Earlier this week, the ACCC released its seventh Quarterly Report on the Petroleum Industry (https://www.accc.gov.au/system/files/Report%20on%20the%20Australian%20petroleum%20market%20%E2%80%94June%20quarter%202016.pdf) which covered the financial quarter ending 30 June 2016.

There was some good news for motorists in terms of petrol prices being at their lowest ever level for 14 years and a narrowing of the historical price gap between average petrol prices in capital cities and those in regional areas.

The ACCC went on, however, to state  that the gap between wholesale and retail prices (referred to as the Gross Indicative Retail Difference or GIRD) was the highest it has been since they began petrol price monitoring in 2004 – a fact that is indisputable but the explanation for which is likely to be due to multiple factors.

This, of course, was the story that the popular media picked up. It led to allegations of petrol price ‘rip-offs by service station operators’ and spurious economic estimates prepared by some journalists in terms of what these rip-offs were likely costing the Australian economy.

Analysing the ACCC statement objectively, however, suggests that there may be two other possible explanations – explanations that were not debated because they were not investigated by the ACCC.

First, it is worth noting that ACCC began monitoring petrol prices just as the Australian petrol market moved into what later became a decade of the most intense industry competition experienced in living memory – largely as a result of the entry of the supermarket majors.

This increase in competition intensity, coupled with a period of record high oil prices and a global financial crisis meant that profit margins of fuel retailers were savaged over a sustained period.

“To suggest that the period from 2004 to 2014, which comprised an unprecedented global financial crisis and volatile world oil prices, is a good baseline to compare future profit levels of fuel retailers is highly questionable”, said ACAPMA CEO Mark McKenzie.

In fact, the decade ending December 2014 was one of abnormally low margins where fuel retailers had to slash margins to stay in business. In addition, many deferred investment in asset renewal because their margins were not sufficient to support investment or secure capital finance.

“In short, we believe that the ACCC assertion that the past decade provides a valid historical baseline for comparison of future prices is unlikely to be useful to anyone”, said Mark.

ACAPMA argues that there is likely to be another possible explanation – or part explanation – for the increased GIRD’s detected in the past year.

That is, a dramatic increase in Government Regulation of fuel retailers, leading to increased costs – and business anticipation of further increased costs.

Over the past 12 months, eight (8) separate pieces of new legislation have been introduced or foreshadowed by State and Territory Governments in Australia. These include:

  • New biofuels laws in NSW requiring the sale of E10 and biodiesel by small fuel retailers from 1 October 2016
  • New biofuels laws in QLD requiring all fuel retailers with 10 or more sites to sell E10 and biodiesel from 1 January 2017
  • New regulations requiring NSW fuel retailers to advise the NSW Government each and every time they change retail fuel prices on their forecourts
  • A looming deadline in NSW for compliance with new laws requiring installation of Vapour Recovery (Stage 2) infrastructure by 1 January 2017.
  • New regulations requiring modification of fuel price boards in Victoria from 30 November 2016
  • New regulations on fuel price boards are also reportedly under active consideration by both the Queensland and Tasmanian State Governments.

“All of this new legislation brings increased investment and compliance costs for fuel retailers and we believe that we may now be seeing the impact of these costs flow through to motorists”, said Mark.

Despite these issues being repeatedly raised by ACAPMA and other stakeholders over the past 6 months, the ACCC has not yet incorporated any discussion of the possible impact of these increased compliance costs on the GIRD.

“The only discussion is a single sentence that is buried on the body of the report and not mentioned in any of ACCC’s media statements”, said Mark.

The result, is that the media and the community have ‘gone to town’ on allegations that the industry is gouging motorists.

This time, however, ACAPMA chose to openly criticise the shortcomings of the ACCC Report (https://acapmag.com.au/home/2016/08/accc-petrol-price-report-not-telling-full-story/).

While the shortcomings we identify are not in dispute, it remains to be seen whether petro politics – gaining political leverage from petrol industry bashing – wins out over informed and balanced assessment.

“We are not hopeful as our industry is a soft target and no politician will win any hearts by backing the sound arguments of our industry in the face of allegations of petrol price gouging”, said Mark.

The debate does, however, beg a very serious question.

What is a fair margin for petrol price retailers?

Within this context, it is worth noting the following facts:

So, in short, the Australian retail fuel market has delivered retail fuel price reductions that are largely in line with movements in crude oil prices and prices that are contributing to an improved national position of international competitiveness by way of lower input prices for households and industry.

The above strategic observations beg a real question.

“If the underlying margins being charged by fuel retailers – which have delivered current historic price lows and enhanced Australia’s international competitiveness – are not acceptable, then what should the profits margins be?”, said Mark.