National media over the past 24 hours has seen everyone from radio commentators like Alan Jones, the NRMA, the head of the ACCC, and even the Federal Energy Minister, allege that fuel retailers are profiteering at present by charging retail petrol prices that cannot be justified by current day wholesale petrol prices – as determined by a comparison with the daily terminal gate price.
But such a comparison is only valid if the current day wholesale prices is the same as it was two weeks earlier, when fuel retailers purchased the fuel that is currently in the ground at their service stations.
“Current day ‘wholesale prices’ do not represent the prices that fuel retailers paid for the fuel that is currently in the ground”, said ACAPMA CEO Mark McKenzie
“Typically, there is a lag of up to 2 weeks as fuel retailers sell the stock of fuel in the ground before they can buy new stock at the lower wholesale price”, Mark said.
When oil prices are volatile, such as they are now, there can be wild swings between the daily published wholesale price (or Terminal Gate Price) and the price that the retailer actually paid for the stock that they are currently selling. Up until 3 weeks ago, the daily variance in terminal gate prices was about 0.5cpl – up and down. Yet, in the past 10 days, the terminal gate price has dropped by just over 20cpl.
This means that comparing current day wholesale prices with current day retail prices is simply not valid, as fuel retailers have paid up to 20cpl more for the fuel stock that is currently in the ground. Commentators like the ACCC, the NRMA and the media can’t see this relationship and so they are understandably asking questions about retail pricing.
“But surely these organisations are not saying that fuel retailers should simply shoulder a loss on the fuel that they bought at a much higher price!” said Mark
The current national criticism is compounded by end of the petrol price discount cycle in some capital cities, where prices have gone up after a sustained period of petrol price discounting.
“These discount cycles move independent of global pricing and so it is understandable that people are seeking an explanation of why prices are going up so sharply”, said Mark.
It is interesting to note, however, that Sydney retail prices have been falling from the top of the cycle at a much faster level than normal. The petrol price in Sydney has fallen by 20cpl in the last 3 days while, under normal price cycle conditions, it would have fallen by just 3.6cpl based on recent history.
This dramatic fall is almost entirely attributable to the fact that, as service station sites replace their inground supply with a new tankerload, they are paying a lower wholesale cost and can lower their prices accordingly. This is being reflected in a much faster fall in the metropolitan average fuel price.
“This is also the reason why there is a marked difference in price at the moment with higher priced service stations still trying to sell stock that they purchased at a high price, competing in real time with service stations that have replenished their stocks with the lower priced fuel”, said Mark
“Most importantly, however, there is another significant issue being introduced by the economic fallout from COVID-19 that means we, like most other industries, are entering unprecedented waters”, said Mark
Some of our members are reporting a sharp fall in fuel sales over the past week which appears to be due to people reducing their travel in response to the COVID-19 threat (e.g. reduce car commutes to major employment centres).
Fuel retailers in some capital city markets, such as Adelaide, appear to be responding to this lower demand by dramatically lowering their price – to the point of selling below wholesale cost – to attract customers and keep cash coming into their businesses.
At an individual retailer level, some retailers are experiencing increased demand for non-fuel products as people purchase products that they can’t get at supermarkets, effectively counter balancing reduced revenues from fuel sales.
Others, who don’t have a wide range of non-fuel products, don’t have this option available to them and are instead choosing to discount heavily to keep cash coming in. These differences in business structures within the petrol-convenience industry means that there is a wide difference in prices between individual businesses.
In short, fuel retail businesses are under significant pressure in terms of fuel sales – and they are responding in different ways to the observed decline. This aspect, coupled with increased volatility in wholesale fuel prices, means that there is an unprecedented variance in the prices charged by different service stations across the national network.
“We are in living in an unprecedented time – one that is characterised by high price volatility and demand uncertainty in the face of abundant global and national fuel supply”, said Mark
“To suggest that the prices are evidence of fuel retailers gouging is, to ignore the fact that the fuel retail – like all retail industries – the fuel retail industry is being reshaped by the global and national economic consequences of COVID-19”, concluded Mark