The recent release of the petrol price report by the Australian Competition and Consumer Commission (ACCC) prompted yet another round of petrol industry bashing. While the theatre of this debate is possibly more fun than beating the NSW Blues in a State of Origin series, it raises an obvious question — “Is there really a problem with petrol prices?”

Compared with other countries, Australia (including Brisbane) has some of the lowest petrol prices in the world — even after considering that the Federal Government captures nearly 55¢ from every litre sold in taxes (fuel excise and GST). In fact, the most recent report by the Australian Department of Energy and Environment shows that average petrol prices in Australia are the fourth lowest of any OECD country.

Community anger is more about the volatility of petrol prices than average petrol prices. People hate learning they should have filled up yesterday, when fuel was 25¢ to 30¢ cheaper than they had to pay today.

Welcome to the petrol price cycle — a capital city pricing phenomenon that has absolutely nothing to do with global oil price movements. This phenomenon occurs in competitive fuel markets around the world, where businesses selling the same product (i.e. petrol) seek to repeatedly undercut competitors’ prices to attract sales.

The cut-throat nature of this competitive ‘game’ means that businesses sell fuel below cost for a period. This discounting eventually ends when one business decides that the discounting pain is too much to bear. But they don’t simply go back to their average price. To recover the money lost during the bottom half of the price cycle, the business raises its price above their average price to cover the losses incurred over the discounting period.

Other service station businesses, seeing the move, respond in kind and so the whole market swings up sharply.

The conspiracy theorists amongst us — or even the slightly sceptical — will have us believe that this uniform price movement is evidence that service station owners are colluding on fuel prices. Such an allegation, while intriguing, is nonsense as it would require more than 300 separate Brisbane service station businesses (large and small) to secretly meet and discuss prices on a regular basis — right under the nose of the ACCC.

The real explanation is far less sensational.

In a market where every service station is openly displaying their prices on large signs, each business can easily see when competitors change price and adjust their own to match.

To not do so in such a competitive market place would be insane.

Further, nothing here is illegal but, rather, a fact of life in a market where everyone sells a similar product. In fact, it is the very essence of competition and is largely why Australian average petrol prices are amongst the lowest of any developed economy in the world.

Some suggest that the solution to all this is to introduce laws on real time pricing. But making prices more visible in real time doesn’t change price volatility — it just makes them more visible. (In fact, some studies have shown these schemes increase average prices). The only way to reduce the volatility is to regulate price.

In evidence put before a recent Victorian Parliamentary Inquiry, the Australasian Convenience and Petroleum Marketers Association noted that the breakeven margin for service stations varied between 6¢ and 23¢ per litre — depending on the size of the service station, its business structure and its annual sales volumes.

This begs the question of where you would set the price? If set at the low end, large businesses and motorists would benefit but, over time, small and medium businesses would be forced to close with negative impacts on future competition. If set at the high end, motorists would pay substantially more than they do now. If set in the middle, smaller businesses — many in regional communities — would be forced to close and those communities would lose their local petrol station.

In short, there is no ready way of reducing petrol price volatility in competitive fuel markets without grave consequences for motorists, market competition, small business destruction and/or job losses.

So, those who want to continue to bash the fuel industry in fruitless debate should “bash on”. Those who want to regulate price or introduce price reporting systems, should be careful what they wish for. But motorists wanting to minimise their yearly fuel spend should take the time to better understand the petrol price cycle from all the information that is already available (via ACCC and others) and make the cycle work for them — not against them.

Mark McKenzie is the CEO of the Australasian Convenience and Petroleum Marketers Association — the national peak body representing fuel wholesalers and fuel retailers in Australia.

Extracted from Courier Mail.

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