Late last week, the ACCC released one of its regular Quarterly reports into petrol prices in Australia.
The release of the December 2017 Quarterly Report on the Australian petroleum market sparked the usual round of fuel industry bashing that has become customary with the release of these regular reports.
But this latest report was noteworthy for two reasons.
First, the ACCC Report made a serious but unsubstantiated assertion about likely industry collusion by some market participants.
On page 3 of the latest report, the ACCC stated that one retailer had apparently embraced a high pricing policy that was likely being followed by other market participants – thereby contributing to a sharp increase in the average petrol price during the December quarter.
Apart from the fact that the ACCC did not provide any evidence to support this claim, public statements by the subject retailer revealed that it experienced a 17% fall in petrol volumes for the six-month period ending 31 December 2017.
Readily available evidence indicated that the ACCC allegation was wrong. Other retailers had apparently taken advantage of the pricing behaviour of this retailer by offering more competitive fuel prices and attracting new customers in the process.
In other words, the retail fuel market responded in a manner that was wholly consistent with that of being a competitive market place – consumers transferred their custom to other cheaper priced retailers.
What is curious is that the ACCC made no mention of this publicly noted shift in fuel sales – a fact that would have debunked any suggestion of pricing collusion during the December 2017 quarter.
The second, and perhaps more concerning aspect, was that the ACCC report called out a single market participant for its higher retail prices and then stated that motorists should patronise three other fuel retailers.
The ACCC, a Federal Government agency that is likely to be considered by any reasonable person to be a consumer authority on the Australian petrol market, publicly stated that Australian motorists should boycott one market participant and take their custom to three other market participants.
“This is an extraordinary development”, said ACAPMA CEO Mark McKenzie
“Here we have the ACCC, the body charged with enforcement of national competition policy, making statements that would likely have the effect of steering consumers from one market participant to three specific market participants”, said Mark
A review of the ACCC website provides the following statement to explain why the ACCC monitors petrol prices in Australia:
While the ACCC does not set fuel prices, we monitor retail fuel prices on a daily basis. Where we see issues of concern we will investigate. And, where we find sufficient evidence we will take action to protect consumers against misleading and anti-competitive conduct by fuel retailers. (Source: ACCC Website)
But who holds the ACCC account for statements that are deemed to be misleading and/or anti-competitive?
“The statements surrounding the release of this latest report signal a new low in the ongoing national discussion about petrol prices in this country”, said Mark.
Rather than aid an understanding of what is going on with petrol prices, the ACCC reports appear to be getting successively less objective and are fuelling nonsensical discussions about petrol prices in Australia.
“Our industry simply cannot respond logically to assessments that are built on false assertions rather than fact”, said Mark.
“During a visit to Parliament House this week, I had an interesting discussion with a senior advisor for a high profile Australian senator”, continued Mark.
The advisor told me stridently that he had been reliably informed by some motoring organisations that service station operators were making a profit of 35c to 40c a litre on petrol”, said Mark.
“When I responded that, for this to be true, a small service station business with just six staff and deployed capital of around $2.0M would be making more than $800,000 profit per year – a staggering return on capital of around 40% per year – he was caused to stop and think”, said Mark.
Th reality is that, at today’s average fuel price of $1.35, a typical 50 litre fill will cost the motorist $67.50. Of this, $61.95 (or 92%) is paid to the Federal Government (42%) and the fuel wholesaler (50%) – who must in turn pay the fuel producer.
So, under this scenario, the fuel retailer captures just $5.55 (or 8%) from an average fill – and must fund their business costs (i.e. wages, rent, electricity, security, cleaning and office costs) from this amount before realising any profit.
But…. and it is a very big ‘but’…. the above analysis is true for a ‘national average’ service station operator – whatever that is.
And it will be relevant for today only.
The assignment of revenues will likely be different tomorrow and will absolutely be different next week, given the interplay of the petrol discount cycle that operates in most Australian capital cities.
“The problem here is that our market is complex and, despite the ACCC having produced regular reports into our industry for more than 12 years, the level of understanding of the Australian petroleum market is arguably at its lowest ebb”, said Mark.
This article is simply not long enough to highlight all the difficulties with the current debate – not the least of which is the ACCC’s attempts to draw conclusions about average petrol prices when prices can vary by up to 20c in Australia’s capital cities on any given day – and that capital city prices generally move independently of each other.
“The continued use of GIRD (Gross Indicative Retail Difference) is also problematic, as it leads people to incorrectly equate this measure – which does not reflect movement in retailer costs – with business profit”, said Mark.
Despite repeatedly raising this concern, the ACCC reports continue to use this criterion, adding to public confusion and generating national discussions about petrol prices that are plainly wrong.
“Perhaps though, we are just making it all too complicated”, said Mark.
“All participants in the fuel industry accept that the nature of their business requires a level of price transparency, given that fuel costs are a key input cost to the Australian economy”, continued Mark.
Within this context, high fuel prices mean that households must spend more of their budget on petrol with less to spend on consumer goods that grow the economy.
Equally, high fuel prices mean that businesses must pay more to get their goods and services to national and international markets, thereby reducing their competitiveness.
Relative to this national concern, however, it is worth noting that:
- In October 2017, CommSec released a report stating that average household expenditure on fuel accounted for just 3.5% (or $50) of weekly household expenditure during 2105/16 – the lowest in real terms for more than 30 years. In fact, many Sydney households are now paying more per week in road tools than they are in petrol.
- Statistics produced by the Office of the Chief Economist – a federal agency like the ACCC – show that Australia has the fourth lowest petrol price and sixth lowest diesel price of any OECD economy (see https://www.energy.gov.au/sites/g/files/net3411/f/australian-petroleum-statistics-dec-2017.pdf
“By any measure, the Australian fuel industry is doing a great job in ensuring that Australian households and businesses have access to some of the cheapest fuel in the developed world”, said Mark.
“Debate about who is making what from these internationally competitive prices, while interesting to some, is largely irrelevant in the context of this national success”, concluded Mark.