Fuel price discounting or not? – that is the question
July 22, 2016
Sharp increases in retail fuel prices in Melbourne and Brisbane late this week have again prompted ‘outrage’ amongst the motoring community as motorists seek to understand why average retail prices in these cities have increased by as much as 28cpl.
These questions are being raised against a background of relatively stable oil prices and steady currency exchange rates, leading some media commentators and motoring associations to label that latest move as a ‘rip off’ by service stations.
Yet again, however, the real answer to the change is clearly apparent to any person who takes the time to review the large amount of retail price data that is constantly published by the Australian Competition and Consumer Commission.
The problem is, no one takes the time to read this data – either because they apparently don’t have the time or because the facts might lessen the sensationalism of their attention grabbing headline.
Petrol price discounting cycles!
As we all know, petrol price discounting cycles are totally unrelated to movements in crude oil prices and the wholesale fuel price of fuel sold into Australia – which is commonly referred to as the Terminal Gate Price (TGP).
There is no accurate way of predicting the duration and price ranges of a petrol price cycle in any given market.
That’s because, the price cycle is determined by a competition dynamic that is constantly changing and one that can be substantially impacted by the isolated pricing decisions of a single fuel retailing business that prompts pricing responses from all other fuel retailers.
You can, however, examine historical trends and then use this analysis to provide a high level explanation for dramatic changes in fuel prices.
And that is certainly the case this week, where sharp increases in fuel prices have occurred in Brisbane and Melbourne.
In Melbourne, the average price for regular unleaded fell steadily from a high of $1.32/litre on 6 June 2016 to an average of $1.04/litre on 19 July 2016 before the sharp increase of the past few days (see chart below).
Melbourne Petrol Price Cycle for unleaded petrol in 2016
(Source: ACCC 2016)
The story is almost identical in Brisbane, where the average price fell from an average of $1.35/litre on 6 June 2016 to $1.08/litre on 19 July 2016, before the latest increases (see chart below).
Brisbane Petrol Price Cycle for unleaded petrol in 2016
(Source: ACCC 2016)
According to the ACCC price data, the 42-day duration of the petrol cycle in both cities is the longest discounting cycle that has been experienced in both cities since the start of the year – and is almost twice the average duration experienced in the recent past.
It generally follows that the longer the period of fuel price discounting, the higher the price correction.
“Given that the latest discounting cycle in Brisbane and Melbourne has been the longest of any experienced in 2016, it therefore follows that the price increase would be larger than any experienced in the recent past”, said ACAPMA CEO Mark McKenzie.
“This is because all fuel retailers have maintained substantial price discounts for a longer period than usual – effectively draining cash reserves for as long as they reasonably could to ensure that they remained competitive – and have had to respond by pushing prices higher than usual to compensate”, said Mark.
The fact that fuel price cycles generally end with ‘follow the leader’ price behaviour is also unsurprising and entirely typical of an open and competitive market.
“The end of a price cycle is typically triggered when one fuel retailing business decides that they can no longer sustain the price discounts – they are literally forced to increase their fuel prices regardless of what their competitors are doing”, said Mark.
This movement effectively creates a ‘pressure relief valve’ in the market and results in a domino effect on retail fuel prices where most – if not all – fuel retailers in the market follow the upward price movement of the ‘first mover’.
“The price change then defines the start of the new price cycle and the game of competition ‘leap frog’ commences again, with each retailer dropping their fuel prices in small increments to stay ahead of their competitors”, said Mark.
Nonetheless, the price increases of the past week have understandably attracted the ire of the popular press and the motoring associations in recent days.
In Melbourne, some media commentators have called for the introduction of a price regulation scheme for Victoria that operates along the same lines as currently used in Western Australia.
“It may surprise these people to learn that some of our members are likely to be somewhat open to such a call”, said Mark.
“This is because the available evidence suggests that such a regulation actually reduces the intensity of price discounting and reduces volatility of cash flows, said Mark.
Once again, the evidence for this observation is provided by a comparison of the ACCC petrol price cycling data in Melbourne and Brisbane with that of Perth (see below).
Perth petrol price cycle for unleaded petrol in 2016
(Source: ACCC 2016)
As can be clearly seen, the Perth market has had 6 price cycles (averaging 7 days’ duration) since the 6th of June 2016 – this compares with a single cycle of 42 days in Brisbane and Melbourne.
The average retail price in Perth since 6th of June 2016 has been around $1.23/litre, while the average price in Melbourne over the same period has been around $1.18/litre.
“While we believe that care needs to be taken about drawing definitive conclusions from the comparison of petrol prices over a short period, if we were to jump to the same idiotic conclusions that are being presented now then we would conclude that motorists actually do better under the current market arrangements”, said Mark.
“Further, fuel retailers in Perth have arguably earned better income from fuel sales under regulated operation than their Melbourne counterparts”, said Mark.
In summary, perhaps the media, politicians and the motoring associations should take more care before making calls for regulation of fuel prices in Australia.