking the fuel retailers to task.

Other than our rampant addiction to fossil fuels, and a carping insistence that it should cost us next to nothing, there would seem to be little to see here.

And, for now, don’t bother howling about the excise impost, because that’s another little addiction; this time of revenue-challenged Government keen to squeeze every drop of cash it can from taxpayers at the bowser, and that addiction ain’t going nowhere.

Tim O’Brien
TMR Managing Editor

Extracted in full from The Motor Report.