Jason Murphy, 23 April 2016

EVERY so often, the price of petrol rises mysteriously. What costs $1.10 on Wednesday costs $1.30 by Saturday.

Why? The case of the extra 20 cents per litre should be an easy one to solve.

There are only a handful of major fuel retailers in Australia. Caltex and Woolworths are in a joint venture. Coles bought out Shell. Then there are 7-Eleven and BP. These players control the majority of the market.

Just last year the Australian Competition and Consumer Commission announced fuel profit margins were the highest since record-keeping began. “Unreasonably high,” it called prices.

The ACCC is constantly haranguing fuel retailers. A major court action against five petrol retailers was resolved last December with a court forcing them to publicise the numbers in their formerly private price-sharing arrangement. The ACCC also monitors petrol stations and publishes report after report on the state of the industry.

And yet the fuel price cycle repeats and repeats. If you’re in Perth, the petrol price cycle is weekly.

In Sydney it is slightly longer.

In Melbourne the pattern is different again, but across Australia the point is the same — sometimes a whole lot of petrol stations — coincidentally — decide they can’t sell fuel cheaply any more.

It is clear something weird is going on. And petrol is far from the only industry where competition is suspiciously mild.

Two big companies that have a big stake in fuel are Woolworths and Coles. They also control a big share of groceries, liquor, and hardware.
Of course, Australia is not a big country. Our population is not large enough to support huge numbers of competitors like they have in America.
The US has dozens of competing supermarkets — Walmart is the biggest and it has less than 30 per cent of the market. Then there’s Kroger and Safeway and Whole Foods, Sprouts, Trader Joes, Dollar Stores, Costco and many, many more.
We, meanwhile, have two major chains, plus Aldi and IGA.

America has dozens of airlines. Delta, United, Southwest, American, JetBlue and Alaska airlines are all big enough to matter. We have Qantas and Virgin. Then there is Jetstar (owned by Qantas), Tiger (owned by Virgin) and a few minor airlines doing regional links.

Not to mention telecommunications, banks and media.

High market concentration is a major risk for low levels of competition. And competition is really important.


Economics says capitalism and free markets work best when companies compete hard on price and quality, always offering us cool new products at better prices. And yeah, they do that. Sometimes. But they also spend a lot of time finding ways to do the opposite. Offer us the same old products at higher and higher prices.

Companies can make big profits in two ways. By being the best competitor, or finding ways to reduce competition in their markets. It should be no surprise when they collude, cheat, or trick us. That’s what the incentives tell them to do.

But when this happens, the point of a free market economy goes out the window. Instead of the benefits of markets coming to us, the consumers, the benefits stay in the pockets of those big companies. This is why we have to make sure competition is razor sharp.


So what are we doing to maximise competition? The answer is not enough. The ACCC does what it can. It has around 100 investigations going and has recently taken to court companies trying to subvert competition in the cement, high voltage cables, ball bearings and credit card industries.

The head of the ACCC recently said it simply can’t do more. “Our resources are very limited and our investigators are fully stretched. Our most difficult issue is to decide what to investigate and what not to.”

It seems clear we should give the ACCC more oomph.

A big set of legal changes to help electrify competition is due to go through the Senate soon — probably after the election. Will they be enough to prevent our economy from falling into the hands of two or three big companies? I don’t know. One way we may be able to tell they’re working is if the mystery of the rising petrol price is never heard of again.

Jason Murphy is an economist. He publishes the blog Thomas The Think Engine. Follow him on Twitter @jasemurphy.

Extracted in full from News.com.au.